TEST BANK FOR Economics (Micro+Macro) Fourth Canadian Edition Glenn Hubbard Anthony Patrick O’Brien by StudyGuide

Test Bank For

Economics (Micro+Macro) Fourth Canadian Edition Glenn Hubbard Anthony Patrick O’Brien Apostolos Serletis Jason Childs

Part 1: Microeconomics: Page 2-1659 Part 2: Macroeconomics: Page 1660-3074

Part 1: Microeconomics Contents Chapter 1: Economics: Foundations and Models Chapter 2: Trade-offs, Comparative Advantage, and the Market System Chapter 3: Where Prices Come From: The Interaction of Supply and Demand Chapter 4: Economic Efficiency, Government Price Setting, and Taxes Chapter 5: Externalities, Environmental Policy, and Public Goods Chapter 6: Elasticity: The Responsiveness of Demand and Supply Chapter 7: Comparative Advantage and the Gains from International Trade Chapter 8: Consumer Choice and Behavioural Economics Chapter 9: Technology, Production, and Costs Chapter 10: Firms in Perfectly Competitive Markets Chapter 11: Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter 12: Oligopoly: Firms in Less Competitive Markets Chapter 13: Monopoly and Competition Policy Chapter 14: The Markets for Labour and Other Factors of Production Chapter 15: Public Choice, Taxes, and the Distribution of Income

Microeconomics, 4Ce (Hubbard) Chapter 1 Economics: Foundations and Models 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, and optimal decisions are made at the margin 1) Changes in global weather patterns can lead to A) more Canadians drinking coffee. B) Canadians having to pay more for coffee. C) wage increases for coffee shop employees. D) the destruction of the Canadian coffee harvest. E) Canadians demanding more coffee. Answer: B Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Chapter Opener: You versus Caffeine? 2) The study of economics arises due to A) money. B) scarcity. C) greed. D) unlimited resources. E) unemployment. Answer: B Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 3) Scarcity refers to the situation in which A) unlimited wants exceed limited resources. B) unlimited resources exceed limited wants. C) a country's population is larger than its resource base. D) a nation's poverty level increases faster than its population. E) our needs and wants are finite. Answer: A Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

4) The basic economic problem of ________ has always existed and will continue to exist. A) scarcity B) efficiency C) inflation D) recession E) unemployment Answer: A Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 5) Economics is the study of the ________ people make to attain their goals, given their ________ resources. A) purchases; unlimited B) choices; scarce C) income; available D) decisions; household E) output; time Answer: B Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 6) An economic ________ is a simplified version of some aspect of economic life used to analyze an economic issue. A) market B) trade-off C) variable D) model E) opportunity cost Answer: D Diff: 1 Type: MC Topic: Economic Models Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

7) The term "market" in economics refers to A) a place where money changes hands between institutions and the arrangements they make. B) a legal institution where exchange can take place between a group of buyers and sellers. C) a group of buyers and sellers and the arrangement by which they come together to trade. D) an organization which sells goods and services to a group of buyers who make decisions at the margin. E) a place where stocks are traded between a group of international buyers and sellers. Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 8) The term ________ in economics refers to a group of buyers and sellers of a product and the arrangement by which they come together to trade. A) collective B) cooperative C) market D) trade-off E) monopoly Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 9) Economists assume that A) individuals behave in unpredictable ways. B) consumer behaviour is explained by the existence of unlimited resources. C) people put other people's interests ahead of their own. D) optimal decisions are made at the margin. E) society's output should be equally distributed. Answer: D Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

10) Economists assume that rational behaviour is useful in explaining choices people make A) because irrational people do not make economic choices. B) even though people may not behave rationally all the time. C) because individuals act rationally all the time in all circumstances. D) even though people rarely, if ever, behave in a rational manner. E) because economic choices are not needed by rational people. Answer: B Diff: 2 Type: MC Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 11) Economists assume that rational people do all of the following except A) use all available information as they act to achieve their goals. B) undertake activities that benefit others and hurt themselves. C) weigh the benefits and costs of all possible alternative actions. D) respond to economic incentives. E) do things to make themselves better off. Answer: B Diff: 2 Type: MC Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 12) Economics does not study correct or incorrect behaviours but rather it assumes that economic agents behave ________, meaning they make the best decisions given their knowledge of the costs and benefits. A) equitably B) rationally C) emotionally D) selfishly E) erratically Answer: B Diff: 2 Type: MC Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

13) Consider the following statements: a. Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area. b. Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment. c. Firms produce more of a particular DVD when its selling price rises. Which of the above statements demonstrates that economic agents respond to incentives? A) a only. B) b only. C) c only. D) a and b. E) a, b, and c. Answer: E Diff: 3 Type: MC Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 14) As professors and teachers get closer to retirement age they typically spend more time reading and thinking about the financial planning as well as the stock market. By gathering and using all available information as they act to achieve their goals, these teachers are exemplifying the economic idea that A) people are rational. B) people respond to economic incentives. C) optimal decisions are made at the margin. D) equity is more important than efficiency. E) people make identical choices. Answer: A Diff: 2 Type: MC Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

15) Suppose your provincial government encouraged new medical school graduates to take over rural and small town practices from doctors wishing to retire by paying both the new and retiring doctors $100,000. These doctors would be exemplifying the economic idea that A) people are rational. B) people respond to economic incentives. C) optimal decisions are made at the margin. D) equity is more important than efficiency. E) people make identical choices. Answer: B Diff: 2 Type: MC Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 16) Obesity is one of the biggest health challenges facing Canadians, with few Canadians getting the recommended amount of daily physical activity. Economists would expect A) people who value physical appearance to exercise less than others. B) people will exercise more when the cost of skipping exercise increases. C) people who agree to pay a fine for skipping exercise sessions will be less healthy. D) there is no correlation between fines for skipping exercise and how often people will go to the gym. E) the cost of gym memberships will decrease as people join gyms and demand increases. Answer: B Diff: 2 Type: MC Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Apply the Concept: Does Canada's Health Care System Contribute to Obesity? 17) By charging users that skip workouts, the designers of a gym are A) increasing the marginal cost of exercise. B) increasing the marginal benefit of exercise. C) increasing both the marginal cost and the marginal benefit of exercise. D) decreasing the marginal cost and the marginal benefit of exercise. E) assuming gym members are rational. Answer: B Diff: 1 Type: MC Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Apply the Concept: Does Canada's Health Care System Contribute to Obesity?

18) In economics, the term ________ means "additional" or "extra." A) allocative B) marginal C) equity D) optimal E) absolute Answer: B Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 19) A grocery store sells a bag of potatoes at a fixed price of $5.50. Which of the following is a term used by economists to describe the money received from the sale of an additional bag of potatoes? A) marginal revenue B) gross earnings C) pure profit D) marginal costs E) net benefit Answer: A Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 20) Economists reason that the optimal decision is to continue any activity up to the point where the A) marginal benefit is zero. B) marginal benefit is greater than the marginal cost. C) marginal cost is zero. D) marginal benefit equals the marginal cost. E) marginal benefit starts declining. Answer: D Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

21) Marginal analysis involves undertaking an activity A) until its marginal costs start declining. B) only when its marginal benefits are positive. C) until its marginal benefits equal marginal costs. D) only if its marginal costs are greater than its marginal benefits. E) until its marginal cost is zero. Answer: C Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 22) The revenue received from the sale of ________ of a product is a marginal benefit to the firm. A) an additional unit B) the total number of units C) no units D) only profitable units E) all the units Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 23) Making optimal decisions "at the margin" requires A) making decisions according to one's whims and fancies. B) making consistently irrational decisions. C) weighing the costs and benefits of a decision. D) making borderline decisions. E) advanced knowledge of economics. Answer: C Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

24) Making "how much" decisions involves A) calculating the total benefits of the activity and determining if you are satisfied with that amount. B) calculating the total costs of the activity and determining if you can afford to incur that expenditure. C) calculating the average benefit and the average cost of an activity to determine if it is worthwhile undertaking that activity. D) determining the additional benefits and the additional costs of that activity. E) advanced knowledge of economics and product markets. Answer: D Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 25) The extra cost associated with undertaking an activity is called A) net loss. B) marginal cost. C) opportunity cost. D) foregone cost. E) activity cost. Answer: B Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 26) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. What is DeShawn's marginal benefit if he sells a basic detailing package? A) $35 B) $75 C) zero dollars D) He makes a marginal loss of $15. E) The marginal benefit cannot be determined. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

27) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. What is the marginal cost of adding the engine detailing to the basic detailing package? A) $20 B) $30 C) $60 D) $60 plus the value of his time E) $0 Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 28) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. Should DeShawn continue to offer the engine detailing service? A) Yes, he still makes a profit by selling the engine detailing service with the basic detailing package. B) Yes, but only if he raises the price of the basic detailing package. C) Yes, because he will increase sales of the basic detailing package. D) No, his marginal benefit is less than his marginal cost. E) More information is needed for DeShawn to make this decision. Answer: D Diff: 3 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

Scenario 1.1 Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000 per week. A manager at the plant observes, "Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we're on the right track. We are producing the optimal number of cell phones." 29) Refer to Scenario 1.1. Using marginal analysis terminology, what is another economic term for the incremental revenue received from the sale of the last 3,000 cell phones? A) gross earnings B) marginal revenue C) sales revenue D) explicit revenue E) net benefit Answer: B Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 30) Refer to Scenario 1.1. Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 3,000 cell phones? A) a marginal cost. B) an opportunity cost C) an explicit cost D) a foregone cost E) a loss Answer: A Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 31) Refer to Scenario 1.1. Had the firm not produced and sold the last 3,000 cell phones, would its profit be higher or lower, and if so by how much? A) Its profit will be $6,700 higher. B) Its profit will be $700 higher. C) Its profit will be $700 lower. D) Its profit will be $6,000 lower. E) Its profit will be unchanged. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

Table 1.1 Hours Open 1 2 3 4 5 6

Total Revenue (dollars) $50 75 95 110 120 125

Lydia runs a small nail salon in the town of New Hope. She is debating whether she should extend her hours of operation. Lydia figures that her sales revenue will depend on the number of hours the nail salon is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $10 per hour. 32) Refer to Table 1.1. Using marginal analysis, how many hours should Lydia extend her nail salon's hours of operations? A) 2 hours B) 3 hours C) 4 hours D) 5 hours E) 6 hours Answer: D Diff: 3 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 33) Refer to Table 1.1. What is Lydia's marginal benefit if she decides to stay open for two hours instead of one hour? A) $25 B) $50 C) $75 D) $125 E) $150 Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

34) Refer to Table 1.1. What is Lydia's marginal cost if she decides to stay open for two hours instead of one hour? A) $10 B) $20 C) $25 D) $40 E) $50 Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 35) Soo Jin shares a one-bedroom apartment with her classmate. Her share of the rent is $700 per month. She is considering moving to a studio apartment which she will not have to share with anyone. The studio apartment rents for $950 per month. Recently, you ran into Soo Jin on campus and she tells you that she has moved into the studio apartment. Soo Jin is as rational as any other person. As an economics major, you rightly conclude that A) Soo Jin did not have a choice; her roommate was a slob. B) Soo Jin figures that the additional benefit of having her own place (as opposed to sharing) is at least $250. C) Soo Jin figures that the benefit of having her own place (as opposed to sharing) is at least $950. D) the cost of having one's own space outweighs the benefits. E) you made an error in assuming that Soo Jin is rational. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 36) McCain Foods Ltd. is one of the largest producer s of frozen French fries in the world. If the marginal cost of producing an extra million kilograms of French fries is $1 million, then McCain Foods Ltd. should produce the extra French fries A) only if the marginal benefit is greater than $1 million plus an acceptable profit margin. B) as long as the marginal benefit the firm receives is just equal to or greater than $1 million. C) as long as the marginal cost does not rise. D) until the marginal benefit the firm receives reaches zero. E) More information is needed for McCain Foods to make this decision. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Solved Problem: Binge Watching and Decisions at the Margin.

37) The approximately 12 seconds between episodes on Netflix means that binge watching is A) the result of a series of marginal decisions. B) something every one plans to when they first login to Netflix. C) something Netflix forces viewers to do. D) an indication of how quickly Netflix users can make decisions. E) a rational decision. Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Solved Problem: Binge Watching and Decisions at the Margin. 38) Scarcity refers to a situation in which unlimited wants exceed the limited resources available to fulfill those wants. Answer: TRUE Diff: 1 Type: TF Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 39) Scarcity is a problem that will eventually disappear as technology advances. Answer: FALSE Diff: 1 Type: TF Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 40) An economic model is a simplified version of reality used to analyze real-world economic situations. Answer: TRUE Diff: 1 Type: TF Topic: Economic Models Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 41) The sales revenue a seller receives from the sale of an additional unit of goods is called the marginal benefit. Answer: TRUE Diff: 1 Type: TF Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

42) Optimal decisions are made at the point where marginal cost equals zero. Answer: FALSE Diff: 1 Type: TF Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 43) If it costs Sinclair $300 to produce 3 suede jackets and $420 to produce 4 suede jackets, then the difference of $120 is the marginal cost of producing the 4th suede jacket. Answer: TRUE Diff: 1 Type: TF Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 44) Suppose the extra cost of producing an extra million kilograms of French fries is $1 million. Then, McCain Foods Ltd. should make the extra French fries if they generate additional revenue of $1 million. Answer: TRUE Diff: 2 Type: TF Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills Special Feature: Solved Problem: Binge Watching and Decisions at the Margin. 45) Explain the economic assumption that "people are rational." Answer: "People are rational" means that economists assume consumers and firms will use all available information as they act to achieve their goals. Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits exceed the costs. Diff: 2 Type: ES Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 46) Explain the economic idea that "people respond to incentives." Answer: Human beings act from a variety of motives, including religious belief, envy, and compassion. "People respond to incentives" means that people will act if they feel it is in their best economic interest to do so. Diff: 2 Type: ES Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

47) What is meant by the statement that "optimal decisions are made at the margin"? Answer: In economics, the word "marginal" means "extra" or "additional." Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost, so optimal decisions are made at the point where the extra benefit received from an activity is equal to the extra cost associated with that activity. Diff: 2 Type: ES Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 48) Suppose that watching one more episode of your favourite NetFlix show is worth $ 200 to you. Suppose that studying for that same amount of time will boost your mark enough to get you a bursary. What is the smallest size of the bursary that would cause you to study instead of watching another episode (assuming you are rational)? Answer: The bursary would have to be at least $200 for a rational person to choose to study instead of watching the next episode — assuming there are no other benefits to studying. Diff: 2 Type: ES Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills Special Feature: Solved Problem: Binge Watching and Decisions at the Margin. 49) Consider the following statements: a. Soda drinkers purchase more soda from a grocery store that sells soda at a lower price than other rival grocery stores in the area. b. Homeowners do not take steps to increase security even though they believe it is more costly to allow burglaries than to install security monitoring equipment. c. Manufacturers produce less of a particular cell phone when its selling price rises. Which of the above statements demonstrates that economic agents respond to incentives? A) a only B) b only C) c only D) a and b Answer: A Diff: 3 Type: MC Topic: People Respond to Economic Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

Scenario 1.2 Suppose a cigar manufacturer currently sells 1,500 cigars per week and makes a profit of $3,000 per week. The plant foreman observes, "Although the last 500 cigars we produced and sold increased our revenue by $7,500 and our costs by $7,000, we are only making an overall profit of $3,000 per week so I think we need to cut back on production." 50) Refer to Scenario 1.2. Using marginal analysis terminology, what is another economic term for the incremental revenue received from the sale of the last 500 cigars? A) gross earnings B) marginal revenue C) sales revenue D) gross profit Answer: B Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 51) Refer to Scenario 1.2. Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 500 cigars? A) marginal cost B) operating cost C) explicit cost D) Any of the above terms are correct. Answer: A Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 52) Refer to Scenario 1.2. Had the firm not produced and sold the last 500 cigars, would its profit be higher or lower, and if so by how much? A) Its profit would be $500 higher. B) Its profit would be $1,000 higher. C) Its profit would be $500 lower. D) Its profit would be $1,500 lower. Answer: C Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

Table 1.3 Hours Open 1 2 3 4 5 6

Total Revenue (dollars) $275 375 450 500 530 550

Ivan runs a custom jewelry shop in Sparkle City. He is debating whether he should extend his hours of operation. Ivan figures that his sales revenue will depend on the number of additional hours the jewelry shop is open as shown in the table above. He would have to hire a worker for those hours at a wage rate of $25 per hour. 53) Refer to Table 1.3. Using marginal analysis, how many hours should Ivan extend his hours of operations? A) 2 hours B) 3 hours C) 4 hours D) 5 hours Answer: D Diff: 3 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 54) Refer to Table 1.3. What is Ivan's marginal benefit if he decides to stay open for six hours instead of five hours? A) $10 B) $20 C) $30 D) $91.67 Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

55) Refer to Table 1.3. What is Ivan's marginal cost if he decides to stay open for six hours instead of five hours? A) $10 B) $20 C) $25 D) $91.67 Answer: C Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 56) Fiona shares an office with her ex-husband. Her share of the rent and utilities is $625 per month. She is considering moving to a home office which she will not have to share with anyone. The home office will not cost her anything as far as extra rent or utilities. Recently, you ran into Fiona at the gym and she tells you that she has moved into her home office. Fiona is as rational as any other person. As an economics major, you rightly conclude that A) Fiona did not have a choice; her ex-husband was a jerk. B) Fiona figures that the additional benefit of having her own office (as opposed to sharing) is at least $625. C) Fiona figures that the benefit of having her own office (as opposed to sharing) is zero, since she is no longer paying rent and utilities. D) the cost of having one's own space outweighs the benefits. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

Table 1.4 Hours Open 1 2 3 4 5 6

Total Revenue (dollars) $75 125 160 185 200 210

Sofia runs a small candy store. She is debating whether she should extend her hours of operation. Sofia figures that her sales revenue will depend on the number of additional hours the candy store is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $15 per hour. 57) Refer to Table 1.4. Using marginal analysis, how many hours should Sofia extend her hours of operations? A) 2 hours B) 3 hours C) 4 hours D) 5 hours Answer: D Diff: 3 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 58) Refer to Table 1.4. What is Sofia's marginal benefit if she decides to stay open for six hours instead of five hours? A) $10 B) $15 C) $25 D) $210 Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

59) Refer to Table 1.4. What is Sofia's marginal cost if she decides to stay open for six hours instead of five hours? A) $10 B) $15 C) $25 D) $210 Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 60) Raul restores old motorcycles. Raul has just spent $9,000 purchasing a 1920 Indian Scout motorcycle which he expects to restore and sell for $25,000 once the work is completed. After having spent $9,000, Raul realizes that he will need to spend an additional $5,000 on materials to complete the restoration. Alternatively, he can sell the motorcycle without restoring it for $11,000. What is his marginal benefit if he sells the motorcycle without restoring it? A) $2,000 B) $5,000 C) $11,000 D) $14,000 Answer: C Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 61) Raul restores old motorcycles. Raul has just spent $9,000 purchasing a 1920 Indian Scout motorcycle which he expects to restore and sell for $25,000 once the work is completed. After having spent $9,000, Raul realizes that he will need to spend an additional $5,000 on materials to complete the restoration. Alternatively, he can sell the motorcycle without restoring it for $11,000. What is his marginal cost to complete the restoration? A) $2,000 B) $5,000 C) $11,000 D) $14,000 Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

62) Raul restores old motorcycles. Raul has just spent $9,000 purchasing a 1920 Indian Scout motorcycle which he expects to restore and sell for $25,000 once the work is completed. After having spent $9,000, Raul realizes that he will need to spend an additional $5,000 on materials to complete the restoration. Alternatively, he can sell the motorcycle without restoring it for $11,000. What should he do? A) He should not restore the motorcycle and sell it now to make the most profit. B) It does not matter what he does; he is going to take a loss on the project. C) He should finish the restoration and then sell the motorcycle. D) He should sell the motorcycle back to the party he purchased it from and cut his losses. Answer: C Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? 1) The three fundamental questions that any economy must address are A) What will be the prices of goods and services; how will these goods and services be produced; and who will receive them? B) What goods and services to produce; how will these goods and services be produced; and who receives them? C) Who gets jobs; what wages do workers earn; and who owns what property? D) How much will be saved; what will be produced; and how can these goods and services be fairly distributed? E) How can the economy's output be equally shared; who are the decision makers; and what is the optimum output? Answer: B Diff: 1 Type: MC Topic: The Economic Problems Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 2) The idea that because of scarcity, producing more of one good or service means producing less of another good or service refers to the economic concept of A) optimization. B) efficiency. C) trade-off. D) equity. E) consumption. Answer: C Diff: 1 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

3) Society faces a trade-off in all of the following situations except A) when deciding who will receive the goods and services produced. B) when deciding what goods and services will be produced. C) when deciding how goods and services will be produced. D) when some previously unemployed workers find jobs. E) when making a trade-off because of scarcity. Answer: D Diff: 2 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 4) Which of the following statements is true? A) Anytime you have to decide which action to take you are experiencing economic equity. B) Trade-offs do not apply when the consumers purchase a product for which there is excess supply, such as a stock clearance sale. C) Every individual, no matter how rich or poor, is faced with making trade-offs. D) Economics is a social science that studies the trade-offs we are forced to make because resources are unlimited. E) Producing more of one good means more of another good can be produced. Answer: C Diff: 2 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 5) Which of the following is not an example of an economic trade-off that a firm has to make? A) whether it is cheaper to produce with more machines or with more workers B) whether it is to outsource the production of a good or service C) whether or not consumers will buy its products D) whether it should produce more of its product E) whether it should produce less of its product Answer: C Diff: 1 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

6) The highest valued alternative that must be given up to engage in an activity is the definition of A) economic equity. B) marginal benefit. C) opportunity cost. D) marginal cost. E) economic stability. Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 7) The Coffee Nook, a small cafe near campus, sells cappuccinos for $2.50 and Russian tea cakes for $1.00 each. What is the opportunity cost of buying a cappuccino? A) 2 1/2 Russian tea cakes B) 2/5 of a Russian tea cake C) $2.50 D) $1.00 E) $0.40 Answer: A Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills 8) Arlene quits her $125,000-a-year job to take care of her ailing parents. What is the opportunity cost of her decision? A) zero, since she will no longer be earning a salary B) It depends on the "going rate" for home-care providers. C) at least $125,000 D) the value she attributes to the satisfaction she receives from taking care of her parents E) the total value of all alternatives that must be given up to engage in taking care of her parents Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills

9) The distribution of income primarily determines which of the fundamental economic questions? A) What goods and services are to be produced? B) How the goods and services are to be produced? C) Who will receive the goods and services produced? D) How to plan the economy? E) How to redistribute the goods and services? Answer: C Diff: 2 Type: MC Topic: Who Will Receive the Goods and Services Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 10) Automobile manufacturers produce a range of automobiles such as sports utility vehicles, luxury sedans, pickup trucks and compact cars. What fundamental economic question are they addressing by making this range of products? A) How to produce goods that consumers want? B) Why produce a variety of automobiles? C) What to produce? D) Who to produce automobiles for? E) What price to charge for each range of products? Answer: C Diff: 1 Type: MC Topic: What Goods and Services Will Be Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

11) Consider the following economic agents: a. the government b. consumers c. producers Who, in a centrally planned economy, decides what goods and services will be produced with the scarce resources available in that economy? A) the government B) producers C) consumers D) consumers and producers E) the government, consumers and producers Answer: A Diff: 1 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 12) The decision about what goods and services will be produced made in a market economy is made by A) lawmakers in the government voting on what will be produced. B) workers deciding to produce only what the boss says must be produced. C) producers deciding what society wants most. D) consumers and firms choosing which goods and services to buy or produce. E) consumers dictating to firms what they need most. Answer: D Diff: 1 Type: MC Topic: What Goods and Services Will Be Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 13) Central planning relies on ________ to determine what types of products to make. A) government employees B) consumers' choices C) individual businesses D) consumers' wants E) collective decisions Answer: A Diff: 1 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking Special Feature: Apply the Concept: Central Planning Leads to Some Odd Products 27 Copyright © 2024 Pearson Canada Inc.

14) Which of the following statements about the economic decisions consumers, firms, and the government have to make is false? A) Governments face the problem of scarcity in making economic decisions. B) Only individuals face scarcity; firms and the government do not. C) Both firms and individuals face scarcity. D) Each faces the problem of scarcity which necessitates trade-offs in making economic decisions. E) Both firms and individuals have to make choices. Answer: B Diff: 1 Type: MC Topic: What Goods and Services Will Be Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 15) Why is it necessary for all economic systems to not only provide people with goods and services, but also restrict them from getting as much of these goods and services as they wish? A) Failure to do this could reduce the efficiency of the system by producing some goods and services that are not as highly valued as others. B) Failure to do this could lead to an inequitable allocation of goods and services produced. C) Failure to do this could lead to drastic shortages of good and services. D) Failure to do this could reduce efficiency and lead to an inequitable allocation of output. E) Failure to do this could lead to an equal allocation of goods and services produced. Answer: A Diff: 3 Type: MC Topic: Who Will Receive the Goods and Services Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills 16) Who receives the most of what is produced in a market economy? A) lawmakers and other politically favoured groups B) those who are willing and able to buy them C) everyone receives an equal amount D) people who earn the highest incomes E) those who need them the most Answer: B Diff: 1 Type: MC Topic: Who Will Receive the Goods and Services Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

17) How are the fundamental economic decisions determined in North Korea? A) Individuals, firms, and the government interact in a market to make these economic decisions. B) These decisions are made by the country's elders who have had much experience in answering these questions. C) The government decides because North Korea is a centrally planned economy. D) The United Nations decides because North Korea is a developing economy. E) North Korean firms decide as they determine production. Answer: C Diff: 1 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 18) How are the fundamental economic questions answered in a market economy? A) The government alone decides the answers. B) Individuals, firms, and the government interact in markets to decide the answers to these questions. C) Households and firms interact in markets to decide the answers to these questions. D) Large corporations alone decide the answers. E) Wealthy individuals alone decide the answers. Answer: C Diff: 2 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 19) Which of the following is a problem inherent in centrally planned economies? A) Households and firms make poor decisions in choosing how resources are allocated. B) There is too little production of low-cost, high-quality goods and services. C) Production managers are more concerned with satisfying consumer wants than with satisfying government's orders. D) Exports tend to exceed imports. E) Those who are willing and able to buy what is produced determine what is produced. Answer: B Diff: 2 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

20) All of the following contributed to the downfall of the Soviet Union in 1991 except A) public dissatisfaction with low living standards and political repression. B) an inability to produce low-cost consumer goods that households wanted. C) lack of high-quality goods and services. D) lack of a strong dictator who can coordinate economic activities. E) all of the above contributed to the downfall. Answer: D Diff: 2 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 21) ________ is a situation in which a good or service is produced at the lowest possible cost. A) Allocative efficiency B) Productive efficiency C) Equity D) Optimal marginalism E) Equality Answer: B Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 22) Productive efficiency is achieved when A) firms add a low profit margin to the goods and services they produce. B) firms produce the goods and services that consumers value most. C) firms produce goods and services at the lowest cost. D) there are no shortages in the market. E) there are no surpluses in the market. Answer: C Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

23) When production reflects consumer preferences, ________ occurs. A) allocative efficiency B) productive efficiency C) equity D) efficient central planning E) scarcity Answer: A Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 24) Allocative efficiency is achieved when firms produce goods and services A) at the lowest possible cost. B) that consumers value most. C) at the lowest opportunity cost. D) at a marginal cost of zero. E) at the highest possible price. Answer: B Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 25) Markets promote A) equity and competition. B) voluntary exchange and equality. C) equity and equality. D) competition and voluntary exchange. E) competition and equality. Answer: D Diff: 2 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

26) Which of the following statements is true about competition in a market? A) Competition forces firms to outsource the production of their labour-intensive products. B) Competition forces firms to undercut their selling price, thus benefiting consumers who will be able to purchase products at the lowest price possible. C) Competition forces firms to produce and sell products as long as the marginal benefit to consumers exceeds the marginal cost of production. D) Competition forces firms to add only low profit margins to their costs of production. E) Competition forces firms to add only high profit margins to their costs of production. Answer: C Diff: 2 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 27) ________ increases economic efficiency because it forces firms to produce and sell goods and services as long as the additional benefit to consumers is greater than the additional cost of production. A) Competition B) Voluntary exchange C) Equity D) A centrally planned economy E) Equality Answer: A Diff: 1 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 28) Which of the following generates productive efficiency? A) competition among sellers B) competition among buyers C) government inspectors D) government production rules E) government regulations Answer: A Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

29) Voluntary exchange between buyers and sellers generates ________ in a market economy. A) scarcity B) allocative efficiency C) productive efficiency D) equity E) equality Answer: B Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 30) Which of the following is a result of a market economy? A) environmental protection B) an equal income distribution C) agreement on equity D) voluntary exchange E) scarcity Answer: D Diff: 1 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 31) Political candidates often hold fund raisers by charging "per plate" for dinner. Wendy purchased four tickets to a $1,000 per plate dinner for a local city council candidate. Is this transaction economically efficient? A) No, political candidates should never be allowed to overcharge for a fund raising dinner. B) Yes, it was a voluntary exchange that benefited both parties. C) No, Wendy paid too much for four dinners. D) Yes, it is efficient only from the perspective of the candidate but not from the perspective of Wendy. E) Yes, it is efficient only from the perspective of Wendy but not from the perspective of the candidate. Answer: B Diff: 2 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills

32) In economics, the term "equity" means A) everyone has an equal standard of living. B) the hardest working individuals consume all they want. C) only elected officials have high standards of living. D) economic benefits are distributed fairly. E) economic benefits are distributed freely. Answer: D Diff: 1 Type: MC Topic: Equity Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 33) Which of the following is motivated by an equity concern? A) Some provinces and municipalities have transferred funds to food bank programs in order to increase benefits to lower-income families. B) Following the implementation of subsidies for energy conservation, household demand for rooftop solar panels increased quite significantly in BC. C) Some provinces allow automotive insurance companies to charge men and women different rates for insurance. D) Canada offers patent protection to pharmaceutical manufacturers to prevent others from duplicating their products. E) Following the removal of subsidies in urban water use, household demand for water decreased quite significantly in Bogor, Indonesia. Answer: A Diff: 3 Type: MC Topic: Equity Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking, Ethical Reasoning

34) Which of the following is motivated by an efficiency concern? A) In 2013 the Alberta government handed out pre-paid credit and debit cards to flood victims. B) The right to purchase tickets to the Grey Cup is decided by a lottery. C) Organ transplant waiting lists rationing scarce kidneys that would favour young patients over old in an effort to wring more life out of donated organs. D) The federal government Equalization program which makes larger transfers to poor provinces than to wealthy ones. E) Some university scholarships have been cut back since these programs siphon money from need-based programs, thus harming lower-income students with greater financial need. Answer: C Diff: 3 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking, Ethical Reasoning 35) Which of the following is an example of an efficiency-equity trade-off faced by economic agents? A) Provincial health programs are not cost effective. Instead of focusing on universal access to the health care system, money should be spent on programs that prevent disease first and treating disease second. B) Concerned about the falling birth rate, the French government has pledged more money for families with three children, in an effort to encourage working women to have more babies. C) Some Canadian universities are actively recruiting foreign students for their technology-based programs. D) Municipal sports programs must charge all participants the same price, even when participants don't live in the municipality. E) The growing demand for corn by ethanol producers has led to a surge in the price of tortillas, a staple in the Mexican diet. To quell public outcry over rising tortilla prices, the Mexican government released government corn stocks at prices well below the market, and pressured states to impose price ceilings on tortillas. Answer: A Diff: 3 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills, Ethical Reasoning

36) Which of the following correctly describes the relationship between economic efficiency and economic equity? A) They are both automatically achieved in a free market economy. B) They always call for opposite outcomes. C) There is no conflict between the two goals. D) There is often a trade-off between the two. E) There is no trade-off between the two. Answer: D Diff: 2 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 37) Allocative efficiency best explains ________, and productive efficiency best explains ________. A) how something will be produced; when something will be produced B) when something will be produced; why something will be produced C) why something will be produced; what will be produced D) what will be produced; how something will be produced E) what will be produced; when something will be produced Answer: D Diff: 2 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 38) Assume an economics instructor want to promote equity in their classroom. To do this, announce that all students will receive a final grade equal to the class average. Based on the equity-efficiency tradeoff, what is a likely outcome? A) Most students will spend their time on other courses, resulting in little learning and a low class average. B) Freed from competition, students will fully apply themselves to an economics course causing the class average to rise. C) Student behaviour will not change, but everyone in the class will have the same mark. D) Students will put extra effort into this economics course solely to help other students do well. E) Students will demand the same grade allocation in all their other courses. Answer: A Diff: 2 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills, Ethical Reasoning Special Feature: Apply the Concept: The Equity-Efficiency Trade-off in the classroom.

39) How are the fundamental economic decisions determined in Canada? A) Individuals, firms, and the government interact in a market to make these economic decisions. B) These decisions are made by the country's elders who have had much experience in answering these questions. C) The government decides because Canada is a centrally planned economy. D) The United Nations decides because Canada is a developing economy. Answer: A Diff: 1 Type: MC Topic: Mixed Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytical Thinking 40) The government makes all economic decisions in a mixed economy. Answer: FALSE Diff: 1 Type: TF Topic: Mixed Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 41) When voluntary exchange takes place, both parties gain from the exchange. Answer: TRUE Diff: 1 Type: TF Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 42) A university must decide if it wants to offer more Internet-based classes. This decision involves answering the economic question of "what to produce." Answer: TRUE Diff: 1 Type: TF Topic: What Goods and Services Will Be Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

43) One desirable outcome of a market economy is that it leads to a more equitable distribution of income. Answer: FALSE Diff: 1 Type: TF Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 44) What is equity, and how does it differ from efficiency? Answer: Equity refers to the fair distribution of economic benefits. In economics, efficiency refers to least cost production (productive efficiency) and producing according to human preferences (allocative efficiency). Diff: 2 Type: ES Topic: Equity Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 45) What is opportunity cost? Answer: Opportunity cost refers to the highest-valued alternative that must be given up to engage in an activity. For example, the opportunity cost of taking this economics class is what you are giving up to take the class, which may be taking another class such as accounting or psychology, working extra hours at your job, or extra sleep (whichever is your highest-valued alternative). Diff: 2 Type: ES Topic: Opportunity Cost Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 46) Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain. Answer: Productive efficiency is an efficiency criterion that describes a situation in which goods and services are produced at the lowest possible cost. It does not imply allocative efficiency which is a criterion associated with producing goods and services that consumers value most. For example, a manufacturer may be able to produce typewriters at the lowest possible cost of say, $200, but this does not necessarily mean that consumers are willing to pay $200 for a typewriter. Diff: 3 Type: ES Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills

47) What is a centrally planned economy? Answer: A centrally planned economy is an economy in which the government decides how economic resources will be allocated. Diff: 3 Type: ES Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 48) Define allocative efficiency. Explain the significance of this concept in economics. Answer: Allocative efficiency is an efficiency criterion that describes a situation where the marginal benefit (or marginal valuation) of the last unit purchased is equal to the marginal cost of producing that unit. In other words, allocative efficiency occurs when production reflects consumer preferences. This is a significant concept in that all societies face scarcity which necessitates that societies make choices about what goods and services to produce. To maximize society's wealth, resources must flow to their highest valued use. This value is determined by consumers. Diff: 3 Type: ES Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytical Thinking

1.3

Understand what economic models are and aren't, and why they are a good idea

1) Economic models do all of the following except A) answer economic questions. B) portray reality in all its minute details. C) make economic ideas explicit and concrete for use by decision makers. D) simplify some aspect of economic life. E) simplify versions of reality. Answer: B Diff: 1 Type: MC Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 2) All of the following are part of an economic model except A) assumptions. B) hypotheses. C) data. D) opinions. E) theory. Answer: D Diff: 1 Type: MC Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 3) Which of the following statements about positive economic analysis is false? A) Positive analysis uses an economic model to estimate the costs and benefits of different course of actions. B) There is much more disagreement among economists over normative economic analysis than over positive economic analysis. C) There is much more disagreement among economists over positive economic analysis than over normative economic analysis. D) Unlike normative economic analysis, positive economic analysis can be tested. E) Positive analysis is concerned with what is and can potentially be disproven. Answer: C Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking

4) Which of the following is a positive economic statement? A) The standard of living in Canada should be higher. B) If the price of iPhones falls, a larger quantity of iPhones will be purchased. C) The government should restructure the health care system. D) The Ontario government should not have bailed out Canadian auto manufacturers. E) The government should close income tax loopholes. Answer: B Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 5) Which of the following is a positive economic statement? A) People should not buy SUVs. B) The government should mandate electric automobiles. C) Scarcity necessitates that people make trade-offs. D) Foreign workers should not be allowed to work for lower wages than the citizens of a country. E) People should not buy imported fruits and vegetables. Answer: C Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 6) Which of the following is a normative economic statement? A) Rising global demand for coal has led to increases in the price of coal. B) With rising mortgage rates and rising unemployment rates, the number of unsold homes has increased. C) Toronto is considering increasing funds for light-rail development to promote the use of public transportation. D) Pharmaceutical manufacturers should not be allowed to patent their products so prescription drugs would be more affordable. E) The minimum wage law causes unemployment. Answer: D Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking

7) Which of the following is a normative economic statement? A) The price of gasoline is too high. B) The current high price of gasoline is the result of strong worldwide demand. C) When the price of gasoline rises, the quantity of gasoline purchased falls. D) When the price of gasoline rises, transportation costs rise. E) When the price of gasoline falls, oil companies cut production. Answer: A Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 8) Which of the following questions or statements regarding minimum wage is normative? A) How do changes in minimum wages affect the employment opportunities of teens? B) People working in the retail sector deserve higher pay. C) Wages play a role in causing someone to apply for a job. D) Higher minimum wages will cause firms to employ fewer people. E) The minimum wage law causes unemployment. Answer: B Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Government of Saskatchewan Increase its Minimum Wage? 9) The economic analysis of minimum wage involves both normative and positive analysis. Consider the following consequences of a minimum wage: a. The minimum wage law causes unemployment. b. A minimum wage law benefits some groups and hurts others. c. In some cities such as San Francisco and New York, minimum wage laws are necessary for lowskilled workers to stay in the city. d. The gains to winners of a minimum wage law should be valued more highly than the losses to losers because the latter primarily comprises businesses. Which of the consequences above are positive statements and which are normative statements? A) a, b, and c are positive statements and d is a normative statement. B) a and b are positive statements, c and d are normative statement. C) Only a is a positive statement, b, c and d are normative statements. D) a and c are positive statements, b and d are normative statements. E) a and d are positive statements, b and c are normative statements. Answer: B Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytic Skills Special Feature: Apply the Concept: Should the Government of Saskatchewan Increase its Minimum Wage? 42 Copyright © 2024 Pearson Canada Inc.

10) Which of the following is part of an economic model? A) preferences of economic agents B) data C) norms D) opinions Answer: B Diff: 1 Type: MC Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytical Thinking 11) "An increase in the price of gasoline will increase the demand for hybrid vehicles." This statement is an example of a positive economic statement. Answer: TRUE Diff: 1 Type: TF Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 12) "The distribution of income should be left to the market" is an example of a positive economic statement. Answer: FALSE Diff: 1 Type: TF Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 13) Positive analysis is concerned with "what ought to be," while normative analysis is concerned with "what is." Answer: FALSE Diff: 2 Type: TF Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 14) What is the difference between positive economic analysis and normative economic analysis? Give one example each of a positive and normative economic issue or question or statement. Answer: Positive economic analysis is concerned with what is. Positive economic analysis reaches conclusions based on verifiable statements. Normative economic analysis, on the other hand, is concerned with what ought to be. Normative analysis reaches conclusions based on opinions. (Students will give many different examples.) Diff: 2 Type: ES Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking

15) Explain why economics is considered a social science. Answer: Economics is a social science because it studies the actions of individuals. As a social science, economics considers human behaviour, particularly decision-making behaviour, in every context. Diff: 2 Type: ES Topic: Economics as a Social Science Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 16) What are the five steps by which economists arrive at a useful economic model? Answer: 1. Decide on the assumptions to use in developing the model. 2. Formulate a testable hypothesis. 3. Use economic data to test the hypothesis. 4. Revise the model if it fails to explain the economic data well. 5. Retain the revised model to help answer similar economic questions in the future. Diff: 2 Type: ES Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytical Thinking 17) What is an economic variable? Give an example of an economic variable. Answer: An economic variable is something measurable that can have different values, such as the wages of software programmers. (Students will give many different examples.) Diff: 1 Type: ES Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytical Thinking 18) Which of the following are positive economic statements and which are normative economic statements? a. An increase in the minimum wage causes unemployment. b. The government should raise the minimum wage above $7.25 per hour. c. The prolonged recession has caused the unemployment rate to reach a 30-year high. d. Interest rates need to be lower for the economy to emerge from the recession. e. Inflation has decreased since the onset of the recession. f. Once the recession has ended, interest rates should increase to assure that inflation does not go up. Answer: Statements a, c, and e are positive economic statements. Statements b, d, and f are normative economic statements. Diff: 2 Type: ES Topic: Positive and Normative Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytical Thinking

1.4

Distinguish between microeconomics and macroeconomics

1) Which of the following is a microeconomics question? A) How much will be saved and how much will be produced in the entire economy? B) What will the level of economic growth be in the entire economy? C) What factors determine the price of carrots? D) What determines the average price level and inflation? E) Why do economies experience periods of recession? Answer: C Diff: 2 Type: MC Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 2) Microeconomics is the study of A) how households and firms make choices. B) the economy as a whole. C) the global economy. D) topics such as inflation and economic growth. E) what determines the unemployment rate. Answer: A Diff: 1 Type: MC Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 3) Which of the following is a macroeconomics question? A) What determines the inflation rate? B) What determines the size of the film industry in Canada? C) How is the production quantity of digital cameras determined? D) What determines the wage of auto workers? E) What factors determine the price of iPhones? Answer: A Diff: 2 Type: MC Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking

4) Macroeconomics is the study of A) how households make choices. B) how firms make choices. C) how households and firms make choices. D) the economy as a whole. E) the impact of government interventions on market outcomes. Answer: D Diff: 1 Type: MC Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 5) Examining the conditions that could lead to a recession in an economy is an example of macroeconomics topic. Answer: TRUE Diff: 1 Type: TF Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 6) The decisions Apple makes in determining production levels for its iPhone is an example of a microeconomics topic. Answer: TRUE Diff: 1 Type: TF Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 7) Suppose that to move more people off the wait list for organ donations, surgeons and hospitals are developing a market for organ swapping. This is an example of a macroeconomic topic. Answer: FALSE Diff: 1 Type: TF Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking 8) Examining the conditions that could lead to economic growth is an example of a macroeconomic topic. Answer: TRUE Diff: 1 Type: TF Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking

9) The decisions General Motors makes in determining production levels for its Chevy Bolt is an example of a microeconomic topic. Answer: TRUE Diff: 1 Type: TF Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking 10) Which of the following are primarily macroeconomic topics and which are primarily microeconomic topics? a. gasoline prices b. unemployment c. inflation d. health care costs e. air pollution f. economic growth Answer: b, c, and f are primarily macroeconomic topics. a, d, and e are primarily microeconomic topics. Diff: 2 Type: ES Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 11) How does the study of microeconomics differ from that of macroeconomics? Give one example each of an issue studied in microeconomics and in macroeconomics. Answer: Microeconomics is the study of how household and businesses make choices, how they interact in markets, and how the government attempts to influence their choices while macroeconomics is the study of the economy as a whole, including topics like unemployment, inflation and economic growth. (Students will give many different examples.) Diff: 2 Type: ES Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking 12) Define macroeconomics. Answer: Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. Diff: 1 Type: ES Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking

1.5

Define important economic terms (It's not all Greek)

1) Which of the following statements is true about profit? A) Profit refers to the revenue received from the sale of a quantity of goods. B) Profit is calculated by multiplying price and quantity sold. C) The terms "accounting profit" and "economic profit" can be used interchangeably. D) Profit is the difference between revenue and cost. E) A firm's revenue will increase as its costs increase. Answer: D Diff: 2 Type: MC Topic: Profit Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 2) In economics, the accumulated skills and training that workers have is known as A) human capital. B) entrepreneurship. C) physical capital. D) innovation. E) natural resources. Answer: A Diff: 1 Type: MC Topic: Human Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 3) Which of the following is an example of an activity undertaken by an entrepreneur? A) designing your landscaping for your new home B) holding a position as the president of a small university C) running for Prime Minister of Canada D) starting your own pet sitting business E) choosing the color scheme for your renovated kitchen Answer: D Diff: 1 Type: MC Topic: Entrepreneur Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking

4) The machines workers have to work with are considered A) human capital. B) physical capital. C) entrepreneurship. D) financial capital. E) natural resources. Answer: B Diff: 2 Type: MC Topic: Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 5) Technology is defined as A) the process of developing and revising models. B) new innovations and creations. C) the processes used to produce goods and services. D) the process of recycling products. E) the machines that workers have to work with. Answer: C Diff: 1 Type: MC Topic: Technology Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 6) Which of the following statements about economic resources is true? A) Economic resources include financial capital and money. B) Economic resources are also called factors of production. C) Economic resources are used only by businesses. D) All economic resources are man-made. E) All economic resources are found in nature. Answer: B Diff: 1 Type: MC Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 7) As the minimum wage rises A) the price of takeout coffee will rise. B) the price of takeout coffee will fall. C) there will be a shortage of coffee. D) there will be a surplus of coffee. E) more coffee will be exported from Canada. Answer: A Diff: 1 Type: MC Topic: Human Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: How Much Will You Pay for a Cup of Coffee? 49 Copyright © 2024 Pearson Canada Inc.

8) If climate change continues to reduce the amount of green coffee available to roasters, A) the price of take out coffee will rise. B) people working in coffee shops will receive higher wages. C) more people will want to drink coffee than before. D) more entrepreneurs will enter the roasting business. E) demand for green coffee will increase. Answer: A Diff: 2 Type: MC Topic: Human Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: How Much Will You Pay for a Cup of Coffee? 9) In the market for factors of production, firms earn income by selling goods and services to households. Answer: FALSE Diff: 1 Type: TF Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 10) One example of human capital is the amount of skills that you have. Answer: TRUE Diff: 1 Type: TF Topic: Human Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 11) List the five main factors of production. Answer: The five main factors of production are labour, capital, human capital, natural resources, and entrepreneurial ability. Diff: 1 Type: ES Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 12) What is the difference between an invention and an innovation? Answer: An invention is the development of a new good or a new process for making a good. An innovation is the practical application of an invention. Innovation could also refer to any significant improvement in a good or in the means of producing a good. Diff: 1 Type: ES Topic: Innovation Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking

13) Explain the difference between a firm's revenue and its profit. Answer: A firm's revenue is the total amount received for selling a good or service. It is calculated by multiplying the price per unit by the number of units sold. A firm's profit is the difference between its revenue and its costs. Diff: 1 Type: ES Topic: Revenue Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 14) What are some of the reasons given for the increase in coffee prices? Answer: The reasons include bad weather in Colombia, wages, and the actions of individual firms. Diff: 2 Type: ES Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: How Much Will You Pay for a Cup of Coffee? 15) What is technology and what factors does it depend on? Answer: Technology is the processes a firm uses to produce goods and services. In the economic sense, a firm's technology depends on many factors, such as the skill of its managers, the training of its workers, and the speed and efficiency of its machinery and equipment. Diff: 1 Type: ES Topic: Technology Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Analytical Thinking 16) What is the difference between physical capital and human capital? Answer: Physical capital includes manufactured goods which are used to produce other goods and services. Human capital refers to the accumulated education, training, and skills that workers possess. Diff: 1 Type: ES Topic: Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Analytical Thinking 17) What is the difference between accounting profit and economic profit? Answer: Profit is the difference between revenue and cost. Accounting profit excludes the cost of some economic resources that the firm does not pay for explicitly. Economic profit includes the opportunity cost of all resources used by the firm. Diff: 1 Type: ES Topic: Profit Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Analytical Thinking

18) What is a household? How do households interact with firms in a market? Answer: A household consists of all persons occupying a home. Households supply factors of production used by firms to produce goods and services. Households also demand goods and services produced by firms. Diff: 1 Type: ES Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Analytical Thinking

1.6

Review the use of graphs and formulas

1) If a graph has a line that shows the amount of outsourcing in the last ten years, it is known as A) a pie chart. B) a time-series graph. C) a demand curve for outsourcing. D) a supply curve of outsourcing. E) a flow chart. Answer: B Diff: 1 Type: MC Topic: Graphs Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 2) ________ have a horizontal and a vertical axis and are used in economics to illustrate relationships between two economic variables. A) Two-dimensional graphs B) One-dimensional graphs C) Pie charts D) Bar graphs E) Flow charts Answer: A Diff: 1 Type: MC Topic: Graphs Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 3) If a straight line passes through the point x = 14 and y = 3 and also through the point x = 4 and y = 10, the slope of this line is A) negative 11 divided by 6. B) seven tenths. C) negative seven tenths. D) 6 divided by 11. E) one and seven tenths. Answer: C Diff: 2 Type: MC Topic: Slope Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 52 Copyright © 2024 Pearson Canada Inc.

4) On a two-dimensional graph, ________ allows for the effects of additional variables. A) moving along a curve B) shifting curves C) eliminating a curve D) adding an additional curve E) eliminating colour Answer: B Diff: 3 Type: MC Topic: Graphs Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 5) Which of the following statements is false? A) An inverse relationship has a negative slope value. B) A direct relationship has a positive slope value. C) A curved line has slope values that change at every point. D) A straight line has a slope of zero. E) Few economic relationships are actually linear. Answer: D Diff: 2 Type: MC Topic: Slope Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 6) The relationship between consumer spending and disposable personal income is A) an inverse relationship. B) a direct relationship. C) a negative relationship. D) independent. E) reverse causality. Answer: B Diff: 1 Type: MC Topic: Positive and Negative Relationships Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 7) Suppose when the price of laptops fall, university students buy more laptops. This implies that A) there is a positive relationship between laptop prices and quantities purchased by college students. B) there is a negative relationship between laptop prices and quantities purchased by college students. C) there is a direct relationship between laptop prices and quantities purchased by college students. D) there is a one-to-one relationship between laptop prices and quantities purchased by college students. E) there is no relationship between laptop prices and quantities purchased by college students. Answer: B Diff: 1 Type: MC Topic: Positive and Negative Relationships Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking

8) If the price of milk was $2.50 a litre and it is now $3.25 a litre, what is the percentage change in price? A) 13 percent B) 30 percent C) 75 percent D) 77 percent E) 130 percent Answer: B Diff: 2 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 9) In 2019, Hooverville consumed 205,000 tonnes of sugar. In 2020, sugar consumption rose to 245,000 tonnes. Calculate the percentage change in sugar consumption. A) 8.37% B) 11.95% C) 19.51% D) 26.33% E) 53% Answer: C Diff: 2 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 10) At a recent faculty meeting, Lorraine Waverly, president of Skywalker College, announced that enrollment is up by 12 percent over the previous semester. If enrollment the previous semester was 3,250 students, what is the student enrollment this semester? A) 390 B) 2,860 C) 3,640 D) 4,030 E) 3,238 Answer: C Diff: 2 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills

Figure 1.1

11) Refer to Figure 1.1. Using the information in the figure above, calculate the percentage change in revenue from alcoholic beverage sales between 2013 and 2015. A) 23.8% B) 30% C) 40% D) 42.9% E) 73.3% Answer: A Diff: 1 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 12) Refer to Figure 1.1. Using the information in the figure above, calculate the percentage change in sales of alcoholic beverages between 2013 and 2015. A) 23.1% B) 23.8% C) 30% D) 40% E) 42.9% Answer: E Diff: 1 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 55 Copyright © 2024 Pearson Canada Inc.

Figure 1.2

13) Refer to Figure 1.2. Calculate the area of the triangle A. A) $1.3 million B) $2.6 million C) $3.4 million D) $5.2 million E) $8.4 million Answer: B Diff: 1 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills

Figure 1.3

14) Refer to Figure 1.3. Calculate the area of the trapezoid X. A) $270 B) $720 C) $810 D) $2,520 E) $2,500 Answer: C Diff: 2 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills

Figure 1.4

15) Refer to Figure 1.4. Which of the following statements is false? A) The slope of the tangent at E is positive. B) The slope of the tangent at F is negative. C) The slope of the tangent at E and the slope of the tangent at F are equal. D) Neither the slope of the tangent at E nor the slope of the tangent at F are equal to zero. E) The slope of the tangent at E is positive and the slope of the tangent at F is negative. Answer: C Diff: 1 Type: MC Topic: Slope Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 16) What is the "omitted variable" problem in determining cause and effect? A) It is a problem that arises when an insignificant variable is given too much weight in an economic analysis leading to skewed conclusions about cause and effect. B) It is a problem that arises when a significant variable is not given enough weight in an economic experiment leading to skewed conclusions about cause and effect. C) It is a problem that arises when an insignificant economic variable that should have been omitted is included in an economic experiment leading to false conclusions about cause and effect. D) It is a problem that arises when an economic variable that affects other variables is omitted from an analysis and its omission leads to false conclusions about cause and effect. E) It is a problem that arises when an economic variable that affects other variables is purposely omitted from an analysis and its omission leads to correct conclusions about cause and effect. Answer: D Diff: 1 Type: MC Topic: Cause and Effect Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 58 Copyright © 2024 Pearson Canada Inc.

17) ________ is a problem that occurs when one concludes that a change in variable X caused a change in variable Y when in actual fact, it is a change in variable Y that caused a change in variable X. A) The omitted variable B) The positive-to-negative relationship C) Reverse causality D) Nonlinear slope E) Tangent line Answer: C Diff: 1 Type: MC Topic: Cause and Effect Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 18) The prevalence of Alzheimer's dementia is very high among residents living in nursing homes. A student concludes that it is likely that living in nursing home causes Alzheimer's dementia. What is the flaw in the student's reasoning? A) The student has failed to take into account other causes of Alzheimer's disease. B) The student is drawing a false conclusion; he is confusing cause and effect. C) The student is using an inadequate sample size. D) The student is drawing a false conclusion by making the mistake of omitting the age of the residents. E) The student is drawing a false conclusion by making the mistake of omitting the gender of the residents. Answer: B Diff: 2 Type: MC Topic: Cause and Effect Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 19) You explain to your roommate Surya, who makes beaded headbands, about an economic theory which asserts that consumers will purchase more of a product at lower prices than they will at higher prices. She contends that the theory is incorrect because over the past two years she has lowered the price of her headbands and yet has seen a decrease in sales. How would you respond to Surya? A) Surya is right; she has evidence to back her claim. The theory must be erroneous. B) Surya is making the mistake of assuming that correlation implies causation. C) I will explain to her that she is making the error of reverse causality: it is the decrease in demand that has caused her to lower her prices. D) I will explain to her that there are some omitted variables that have contributed to a decrease in her sales such as changes in income. E) Surya is making the mistake of assuming that causation implies correlation. Answer: D Diff: 2 Type: MC Topic: Cause and Effect Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking

Table 1.5 Year 2007 2008 2009 2010 2011

DVD Recorders (millions) 12.5 14.0 17.2 20.0 21.7

20) Refer to Table 1.5. The table above shows the sales of DVD recorders in North America. Present the information using a bar graph. Answer:

Diff: 1 Type: ES Topic: Graphs Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills

Microeconomics, 4Ce (Hubbard) Chapter 2 Trade-offs, Comparative Advantage, and the Market System 2.1

Use a production possibilities frontier to analyze opportunity costs and trade-offs

1) ________ exists because unlimited wants exceed the limited resources available to fulfill those wants. A) Scarcity B) Productive efficiency C) The command economy D) Economic growth E) Inefficiency Answer: A Diff: 2 Type: MC Topic: Scarcity Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 2) To compete in the automobile market, Tesla must make many strategic decisions such as whether to introduce a new car model like the Model 3, how to sell and service its cars, and where to advertise. At Tesla's Fairmont, California plant, managers must decide on the monthly production quantities of their S, X, and 3 models. In making this decision, the managers A) face no trade-off because the Fremont plant only produces these three models of the many Tesla models produced worldwide. B) face a trade-off, because producing more of one model means producing less of the others. C) will choose to only produce the quantity of S, X, and 3 models where marginal cost equals zero. D) will always decide on production quantities in which revenues are maximized. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytical Thinking Special Feature: Chapter Opener: Elon Musk and Managers at Tesla Make Choices 3) The principle of opportunity cost is that A) in a market economy, taking advantage of profitable opportunities involves some money cost. B) the economic cost of using a factor of production is the alternative use of that factor that is given up. C) taking advantage of investment opportunities involves costs. D) the cost of production varies depending on the opportunity for technological application. E) unlimited wants exceed the limited resources available to fulfill those wants. Answer: B Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

4) The production possibilities frontier shows the ________ combinations of two products that may be produced in a particular time period with available resources. A) minimum attainable B) maximum attainable C) many and various D) restricted and only E) equitable Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 5) The production possibilities frontier model shows that A) if consumers decide to buy more of a product its price will increase. B) a market economy is more efficient in producing goods and services than is a centrally planned economy. C) economic growth can only be achieved by free market economies. D) if all resources are fully utilized, more of one good can be produced only by producing less of another good. E) firms produce what people want in a particular period of time. Answer: D Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 6) The production possibilities frontier model assumes which of the following? A) Labour, capital, land and natural resources are unlimited. B) The economy produces only two products. C) Any quantity of the two products is currently possible. D) The level of available technology is variable. E) Various products can be produced, now and in the future. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

7) The attainable production points on a production possibility curve are A) the horizontal and vertical intercepts. B) the points along the production possibilities frontier. C) the points outside the area enclosed by the production possibilities frontier. D) the points along and inside the production possibility frontier. E) the points of inefficiency, now and in the future. Answer: D Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 8) The points outside the production possibilities frontier are A) attainable. B) unattainable. C) inefficient. D) allocatively efficient. E) productively efficient. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Figure 2.1

9) Refer to Figure 2.1. Point A is A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) the equilibrium output combination. E) the least-valued alternative in this society. Answer: C Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 10) Refer to Figure 2.1. Point B is A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) the equilibrium output combination. E) the least-valued alternative in this society. Answer: A Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

11) Refer to Figure 2.1. Point C is A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) is the equilibrium output combination. E) the least-valued alternative in this society. Answer: B Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 12) Carmelita can perform either a combination of 35 manicures and 70 pedicures or a combination of 50 manicures and 45 pedicures. If she now performs 35 manicures and 70 pedicures, what is the opportunity cost of performing an additional 15 manicures? A) 5 pedicures B) 20 pedicures C) 25 pedicures D) 45 pedicures E) 50 pedicures Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 13) Bella can produce either a combination of 60 silk roses and 80 silk leaves or a combination of 70 silk roses and 55 silk leaves. If she now produces 60 silk roses and 80 silk leaves, what is the opportunity cost of producing an additional 10 silk roses? A) 2.5 silk leaves B) 10 silk leaves C) 25 silk leaves D) 55 silk leaves E) 80 silk leaves Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

14) If the production possibilities frontier is ________, then opportunity costs are constant as more of one good is produced. A) bowed out B) bowed in C) nonlinear D) linear E) vertical Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.2

Figure 2.2 above shows the production possibilities frontier for Atikamekw Cree (ca. 1600) with a historical tradition of fishing and farming. Assume they produce two goods: fish and grains. 15) Refer to Figure 2.2. What is the opportunity cost of one kilogram of grain? A)

kilograms of fish

B) 1.2 kilograms of fish C)

kilograms of fish

D) 12 kilograms of fish E) 120 kilograms of fish Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 6 Copyright © 2024 Pearson Canada Inc.

16) Refer to Figure 2.2. What is the opportunity cost of one kilogram of fish? A)

kilogram of grain

kilograms of grain

C) 1.6 kilograms of grain D) 16 kilograms of grain E) 160 kilograms of grain Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 17) Refer to Figure 2.2. Suppose Atikamekw Cree are currently producing 60 kilograms of grain per period. How much fish is it also producing, assuming that resources are fully utilized? A) 45 kilograms of fish B) 75 kilograms of fish C) 80 kilograms of fish D) 100 kilograms of fish E) 120 kilograms of fish Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 18) Refer to Figure 2.2. The linear production possibilities frontier in the figure indicates that A) Atikamekw Cree have a comparative advantage in the production of vegetables. B) Atikamekw Cree have a comparative disadvantage in the production of meat. C) the trade-off between producing fish and grain is constant. D) it is progressively more expensive to produce fish. E) it is progressively more expensive to produce grain. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit

19) A production possibilities frontier with a bowed outward shape indicates A) the possibility of inefficient production. B) the possibility of scarcity of factors of production. C) constant opportunity costs as more of one good is produced. D) increasing opportunity costs as more of one good is produced. E) zero opportunity costs as more of one good is produced. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 20) Increasing opportunity cost is represented by a ________ production possibilities frontier. A) linear B) convex C) concave D) vertical E) horizontal Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 21) The slope of a production possibilities frontier A) measures the marginal revenue of producing one more unit of a good. B) measures the total revenue of producing one more unit of a good. C) measures the marginal cost of producing one more unit of a good. D) measures the opportunity cost of producing one more unit of a good. E) measures the total cost of producing one more unit of a good. Answer: D Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

22) ________ opportunity cost implies that as more resources are applied to producing one good, that production increases by smaller and smaller amounts. A) Increasing B) Decreasing C) Constant D) Negative E) Zero Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 23) If opportunity costs are constant, the production possibilities frontier would be graphed as A) a ray from the origin. B) a perfectly horizontal straight line. C) a perfectly vertical straight line. D) a positively sloped straight line. E) a negatively sloped straight line. Answer: E Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Figure 2.3

24) Refer to Figure 2.3. Sergio Vignetto raises cattle and llamas on his land. His land is equally suitable for raising either animal. Which of the graphs in Figure 2.3 represent his production possibilities frontier? A) Graph A B) Graph B C) Graph C D) either Graph A or Graph C E) either Graph B or Graph C Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 25) Refer to Figure 2.3. Sergio Vignetto raises cattle and llamas on his land. Half the land is more suitable for raising cattle and half the land is better suited for raising llamas. Which of the graphs in Figure 2.3 represent his production possibilities frontier? A) Graph A B) Graph B C) Graph C D) either Graph A or Graph C E) either Graph B or Graph C Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Table 2.1 Production choices for Tomaso's Trattoria Quantity of Quantity of Pizzas Calzones Choice Produced Produced A 48 0 B 36 15 C 24 30 D 12 45 E 0 60 26) Refer to Table 2.1. Assume Tomaso's Trattoria only produces pizzas and calzones. A combination of 24 pizzas and 30 calzones would appear A) along Tomaso's production possibilities frontier. B) inside Tomaso's production possibilities frontier. C) outside Tomaso's production possibilities frontier. D) at the horizontal intercept of Tomaso's production possibilities frontier. E) at the vertical intercept of Tomaso's production possibilities frontier. Answer: A Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 27) Refer to Table 2.1. Assume Tomaso's Trattoria only produces pizzas and calzones. A combination of 36 pizzas and 30 calzones would appear A) along Tomaso's production possibilities frontier. B) inside Tomaso's production possibilities frontier. C) outside Tomaso's production possibilities frontier. D) at the horizontal intercept of Tomaso's production possibilities frontier. E) at the vertical intercept of Tomaso's production possibilities frontier. Answer: C Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

28) Refer to Table 2.1. Assume Tomaso's Trattoria only produces pizzas and calzones. A combination of 24 pizzas and 15 calzones would appear A) along Tomaso's production possibilities frontier. B) inside Tomaso's production possibilities frontier. C) outside Tomaso's production possibilities frontier. D) at the horizontal intercept of Tomaso's production possibilities frontier. E) at the vertical intercept of Tomaso's production possibilities frontier. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 29) Refer to Table 2.1. Assume Tomaso's Trattoria only produces pizzas and calzones. Tomaso faces ________ opportunity costs in the production of pizzas and calzones. A) increasing B) decreasing C) constant D) negative E) zero Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 30) An inward shift of a nation's production possibilities frontier can occur due to A) a reduction in unemployment. B) a natural disaster. C) a change in the amounts of one good desired. D) an increase in the labour force. E) economic growth. Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

31) An outward shift of a nation's production possibilities frontier represents A) a decrease in the labour force. B) a natural disaster. C) rising prices of the two goods. D) an impossible situation. E) economic growth. Answer: E Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 32) Economic decline (negative growth) is represented on a production possibilities frontier model by the production possibility frontier A) shifting outward. B) shifting inward. C) becoming steeper. D) becoming flatter. E) staying the same. Answer: B Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 33) Economic growth is represented on a production possibilities frontier model by the production possibilities frontier A) shifting outward. B) shifting inward. C) becoming steeper. D) becoming flatter. E) staying the same. Answer: A Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

34) Without an increase in the supplies of factors of production, how can a nation achieve economic growth? A) by producing more high-value goods and less of low-value goods B) through technological advancement which enables more output C) by lowering the prices of factors of production D) by increasing the prices of factors of production E) by decreasing the size of the labour force Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 35) Which of the following would shift a nation's production possibilities frontier outward? A) developing solar power that is more efficient in generating electricity B) an increase in demand for the nation's products C) a decrease in the unemployment rate D) a law requiring workers to retire at age 50 E) producing less capital equipment Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 36) Which of the following would shift a nation's production possibilities frontier inward? A) discovering a cheap way to convert sunshine into electricity B) producing more capital equipment C) an increase in the unemployment rate D) a law requiring workers to retire at age 50 E) an increase in demand for the nation's product Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

Figure 2.4

Figure 2.4 shows various points on three different production possibilities frontiers for a nation. 37) Refer to Figure 2.4. A movement from X to Y A) could be due to a change in consumers' tastes and preferences. B) could occur because of an influx of immigrant labour. C) is the result of advancements in food production technology only. D) is the result of advancements in plastic production technology only. E) is the result of a decrease in consumer wealth. Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 38) Refer to Figure 2.4. A movement from Y to Z A) represents an increase in the demand for plastic products. B) could occur because of general technological advancements. C) is the result of advancements in food production technology. D) is the result of advancements in plastic production technology. E) is the result of a decrease in consumer wealth. Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 15 Copyright © 2024 Pearson Canada Inc.

39) Refer to Figure 2.4. Consider the following events: a. an increase in the unemployment rate b. a decrease in a nation's money supply c. a war that kills a significant portion of a nation's population Which of the events listed above could cause a movement from Y to W? A) a, b and c B) a and b only C) a and c only D) a only E) c only Answer: E Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 40) Refer to Figure 2.4. Consider the following movements: a. from point V to point W b. from point W to point Y c. from point Y to point Z Which of the movements listed above represents economic growth? A) a, b, and c B) b and c only C) a only D) b only E) c only Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

41) Refer to Figure 2.4. Consider the following events: a. a decrease in the unemployment rate b. general technological advancement c. an increase in consumer wealth Which of the events listed above could cause a movement from V to W? A) a only B) a and b only C) a and c only D) b and c only E) a, b, and c Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 42) Refer to Figure 2.4. Consider the following events: a. a reduction in the patent protection period to no more than 2 years b. a war that destroys a substantial portion of a nation's capital stock c. the lack of secure and enforceable property rights system Which of the events listed above could cause a movement from W to V? A) a only B) a and b only C) a and c only D) b and c only E) a, b, and c Answer: C Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

43) The Great Depression of the 1930s with a large number of workers and factories unemployed would be represented in a production possibilities frontier graph A) by a point inside the frontier. B) by a point outside the frontier. C) by a point on the frontier. D) at the horizontal intercept of the frontier. E) at the vertical intercept of the frontier. Answer: A Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 44) Suppose there is no unemployment in the economy and society decides that it wants more of one good. Which of the following statements is true? A) It can only achieve this with an advance in technology. B) It can increase output without giving up another good. C) It can only achieve this with an increase in resource supplies. D) It will have to give up production and consumption of some other good. E) It will have to increase unemployment. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 45) If society decides it wants more of one good and all resources are fully utilized, then A) it is unable to do this unless technology advances. B) additional resource supplies will have to be found. C) it has to give up some of another good and incur some opportunity costs. D) more unemployment will occur. E) it can increase output without giving up another good. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

46) According to the production possibility model, if more resources are allocated to the production of physical and human capital, then which of the following is likely to happen? A) Fewer goods will be produced for consumption today. B) Fewer goods will be produced for consumption in the future. C) The production possibilities frontier will be shifted inward in the future. D) Economic growth will decline in the future. E) The country's total production will fall in the future. Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Figure 2.5

47) Refer to Figure 2.5. If the economy is currently producing at point Y, what is the opportunity cost of moving to point W? A) 2 million tons of steel B) 2 million tons of paper C) 9 million tons of paper D) 16 million tons of paper E) zero tons of paper and steel Answer: E Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 19 Copyright © 2024 Pearson Canada Inc.

48) Refer to Figure 2.5. If the economy is currently producing at point W, what is the opportunity cost of moving to point X? A) 3 million tons of steel B) 19 million tons of steel C) 5 million tons of paper D) 9 million tons of paper E) zero tons of paper and steel Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 49) Refer to Figure 2.5. If this economy is currently producing at point X, what is the opportunity cost of moving to point W? A) 3 million tons of steel B) 5 tons of paper C) 7 tons of paper D) 19 tons of steel E) zero tons of paper and steel Answer: A Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 50) Refer to Figure 2.5. If this economy is currently considering switching from point X to point W, what is the opportunity cost of each newly produced ton of paper? A) 0.6 tons of steel B) 3 tons of steel C) 1.67 tons of paper D) 5 tons of paper. E) zero tons of paper and steel Answer: A Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

51) As provincial governments across Canada face growing budget deficits some analysts caution that rising health care spending could lead to reduced funding for universities and colleges. This statement suggests that A) Canadian governments never really supported post secondary education. B) there is a trade-off between health care spending and education spending. C) society should value education spending more highly than health care spending. D) there are long-term economic benefits generated by a healthier population. E) there are fewer long-term economic benefits generated by an educated population. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 52) Suppose your expenses for this term are as follows: tuition: $7,000, room and board: $8,500, books and other educational supplies: $2,500. Further, during the term, you can only work part-time and earn $5,500 instead of your full-time salary of $20,000. What is the opportunity cost of going to college this term, assuming that your room and board expenses would be the same even if you did not go to college? A) $7,000 B) $9,500 C) $20,000 D) $24,000 E) $38,000 Answer: D Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 53) The opportunity cost of taking a semester-long economics class is A) the cost of tuition and fees only. B) the value of the time spent in the classroom. C) zero because there is no admission charged if you are enrolled in the course. D) equal to the highest value of an alternative use of the time and money spent on the class. E) the knowledge and enjoyment you receive from attending the class. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Figure 2.6

Toyota found the emission standards too difficult to meet to bring its diesel-engine offerings to North America. They have instead focused their research on hybrid-engine technology. Assume Toyota chooses to produce both hybrid-engine vehicles and diesel-engine vehicles (for markets outside North America) for its Prius brand. Figure 2.6 shows changes to its production possibilities frontier in response to new developments and different strategic production decisions. 54) Refer to Figure 2.6. Assume a technological advancement greatly reduces the cost to produce hybridengine vehicles. This is best represented by the A) movement from E to F in Graph A. B) movement from G to H in Graph B. C) movement from H to J in Graph B. D) movement from K to L in Graph C. E) movement from L to K in Graph C. Answer: C Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 55) Refer to Figure 2.6. In response to changing regulations and enforcement, Toyota has cut back on the production of diesel-powered vehicles and increased its hybrid production. This strategy is best represented by the A) movement from F to E in Graph A. B) movement from J to H in Graph B. C) movement from G to J in Graph B. D) movement from L to K in Graph C. E) movement from K to L in Graph C. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

56) Refer to Figure 2.6. Assume that in 2019, after extensive research and development Toyota builds a new factory that can produce both types of vehicles that meet emission standards. This is best represented by the A) movement from E to F in Graph A. B) movement from H to J in Graph B. C) movement from J to G in Graph B. D) movement from L to K in Graph C. E) movement from K to L in Graph C. Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 57) The federal government supports health care spending through the Canada Health Transfer. The COVID-19 pandemic put incredible strain on the healthcare system; by providing care to COVID patients A) the federal government put a lot of strain on its resources that it can go bankrupt within the next 5 years. B) the economy got destabilized and ultimately caused the creation of new taxes. C) many other medical treatments were postponed or cancelled. D) more nurses were hired instead of doctors to reduce health care costs. E) overall healthcare cost reduced because most of the other healthcare treatments were cancelled. Answer: C Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Special Feature: Apply the Concept: Facing the Trade-Offs of Health Care Spending 58) A decrease in the unemployment rate may be represented as a movement from a point on the production possibilities frontier to a point outside the frontier. Answer: FALSE Diff: 2 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 59) If a country is producing efficiently and is on the production possibilities frontier, the only way to produce more of one good is to produce less of the other. Answer: TRUE Diff: 1 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 23 Copyright © 2024 Pearson Canada Inc.

60) Consider a country that produces only two goods: kayaks and mittens. Suppose it is possible for this country to increase its production of kayaks without producing fewer mittens. In this case, its current output combination is efficient. Answer: FALSE Diff: 2 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 61) Any output combination outside a production possibility frontier is associated with unused or underutilized resources. Answer: FALSE Diff: 1 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 62) An increase in the labour force shifts the production possibility frontier inwards over time. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 63) If additional units of a good could be produced at a constant opportunity cost, the production possibility frontier would be bowed outward (concave). Answer: FALSE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 64) On a diagram of a production possibility frontier, opportunity cost is represented by the production possibility frontier shifting outward. Answer: FALSE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

65) To increase fuel efficiency, automobile manufacturers make cars small and light. Large cars absorb more of the impact of an accident than small cars but yield lower fuel efficiency. These facts suggest that a negative relationship exists between safety and fuel efficiency. Answer: TRUE Diff: 2 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Economics in Your Life and Career: The Trade-offs When You Buy a Car 66) Governments do not face trade-offs in providing programs, only individuals do. Answer: FALSE Diff: 1 Type: TF Topic: Trade-offs Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Special Feature: Apply the Concept: Facing the Trade-Offs of Health Care Spending 67) What is a production possibilities frontier? What do points along the frontier represent? What do points inside and outside the frontier represent? Answer: A production possibilities frontier is a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. Points along a production possibilities frontier are attainable with the resources available and are efficient. Points inside the frontier are attainable but inefficient. Points outside the frontier are unattainable. Diff: 2 Type: ES Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 68) What shape does a production possibilities frontier take if it displays increasing opportunity costs? What shape does a production possibilities frontier take if it displays constant opportunity costs? Which shape is most common in production situations? Why are both types presented in the text? Answer: A production possibilities frontier which displays increasing opportunity costs is bowed out. A production possibilities frontier which displays constant opportunity costs is linear. A bowed out production possibilities frontier is most common in production situations. Linear production possibilities frontiers are much simpler to work with mathematically, while still demonstrating the key points of the model. Diff: 2 Type: ES Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

69) a. Draw a production possibilities frontier for a country that produces two goods, beer and pretzels. Assume that resources are equally suited to both tasks. b. Define opportunity costs. c. Use your production possibilities frontier graph to demonstrate the principle of opportunity costs. Answer: a. The PPF is linear to reflect the fact that resources are equally suited to both tasks.

b. Opportunity cost is defined as the highest valued alternative that must be forgone by taking an action. c. In the PPF graph in part (a), suppose the country is currently producing at point X and wishes to move to point Y so that it can produce more beer. The only way it can obtain more beer is to give up some amount of pretzels. Diff: 2 Type: ES Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

Table 2.2 Possible Output Combinations A B C D E F G H

Apples (thousands of pounds) 70 60 50 40 30 20 10 0

Pears (thousands of pounds) 0 20 36 48 56 60 63 65

70) Refer to Table 2.2. The Fruit Farm produces only apples and pears. The table above shows the maximum possible output combinations of the two fruits using all resources and currently available technology. a. Graph The Fruit Farm's production possibilities frontier. Put apples on the horizontal axis and pears on the vertical axis. Be sure to identify the output combination points on your diagram. b. Suppose The Fruit Farm is currently producing at point D. What is the opportunity cost of producing an additional 8,000 pounds of pears? c. Suppose The Fruit Farm is currently producing at point D. What happens to the opportunity cost of producing more and more pears? Does it increase, decrease or remain constant? Explain your answer. d. Suppose The Fruit Farm is currently producing at point G. What happens to the opportunity cost of producing more and more apples? Does it increase, decrease or remain constant? Explain your answer. e. Suppose The Fruit Farm is plagued by the apple maggot infestation which destroys apple trees but not pears. Show in a graph what happens to its PPF.

Answer: a.

b. 10,000 pounds of apples c. It increases. For example to move to E, The Fruit Farm has to give up 10,000 pounds of apples to produce an additional 8,000 pounds of pears. For each additional 10,000 pounds of apples foregone, the payoff in terms of pears gets progressively smaller. d. It increases. Each time it wants to produce an additional 10,000 pounds of apples, more and more pears must be given up. e.

Diff: 3 Type: ES Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit

71) ________ exists because unlimited wants exceed the limited resources available to fulfill those wants. A) Scarcity B) Productive efficiency C) The command economy D) Economic growth E) Inflation Answer: A Diff: 2 Type: MC Topic: Scarcity Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 72) The principle of ________ is that the economic cost of using a factor of production is the alternative use of that factor that is given up. A) marginal cost B) opportunity cost C) normative economics D) entrepreneurship E) comparative advantage Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 73) The production possibilities frontier shows A) the various products that can be produced now and in the future. B) the maximum attainable combinations of two products that may be produced in a particular time period with available resources. C) what an equitable distribution of products among citizens would be. D) what people want firms to produce in a particular time period. E) that the economy only produces two products at any given time. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

74) ________ shows that if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good. A) Comparative advantage B) Absolute advantage C) The mixed market system D) The command system E) The production possibilities frontier model Answer: E Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 75) The production possibilities frontier model assumes all of the following, except A) land and capital are fixed in quantity, but labour and natural resources are variable. B) labour, capital, land, and natural resources are fixed in quantity. C) the economy produces only two products at any given time. D) any level of the two products that the economy produces is currently possible. E) the level of technology is fixed and unchanging. Answer: D Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 76) The ________ production points on a production possibility curve are the points along and inside the production possibility frontier. A) attainable B) unattainable C) impossible D) productively efficient E) allocatively efficient Answer: A Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

77) The unattainable points in a production possibilities diagram are A) the points within the production possibilities frontier. B) the points along the production possibilities frontier. C) the points of the horizontal and vertical intercepts. D) the points outside the production possibilities frontier. E) the intercepts on the horizontal and vertical axes. Answer: D Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.7

78) Refer to Figure 2.7. ________ is (are) inefficient in that not all resources are being used. A) Point A B) Point B C) Point C D) Points A and C E) Points B and C Answer: A Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

79) Refer to Figure 2.7. ________ is (are) technically efficient. A) Point A B) Point B C) Point C D) Points A and C E) Points B and C Answer: B Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 80) Refer to Figure 2.7. ________ is (are) unattainable with current resources. A) Point A B) Point B C) Point C D) Points A and C E) Points B and C Answer: C Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 81) In a production possibilities frontier model, a point inside the frontier is A) allocatively efficient. B) productively efficient C) allocatively inefficient. D) productively inefficient. E) not relevant to production. Answer: D Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

82) If the production possibilities frontier is linear, then A) opportunity costs are decreasing as more of one good is produced. B) it is easy to efficiently produce output. C) opportunity costs are increasing as more of one good is produced. D) opportunity costs are constant as more of one good is produced. E) all points on the linear line are inefficient, as only a curve is efficient. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.8

Figure 2.8 above shows the production possibilities frontier for Vidalia, a nation that produces two goods, roses and orchids. 83) Refer to Figure 2.8. What is the opportunity cost of one dozen orchids? A) 0.4 dozen roses B) 1.0 dozen roses C) 2.5 dozen roses D) 7.25 dozen roses E) 16 dozen roses Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 33 Copyright © 2024 Pearson Canada Inc.

84) Refer to Figure 2.8. What is the opportunity cost of one dozen roses? A) 0.4 dozen orchids B) 1.0 dozen orchids C) 2.5 dozen orchids D) 7.25 dozen orchids E) 16 dozen orchids Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 85) Refer to Figure 2.8. Suppose Vidalia is currently producing 20 dozen orchids per period. How many roses is it also producing, assuming that resources are fully utilized? A) 30 dozen roses B) 50 dozen roses C) 100 dozen roses D) 150 dozen roses E) 200 dozen roses Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 86) Refer to Figure 2.8. The linear production possibilities frontier in the figure indicates that A) Vidalia has a comparative advantage in the production of orchids. B) Vidalia has a comparative disadvantage in the production of roses. C) the trade-off between roses and orchids is constant. D) it is progressively more expensive to produce orchids. E) it is progressively more expensive to produce roses. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit

87) Refer to Figure 2.8. Suppose Vidalia receives orders for 60 dozen orchids and 120 dozen roses. Vidalia will A) not be able to produce enough to fill the order. B) will be able to produce enough to fill the order. C) make a lot of extra money. D) be using its resources inefficiently if it fills the order. E) experience economic growth if it fills the order. Answer: A Diff: 3 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 88) What is the opportunity cost of a provincial government raising taxes to pay for increased spending on health care? A) less private consumption B) more private consumption C) lower tax revenue D) cuts to other government programs E) extra spending will offset the increase in taxes Answer: A Diff: 1 Type: MC Topic: Trade-offs Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Apply the Concept: Facing the Trade-Offs of Health Care Spending 89) A production possibilities frontier with a ________ shape indicates increasing opportunity costs as more and more of one good is produced. A) linear B) bowed inward C) bowed outward D) perfectly horizontal E) perfectly vertical Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

90) The slope of a production possibilities frontier measures the ________ of producing one more unit of a good. A) marginal revenue B) total revenue C) marginal cost D) opportunity cost E) total cost Answer: D Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 91) Increasing marginal opportunity cost implies that A) the payoff from allocating more resources increases by progressively smaller amounts. B) the benefits from allocating more resources decreases by progressively larger amounts. C) rising opportunity costs make it inefficient to produce beyond a certain quantity. D) the law of scarcity applies. E) the law of comparative advantage applies. Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 92) If opportunity costs are ________, the production possibilities frontier would be graphed as a negatively sloped straight line. A) decreasing B) increasing C) negative D) positive E) constant Answer: E Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Figure 2.9

93) Refer to Figure 2.9. Carlos Vanya grows tomatoes and strawberries on his land. His land is equally suited for growing either fruit. Which of the graphs in Figure 2.9 represents his production possibilities frontier? A) Graph A B) Graph B C) Graph C D) either Graph A or Graph B E) either Graph B or Graph C Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 94) Refer to Figure 2.9. Carlos Vanya grows tomatoes and strawberries on his land. A portion of his land is more suitable for growing tomatoes and the other portion is better suited for strawberry cultivation. Which of the graphs in Figure 2.9 represent his production possibilities frontier? A) Graph A B) Graph B C) Graph C D) either Graph A or Graph B E) either Graph B or Graph C Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Table 2.3 Production Choices for Dina's Diner Quantity of Quantity of Sliders Hot Wings Choice Produced Produced A 80 0 B 60 25 C 40 50 D 20 75 E 0 100 95) Refer to Table 2.3. Assume Dina's Diner only produces sliders and hot wings. A combination of 40 sliders and 50 hot wings would appear A) along Dina's production possibilities frontier. B) inside Dina's production possibilities frontier. C) outside Dina's production possibilities frontier. D) at the vertical intercept of Dina's production possibilities frontier. E) at the horizontal intercept of Dina's production possibilities frontier. Answer: A Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 96) Refer to Table 2.3. Assume Dina's Diner only produces sliders and hot wings. A combination of 40 sliders and 25 hot wings would appear A) along Dina's production possibilities frontier. B) inside Dina's production possibilities frontier. C) outside Dina's production possibilities frontier. D) at the vertical intercept of Dina's production possibilities frontier. E) at the horizontal intercept of Dina's production possibilities frontier. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

97) Refer to Table 2.3. Assume Dina's Diner only produces sliders and hot wings. A combination of 60 sliders and 50 hot wings would appear A) along Dina's production possibilities frontier. B) inside Dina's production possibilities frontier. C) outside Dina's production possibilities frontier. D) at the vertical intercept of Dina's production possibilities frontier. E) at the horizontal intercept of Dina's production possibilities frontier. Answer: C Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 98) Refer to Table 2.3. Dina faces ________ opportunity costs in the production of sliders and hot wings. A) increasing B) decreasing C) constant D) negative E) positive Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 99) An outward shift of a nation's production possibilities frontier can occur due to A) a reduction in unemployment. B) a natural disaster like a hurricane or bad earthquake. C) a change in the amounts of one good desired. D) an increase in the labour force. E) a decrease in the labour force. Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

100) ________ a nation's production possibilities frontier represents economic growth. A) An outward shift of B) An inward shift of C) Moving up along D) Moving down along E) A steeper curve in Answer: A Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 101) Economic growth is represented on a production possibilities frontier model by the production possibility frontier A) shifting outward. B) shifting inward. C) becoming steeper. D) becoming flatter. E) staying the same. Answer: A Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 102) Without technological advancement, how can a nation achieve economic growth? A) by producing more high-value goods and fewer low-value goods B) by increasing the quantities of at least one factor of production C) by producing more low-value goods and fewer high-value goods D) by decreasing the size of the labour force E) by passing a law requiring workers to retire at age 50 Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

103) Which of the following would shift a nation's production possibilities frontier inward? A) discovering a cheap way to convert sunshine into electricity B) producing more capital equipment C) an increase in the unemployment rate D) a law requiring workers to retire at age 50 E) decreasing opportunity costs Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 104) Japan currently has fewer women working (outside the home) than most other developed countries. If these women were to take on jobs, it would A) cause Japan's PPF to shift outward. B) cause Japan's PPF to shift inward. C) cause a reduction in Japan's ability to produce manufactured goods. D) cause Japan to allow much more immigration. E) decrease the labour force. Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

Figure 2.10

Figure 2.10 shows various points on three different production possibilities frontiers for a nation. 105) Refer to Figure 2.10. A movement from ________ could occur because of an influx of immigrant labour. A) X to W B) X to Y C) W to V D) W to X E) X to V Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 106) Refer to Figure 2.10. A movement from ________ is the result of advancements in plastic production technology. A) V to X B) W to X C) Z to W D) Y to Z E) Y to X Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 42 Copyright © 2024 Pearson Canada Inc.

107) Consider the following events: a. an increase in the unemployment rate b. a decrease in a nation's money supply c. a war that kills a significant portion of a nation's population Refer to Figure 2.10. Which of the events listed above could cause a movement from Z to X? A) a only B) b only C) c only D) a and c only E) a, b, and c Answer: C Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 108) Consider the following movements: a. from point V to point W b. from point W to point Y c. from point Y to point Z Refer to Figure 2.10. Which of the movements listed above represents advancements in technology with respect to both plastic production and food production? A) a only B) b only C) c only D) b and c only E) a, b, and c Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

109) Consider the following events: a. a decrease in the unemployment rate b. general technological advancement c. an increase in consumer wealth Refer to Figure 2.10. Which of the events listed above could cause a movement from V to X? A) a only B) b only C) c only D) a and c only E) a, b, and c Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 110) Consider the following events: a. a reduction in the patent protection period to no more than 2 years b. a war that destroys a substantial portion of a nation's capital stock c. the lack of a secure and enforceable property rights system Refer to Figure 2.10. Which of the events listed above could cause a movement from W to V? A) a only B) b only C) c only D) a and c only E) a, b, and c Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

111) The recession of 2008-2009 would most likely be represented in a production possibilities frontier graph by A) movement to a point inside the frontier. B) movement to a point outside the frontier. C) movement to a point on the frontier. D) an increase in an intercept on either axis of the PPF. E) a decrease in an intercept on either axis of the PPF. Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 112) Suppose there is some unemployment in the economy and society decides that it wants more of one good. Which of the following statements is true? A) It is not possible to achieve this unless technology advances. B) It can increase output by employing more resources. C) It will have to increase resource supplies. D) It will have to give up production of some other good. E) It will have to give up consumption of some other good. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 113) If society decides it wants more of one good and ________, then it has to give up some of another good and incur some opportunity costs. A) technology advances B) resources are underutilized C) all resources are fully utilized D) new resources are discovered E) there is some unemployment Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

114) According to the production possibility model, if more resources are allocated to the production of physical and human capital, which of the following is not likely to occur? A) Fewer goods will be produced for consumption today. B) The production possibilities frontier will shift outward in the future. C) Future economic growth will be enhanced. D) The country's total production will fall. E) Fewer goods will be produced for consumption in the future. Answer: D Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.11

115) Refer to Figure 2.11. If the economy is currently producing at point Y, what is the opportunity cost of moving to point X? A) 3 million tons of steel B) 5 million tons of steel C) 9 million tons of paper D) 5 million tons of paper E) 10 million tons of both paper Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 46 Copyright © 2024 Pearson Canada Inc.

116) Refer to Figure 2.11. If the economy is currently producing at point X, what is the opportunity cost of moving to point W? A) 3 million tons of steel B) 19 million tons of steel C) 5 million tons of paper D) 9 million tons of paper E) 10 million tons of paper Answer: A Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 117) A student comments to his roommate that the only way he will be able to pass his final exams is to not sleep for the next three days. This statement suggests that A) students are more concerned about good grades than good health. B) society should value sleep more highly than good grades. C) there is a trade-off between studying and sleep. D) students can catch up on their sleep once final exams are over. E) students do not need to sleep. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 118) Suppose your expenses for this term are as follows: tuition: $5,000, room and board: $3,000, books and other educational supplies: $500. Further, during the term, you can only work part-time and earn $12,000 instead of your full-time salary of $20,000. What is the opportunity cost of going to university this term, assuming that your room and board expenses would be the same even if you did not go to university? A) $5,500 B) $8,500 C) $13,500 D) $20,000 E) $20,500 Answer: C Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

119) The opportunity cost of taking an online history class is A) the knowledge you receive from taking the class. B) the value of the time spent online. C) equal to the highest value of an alternative use of the time and money spent on the class. D) zero because there is no classroom time involved if you are enrolled in the course. E) the cost of tuition and books for the class. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.12

Tesla motors currently has three different models available in Canada; the Model S and the Model 3 (both coupes) and the Model X (an SUV). Figure 2.12 shows changes to its production possibilities frontier in response to new developments and different strategic production decisions. 120) Refer to Figure 2.12. Suppose worker productivity increases so that the total number of vehicles produced increases as the company adds more machinery and workers and changes the layout of the factory. This is best represented by the A) movement from E to F in Graph A. B) movement from G to H in Graph B. C) movement from J to H in Graph B. D) movement from H to J in Graph B. E) movement from K to L in Graph C. Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

121) Refer to Figure 2.12. In response to changing consumer demands, Tesla cuts back on the production of coupes and increases its production of SUVs. This strategy is best represented by A) movement from E to F in Graph A. B) movement from G to H in Graph B. C) movement from J to H in Graph B. D) movement from H to J in Graph B. E) movement from K to L in Graph C. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 122) Refer to Figure 2.12. Suppose Tesla has to shut down a portion of its facility as it works on remodelling the facility to merge two of its separate assembly lines in preparation for the production of a new model called a "minibus". The production decision to shut down temporarily will result in a A) movement from E to F in Graph A. B) movement from G to H in Graph B. C) movement from J to H in Graph B. D) movement from H to J in Graph B. E) movement from K to L in Graph C. Answer: E Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 123) If the price of a good or service rises, households have to choose whether to buy less of that good or service or spend less on other goods and services. When doctors and/or nurses demand pay increases, provincial governments A) cut back on their total spending on health care. B) increase spending on other programs. C) automatically increase sales taxes. D) cut back on other programs or increase taxation. E) increase the minimum wage. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Special Feature: Apply the Concept: Facing the Trade-Offs of Health Care Spending

124) An increase in the unemployment rate may be represented as a movement from a point on the production possibilities frontier to a point inside the frontier. Answer: TRUE Diff: 2 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 125) If a country is producing efficiently and is on the production possibilities frontier, the only way to produce more of one good is with an advance in technology. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 126) Consider a country that produces only two goods: pineapples and tractors. Suppose it is possible for this country to increase its production of pineapples without producing fewer tractors. In this case, its current output combination is inefficient. Answer: TRUE Diff: 2 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 127) Any output combination inside a production possibility frontier is associated with unused or underutilized resources. Answer: TRUE Diff: 1 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 128) An increase in population shifts the production possibility frontier inwards over time. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

129) If additional units of a good could be produced at a constant opportunity cost, the production possibility frontier would be linear. Answer: TRUE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 130) On a diagram of a production possibilities frontier, opportunity cost is represented by the slope of the production possibilities frontier. Answer: TRUE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 131) What causes a production possibilities frontier to shift outward? Answer: A production possibilities curve shifts outward with economic growth, which occurs with an increase in resources or a positive technology change. Diff: 2 Type: SA Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 132) What causes a production possibilities frontier to shift inward? Answer: A production possibilities curve shifts inward with economic decline, or negative growth. This occurs with a decrease in resources or a negative technology change. Diff: 2 Type: SA Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 133) To increase fuel efficiency, automobile manufacturers make cars small and light. Large cars absorb more of the impact of an accident than small cars but yield lower fuel efficiency. These facts suggest that a positive relationship exists between safety and fuel efficiency. Answer: FALSE Diff: 2 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: The Trade-offs When You Buy a Car

134) How are efficiency and inefficiency represented on a production possibilities frontier? Answer: Efficiency is represented by points along the production possibilities frontier. Inefficiency is represented by points inside the production possibilities frontier. Diff: 2 Type: SA Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 135) What does the term "increasing marginal opportunity cost" mean? How are increasing marginal opportunity costs represented on a bowed out production possibilities frontier? Answer: Increasing marginal opportunity costs means that as more and more of a product is made, the opportunity cost of making each additional unit rises. They are represented by moving down a bowed out production possibilities frontier. Diff: 2 Type: SA Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 136) a. Draw a production possibilities frontier for a country that produces two goods, wine and cheese. Assume that resources are not equally suited to both tasks. b. Define opportunity costs. c. Use your production possibilities frontier graph to demonstrate the principle of opportunity costs.

Answer: a. The PPF is concave (bowed away from the origin) to reflect the fact that resources are not equally suited to both tasks.

b. Opportunity cost is defined as the highest valued alternative that must be forgone by taking an action. c. In the PPF graph in part (a), suppose the country is currently producing at point A and wishes to move to point B so that it can produce more wine. The only way it can obtain more wine is to give up some amount of cheese. Diff: 2 Type: SA Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

Table 2.4 Possible Output Combinations A B C D E F G H

Cashews (thousands of kilograms) 35 30 25 20 15 10 5 0

Almonds (thousands of kilograms) 0 20 35 47 57 64 68 70

137) Refer to Table 2.4. The Nut House produces only cashews and almonds. The table above shows the maximum possible output combinations of the two nuts using all resources and currently available technology. a. Graph The Nut House's production possibilities frontier. Put almonds on the horizontal axis and cashews on the vertical axis. Be sure to identify the output combination points on your diagram. b. Suppose The Nut House is currently producing at point C. What is the opportunity cost of producing an additional 12,000 kilograms of almonds? c. Suppose The Nut House is currently producing at point C. What happens to the opportunity cost of producing more and more almonds? Does it increase, decrease, or remain constant? Explain your answer. d. Suppose The Nut House is currently producing at point F. What happens to the opportunity cost of producing more and more cashews? Does it increase, decrease, or remain constant? Explain your answer. e. Suppose The Nut House is plagued by a variety of white root-rot disease, which destroys cashew trees but not almond trees. Show in a graph what happens to its PPF.

Answer: a.

b. 5,000 kilograms of cashews c. It increases. For example to move to D, The Nut House has to give up 5,000 kilograms of cashews to produce an additional 10,000 kilograms of almonds. For each additional 5,000 kilograms of cashews foregone, the payoff in terms of almonds gets progressively smaller. d. It increases. Each time it wants to produce an additional 5,000 kilograms of cashews, more and more almonds must be given up. e.

2.2

Understand comparative advantage and explain how it is the basis for trade

1) If you can produce more of something than others with the same resources, you have A) a comparative advantage. B) an absolute advantage. C) an efficient production system. D) a free-market economy. E) a command economy. Answer: B Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Table 2.5 Bracelets Necklaces

Serena 8 16

Haley 9 12

Table 2.5 shows the output per week of two jewelers, Serena and Haley. They can either devote their time to making bracelets or making necklaces. 2) Refer to Table 2.5. Which of the following statements is true? A) Haley has an absolute advantage in making both products. B) Serena has an absolute advantage in making both products. C) Haley has an absolute advantage in making bracelets and Serena in making necklaces. D) Haley has an absolute advantage in making necklaces and Serena in making bracelets. E) Neither Haley nor Serena has an absolute advantage. Answer: C Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 3) Refer to Table 2.5. What is Haley's opportunity cost of making a bracelet? A) 3/4 of a bracelet B) 3 bracelets C) 1 1/3 necklaces D) 2 necklaces E) 12 necklaces Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

4) Refer to Table 2.5. What is Haley's opportunity cost of making a necklace? A) 3/4 of a bracelet B) 3 bracelets C) 1 1/3 necklaces D) 2 necklaces E) 12 necklaces Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 5) Refer to Table 2.5. What is Serena's opportunity cost of making a bracelet? A) 2 necklaces B) 1/2 of a bracelet C) 1/2 of a necklace D) 3/4 of a bracelet E) 12 necklaces Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 6) Refer to Table 2.5. What is Serena's opportunity cost of making a necklace? A) 2 necklaces B) 1/2 of a bracelet C) 1/2 of a necklace D) 3/4 of a bracelet E) 12 necklaces Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 7) Refer to Table 2.5. Which of the following statements is true? A) Haley has a comparative advantage in making both products. B) Serena has a comparative advantage in making both products. C) Haley has a comparative advantage in making bracelets and Serena in making necklaces. D) Haley has a comparative advantage in making necklaces and Serena in making bracelets. E) Neither Haley nor Serena has a comparative advantage. Answer: C Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

8) Comparative advantage means the ability to produce a good or service A) at a lower selling price than any other producer. B) at a lower opportunity cost than any other producer. C) of a higher quality than any other producer. D) at a higher profit level than any other producer. E) better at producing compared to others. Answer: B Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 9) Specializing in the production of a good or service in which one has a comparative advantage enables a country to do all of the following except A) engage in mutually beneficial trade with other nations. B) increase the variety of products that it can consume with no increase in resources. C) consume a combination of goods that lies outside its own production possibilities frontier. D) produce a combination of goods that lies outside its own production possibilities frontier. E) become better off by increasing both production and consumption. Answer: D Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 10) For each bottle of wine that Italy produces, it gives up the opportunity to make 10 pounds of cheese. France can produce 1 bottle of wine for every 25 pounds of cheese it produces. Which of the following is true about the comparative advantage between the two countries? A) Italy has the comparative advantage in cheese. B) France has the comparative advantage in wine. C) Italy has the comparative advantage in wine. D) Both France and Italy have a comparative advantage in wine. E) Neither France nor Italy has a comparative advantage in wine. Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

Figure 2.13

Figure 2.13 shows the production possibilities frontiers for Pakistan and Indonesia. Each country produces two goods, cotton and cashews. 11) Refer to Figure 2.13. What is the opportunity cost of producing 1 bolt of cotton in Pakistan? A) 3/8 of a pound of cashews B) 5/8 of a pound of cashews C) 1 3/5 pounds of cashews D) 150 pounds of cashews E) 240 pounds of cashews Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 12) Refer to Figure 2.13. What is the opportunity cost of producing 1 bolt of cotton in Indonesia? A) 3/8 of a pound of cashews B) 5/8 of a pound of cashews C) 2 2/3 pounds of cashews D) 120 pounds of cashews E) 320 pounds of cashews Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

13) Refer to Figure 2.13. What is the opportunity cost of producing 1 pound of cashews in Pakistan? A) 3/8 of a bolt of cotton B) 5/8 of a bolt of cotton C) 1 3/5 bolts of cotton D) 240 bolts of cotton E) 320 bolts of cotton Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 14) Refer to Figure 2.13. What is the opportunity cost of producing 1 pound of cashews in Indonesia? A) 3/8 of a bolt of cotton B) 5/8 of a bolt of cotton C) 2 2/3 bolts of cotton D) 240 bolts of cotton E) 320 bolts of cotton Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 15) Refer to Figure 2.13. Which country has a comparative advantage in the production of cotton? A) Indonesia B) Pakistan C) Both countries have equal productive abilities. D) Neither country has productive abilities. E) cannot be determined Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 16) Refer to Figure 2.13. Which country has a comparative advantage in the production of cashews? A) Indonesia B) Pakistan C) Both countries have a comparative advantage. D) Neither country has a comparative advantage. E) cannot be determined Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

17) Refer to Figure 2.13. If the two countries have the same amount of resources and the same technological knowledge, which country has an absolute advantage in the production of cotton? A) Indonesia B) Pakistan C) Both countries have an absolute advantage. D) Neither country has an absolute advantage. E) cannot be determined Answer: A Diff: 2 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 18) Individuals who have never been the best at doing anything A) cannot have a comparative advantage in producing any product. B) can still have a comparative advantage in producing some product. C) perform all tasks at a higher opportunity cost than others. D) must have an absolute advantage in at least one task. E) perform all tasks at a lower opportunity cost than others. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Table 2.6

China South Korea

One Digital Camera 100 hours 60 hours

Wheat (per pound) 4 hours 3 hours

Table 2.6 shows the number of labour hours required to produce a digital camera and a pound of wheat in China and South Korea. 19) Refer to Table 2.6. Does either China or South Korea have an absolute advantage and if so, in what product? A) South Korea has an absolute advantage in wheat. B) China has an absolute advantage in wheat. C) South Korea has an absolute advantage in both products. D) China has an absolute advantage in digital cameras. E) Neither country has an absolute advantage in both products. Answer: C Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

20) Refer to Table 2.6. What is China's opportunity cost of producing one digital camera? A) 0.04 pounds of wheat B) 4 pounds of wheat C) 25 pounds of wheat D) 40 pounds of wheat E) 100 pounds of wheat Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 21) Refer to Table 2.6. What is South Korea's opportunity cost of producing one digital camera? A) 0.05 pounds of wheat B) 20 pounds of wheat C) 25 pounds of wheat D) 60 pounds of wheat E) 100 pounds of wheat Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 22) Refer to Table 2.6. What is China's opportunity cost of producing one pound of wheat? A) 0.04 units of a digital camera B) 4 digital cameras C) 25 digital cameras D) 40 digital cameras E) 60 digital cameras Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

23) Refer to Table 2.6. What is South Korea's opportunity cost of producing one pound of wheat? A) 60 digital cameras B) 20 digital cameras C) 5 digital cameras D) 0.05 units of a digital camera E) 0.04 units of a digital camera Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 24) Refer to Table 2.6. China has a comparative advantage in the production of A) wheat. B) digital cameras. C) both products. D) neither product. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 25) Refer to Table 2.6. South Korea has a comparative advantage in the production of A) wheat. B) digital cameras. C) both products. D) neither product. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

26) Refer to Table 2.6. If the two countries specialize and trade, who should export wheat? A) There is no basis for trade. B) China C) South Korea D) They should both be exporting wheat. E) They should both be importing wheat. Answer: B Diff: 1 Type: MC Topic: Specialization Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 27) Refer to Table 2.6. If the two countries specialize and trade, who should export digital cameras? A) There is no basis for trade. B) China C) South Korea D) They should both be importing digital cameras. E) They should both be exporting digital cameras. Answer: C Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 28) If the best surgeon in town is also the best at cleaning swimming pools, then according to economic reasoning, this person should A) pursue the activity he enjoys more. B) specialize in cleaning swimming pools because it is more labour-intensive. C) split his time evenly between being a surgeon and cleaning swimming pools. D) specialize in being a surgeon because its opportunity cost is lower. E) specialize in being a surgeon because its opportunity cost is higher. Answer: D Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

29) Crystal Schick is a highly talented photographer. She has chosen to specialize in photography because of all of the following except A) she obviously has a comparative advantage in photography. B) her opportunity cost of pursuing another career is very low. C) for her, this is the most lucrative way to purchase the products that she wants to consume. D) her photographs are highly esteemed by art lovers who are willing to pay very high prices. E) her opportunity cost of pursuing another career is very high. Answer: B Diff: 3 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 30) If Sanjaya can shuck more oysters in one hour than Tatiana, then Sanjaya has a comparative advantage in shucking oysters. Answer: FALSE Diff: 2 Type: TF Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 31) The basis for trade is comparative advantage, not absolute advantage. Answer: TRUE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 32) If a country produces only two goods, it is possible to have a comparative advantage in the production of both those goods. Answer: FALSE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 33) In a two-good, two-country world, if one country has an absolute advantage in the production of both goods, it cannot benefit by trading with the other country. Answer: FALSE Diff: 2 Type: TF Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

34) For a person to have a comparative advantage in producing a product, she must be able to produce that product at a lower opportunity cost than her competitors. Answer: TRUE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 35) It is possible to have a comparative advantage in producing a good or service without having an absolute advantage. Answer: TRUE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Absolute Advantage and Comparative Advantage 36) What is comparative advantage? What is absolute advantage? Answer: Comparative advantage is the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors. Absolute advantage is the ability of an individual, firm, or country to produce more of a good or service than competitors, using the same amount of resources. Diff: 1 Type: ES Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 37) Is it possible for a firm to have an absolute advantage in producing something without having a comparative advantage? Why or why not? Answer: Yes, a firm can have an absolute advantage without having a comparative advantage. A firm may be able to produce more of a good or service than its competitors, but that does not necessarily mean it can produce the good or service at a lower opportunity cost than its competitors. Diff: 2 Type: ES Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

Table 2.7 China South Korea

Digital Camera 100 hours 90 hours

Wheat (bushels) 5 hours 3 hours

38) Refer to Table 2.7. This table shows the number of labour hours required to produce a digital cameras and a bushel of wheat in China and South Korea. a. Which country has an absolute advantage in the production of digital cameras? b. Which country has an absolute advantage in the production of wheat? c. What is China's opportunity cost of producing one digital camera? d. What is South Korea's opportunity cost of producing one digital camera? e. What is China's opportunity cost of producing one bushel of wheat? f. What is South Korea's opportunity cost of producing one bushel of wheat? g. If each country specializes in the production of the product in which it has a comparative advantage, who should produce digital cameras? h. If each country specializes in the production of the product in which it has a comparative advantage, who should produce wheat? Answer: a. South Korea has an absolute advantage in the production of digital cameras. b. South Korea has an absolute advantage in wheat production. c. China's the opportunity cost of producing one digital camera is 20 bushels of wheat. d. South Korea's opportunity cost of producing one digital camera is 30 bushels of wheat. e. China's opportunity cost of one bushel of wheat is 0.05 units of a digital camera. f. South Korea's opportunity cost of one bushel of wheat is 0.03 units of a digital camera. g. China should specialize in producing digital cameras. h. South Korea should specialize in producing wheat. Diff: 3 Type: ES Topic: Specialization Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

39) Refer to Table 2.7. This table shows the number of labour hours required to produce a digital camera and a bushel of wheat in China and South Korea. a. If each country has a total of 9000 labour hours to devote to the production of the two goods, draw the production possibilities frontier for each country. Put "Digital Camera" on the horizontal axis and "Wheat" on the vertical axis. Be sure to identify the intercept values on your graphs. b. Suppose each country allocates 60% its labour hours to wheat production and 40% to the production of digital cameras. Complete Table 2.8 below to show each country's output of the two products. Table 2.8: Production and Consumption with no Trade Digital Camera Wheat Output Output (bushels) China South Korea Total c. If the two countries do not trade and consume whatever they produce, identify the current production and consumption point for each country on their respective production possibilities frontiers. Label China's consumption point "C" and South Korea's consumption point "K." d. Suppose the two countries specialize and trade. Who should produce digital cameras and who should produce wheat? Explain your answer. e. Complete Table 2.9 below to show each country's output with specialization. Table 2.9: Output with Specialization Digital Camera Wheat Output Output (bushels) China South Korea Total f. Did specialization increase the combined output for the two countries without any increase in resources? If so, by how much? g. Suppose China and South Korea agree to trade so that in exchange for 1,200 bushels of wheat, the exporter of wheat receives 48 digital cameras. Complete Table 2.10 below to show each country's consumption bundle after trade. Table 2.10: Consumption with Trade Digital Camera Wheat (bushels) China South Korea h. Show the consumption points after trade on each country's production possibilities frontier. Label these points "B" for China and "J" for South Korea. i. Has trade made the two countries better off? Explain your answer.

Answer: a.

b. Table 2.8: Production and Consumption with no Trade Digital Camera Wheat Output Output (bushels) China 36 1,080 South Korea 40 1,800 Total 76 2,880 c. See graph in part (a) d. China should specialize in producing digital cameras because it has a lower opportunity cost: 20 bushels of wheat as opposed to South Korea's 30 bushels of wheat. South Korea should specialize in producing wheat because it has a lower opportunity cost: 0.03 units of a digital camera as opposed to China's 0.05 units of a digital camera. e. Table 2.9: Output with Specialization Digital Camera Wheat Output Output (bushels) China 90 0 South Korea 0 3,000 Total 90 3,000 f. Yes, digital camera output increased by 14 units (from 76 units to 90 units) and wheat output increased by 120 bushels (from 2,880 bushels to 3,000 bushels). g. Table 2.10: Consumption with Trade Digital Camera Wheat (bushels) China 42 1,200 South Korea 48 1,800

Lawns Mowed Gardens Cultivated

George 10

Jack 6

Table 2.11 shows the output per day of two gardeners, George and Jack. They can either devote their time to mowing lawns or cultivating gardens. 41) Refer to Table 2.11. Which of the following statements is true? A) Jack has an absolute advantage in both tasks. B) George has an absolute advantage in both tasks. C) Jack has an absolute advantage in lawn mowing and George in garden cultivating. D) Jack has an absolute advantage in garden cultivating and George in lawn mowing. E) Neither George nor Jack have an absolute advantage. Answer: B Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

42) Refer to Table 2.11. What is Jack's opportunity cost of mowing a lawn? A) half a garden cultivated B) one lawn mowed C) two-thirds of a garden cultivated D) one and a half lawns mowed E) two lawns mowed Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 43) Refer to Table 2.11. What is Jack's opportunity cost of cultivating a garden? A) half a garden cultivated B) one lawn mowed C) one and a half lawns mowed D) two lawns mowed E) two-thirds of a garden cultivated Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 44) Refer to Table 2.11. What is George's opportunity cost of mowing a lawn? A) half a garden cultivated B) one lawn mowed C) two lawns mowed D) two-thirds of a garden cultivated E) one and a half lawns mowed Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 45) Refer to Table 2.11. What is George's opportunity cost of cultivating a garden? A) half a garden cultivated B) one lawn mowed C) one and a half lawns mowed D) two lawns mowed E) two-thirds of a garden cultivated Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

46) Refer to Table 2.11. Which of the following statements is true? A) Jack has a comparative advantage in both tasks. B) George has a comparative advantage in both tasks. C) Jack has a comparative advantage in lawn mowing and George in garden cultivating. D) Jack has a comparative advantage in garden cultivating and George in lawn mowing. E) Neither George nor Jack has a comparative advantage. Answer: D Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 47) Comparative advantage means A) the ability to produce more of a product with the same amount of resources than any other producer. B) the ability to produce a good or service at a lower opportunity cost than any other producer. C) the ability to produce a good or service at a higher opportunity cost than any other producer. D) compared to others, you are better at producing a product. E) your opportunity costs for other activities are low. Answer: B Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 48) Specializing in the production of a good or service in which one has a comparative advantage enables a country to do which of the following? A) never have to engage in trade with other nations B) increase the variety of products that it can produce with a decrease in resources C) consume a combination of goods that lies outside its own production possibilities frontier D) produce a combination of goods that lies outside its own production possibilities frontier E) have a low rate of economic growth Answer: C Diff: 3 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

49) For each watch that Switzerland produces, it gives up the opportunity to make 50 pounds of chocolate. Germany can produce 1 watch for every 100 pounds of chocolate it produces. Which of the following is true about the comparative advantage between the two countries? A) Switzerland has the comparative advantage in chocolate. B) Switzerland has the comparative advantage in watches. C) Germany has the comparative advantage in watches and chocolate. D) Germany has the comparative advantage in watches. E) Neither Germany nor Switzerland has a comparative advantage. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

Figure 2.14

Figure 2.14 shows the production possibilities frontiers for Costa Rica and Guatemala. Each country produces two goods, pineapples and coconuts. 50) Refer to Figure 2.14. What is the opportunity cost of producing 1 tonne of coconuts in Costa Rica? A) 3/8 of a tonne of pineapples B) 2/3 of a tonne of pineapples C) 1 1/2 tonnes of pineapples D) 100 tonnes of pineapples E) 150 tonnes of pineapples Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 74 Copyright © 2024 Pearson Canada Inc.

51) Refer to Figure 2.14. What is the opportunity cost of producing 1 tonne of coconuts in Guatemala? A) 1/2 of a tonne of pineapples B) 1 1/3 tonnes of pineapples C) 2 tonnes of pineapples D) 90 tonnes of pineapples E) 100 tonnes of pineapples Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 52) Refer to Figure 2.14. What is the opportunity cost of producing 1 tonne of pineapples in Costa Rica? A) 3/8 of a tonne of coconuts B) 2/3 of a tonne of coconuts C) 1 1/2 tonnes of coconuts D) 100 tonnes of coconuts E) 180 tonnes of coconuts Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 53) Refer to Figure 2.14. What is the opportunity cost of producing 1 tonne of pineapples in Guatemala? A) 1/2 of a tonne of coconuts B) 1 1/3 tonnes of coconuts C) 2 tonnes of coconuts D) 100 tonnes of coconuts E) 180 tonnes of coconuts Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 54) Refer to Figure 2.14. Which country has a comparative advantage in the production of coconuts? A) Costa Rica B) Guatemala C) Neither country has any productive abilities. D) Both countries have equal productive abilities. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

55) Refer to Figure 2.14. Which country has a comparative advantage in the production of pineapples? A) Costa Rica B) Guatemala C) Neither country has a comparative advantage. D) Both countries have an equal comparative advantage. E) Cannot be determined. Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 56) Refer to Figure 2.14. If the two countries have the same amount of resources and the same technological knowledge, which country has an absolute advantage in the production of both pineapples and coconuts? A) Costa Rica B) Guatemala C) Neither country has an absolute advantage. D) Both countries have an equal absolute advantage. E) Cannot be determined. Answer: C Diff: 2 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Table 2.12 One Cell Phone Estonia Finland

40 hours 16 hours

Lumber (per cubic metre) 8 hours 4 hours

Table 2.12 shows the number of labour hours required to produce a cell phone and a cubic metre of lumber in Estonia and Finland. 57) Refer to Table 2.12. Does either Estonia or Finland have an absolute advantage and if so, in what product? A) Finland has an absolute advantage in lumber. B) Estonia has an absolute advantage in lumber. C) Estonia has an absolute advantage in cell phones. D) Finland has an absolute advantage in both products. E) Estonia has an absolute advantage in both products. Answer: D Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 76 Copyright © 2024 Pearson Canada Inc.

58) Refer to Table 2.12. What is Estonia's opportunity cost of producing one cell phone? A) 0.2 cubic metres of lumber B) 5 cubic metres of lumber C) 8 cubic metres of lumber D) 16 cubic metres of lumber E) 32 cubic metres of lumber Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 59) Refer to Table 2.12. What is Finland's opportunity cost of producing one cell phone? A) 0.25 cubic metres of lumber B) 4 cubic metres of lumber C) 12 cubic metres of lumber D) 16 cubic metres of lumber E) 32 cubic metres of lumber Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 60) Refer to Table 2.12. What is Estonia's opportunity cost of producing one cubic metre of lumber? A) 0.2 cell phones B) 5 cell phones C) 8 cell phones D) 16 cell phones E) 32 cell phones Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

61) Refer to Table 2.12. What is Finland's opportunity cost of producing one cubic metre of lumber? A) 0.25 cell phones B) 4 cell phones C) 12 cell phones D) 16 cell phones E) 32 cell phones Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 62) Refer to Table 2.12. Estonia has a comparative advantage in the production of A) both products. B) lumber. C) cell phones. D) neither product. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 63) Refer to Table 2.12. Finland has a comparative advantage in the production of A) both products. B) lumber. C) cell phones. D) neither product. E) Cannot be determined. Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

64) Refer to Table 2.12. If the two countries specialize and trade, who should export lumber? A) There is no basis for trade between the two countries. B) Estonia C) Finland D) They should both be exporting lumber. E) They should both be importing lumber. Answer: B Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 65) Refer to Table 2.12. If the two countries specialize and trade, who should export cell phones? A) There is no basis for trade between the two countries. B) Estonia C) Finland D) They should both be importing cell phones. E) They should both be exporting cell phones. Answer: C Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 66) Assume few people can be excellent surgeons but many people can be excellent managers. If the best surgeon in town is also the best manager, economic reason suggests they should A) split their time evenly between being a surgeon and a manager. B) specialize in being a surgeon because its opportunity cost is lower. C) pursue the activity she enjoys more. D) specialize in being a manager because it is more capital-intensive. E) specialize in being a manager because its opportunity cost is lower. Answer: B Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

67) Izzy Amador is a highly talented tattoo artist. An economist would argue she has chosen to specialize in tattoo art for all of the following reasons, except A) her tattoos are highly esteemed by tattoo lovers who are willing to pay very high prices. B) for her, this is the most lucrative way to purchase the products that she wants to consume. C) her opportunity cost of pursuing another career is very low. D) she obviously has a comparative advantage in tattoo art. E) her opportunity cost of pursuing another career is very high. Answer: C Diff: 3 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 68) If Blake can pick more cherries in one hour than Cody, then Blake has a comparative advantage in cherry picking. Answer: FALSE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 69) The basis for trade is absolute advantage, not comparative advantage. Answer: FALSE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 70) If a country produces only two goods, then it is not possible to have a comparative advantage in the production of both those goods. Answer: TRUE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 71) In a two-good, two-country world, if one country has an absolute advantage in the production of both goods, it can still benefit by trading with the other country. Answer: TRUE Diff: 2 Type: TF Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

72) If the opportunity cost of producing more of one good increases as more of that good is produced, then the production method is inefficient. Answer: FALSE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 73) It is not possible to have a comparative advantage in producing a good or service without having an absolute advantage. Answer: FALSE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Absolute Advantage and Comparative Advantage 74) Is it possible for a firm to have a comparative advantage in producing something without having an absolute advantage? Why or why not? Answer: Yes, a firm can have a comparative advantage without having an absolute advantage if it can produce a good or service at a lower opportunity cost than competitors, even if it is not able to produce more of the good or service than its competitors. Diff: 2 Type: SA Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 75) Should countries specialize in producing goods and services based on having a comparative advantage or an absolute advantage? Why? Answer: Countries should specialize in producing products based on comparative advantage because this allows countries to produce those products and services at a lower opportunity cost than potential trading partners. Diff: 2 Type: SA Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

Table 2.13

Estonia Finland

Cell Phone 20 hours 18 hours

Lumber (cubic metres) 5 hours 4 hours

76) Refer to Table 2.13. This table shows the number of labour hours required to produce a cell phone and a cubic metre of lumber in Estonia and Finland. a. Which country has an absolute advantage in the production of cell phones? b. Which country has an absolute advantage in the production of lumber? c. What is Estonia's opportunity cost of producing one cell phone? d. What is Finland's opportunity cost of producing one cell phone? e. What is Estonia's opportunity cost of producing one cubic metre of lumber? f. What is Finland's opportunity cost of producing one cubic metre of lumber? g. If each country specializes in the production of the product in which it has a comparative advantage, who should produce cell phones? h. If each country specializes in the production of the product in which it has a comparative advantage, who should produce lumber? Answer: a. Finland has an absolute advantage in the production of cell phones. b. Finland has an absolute advantage in lumber production. c. Estonia's opportunity cost of producing one cell phone is 4 cubic metres of lumber. d. Finland's opportunity cost of producing one cell phone is 4.5 cubic metres of lumber. e. Estonia's opportunity cost of one cubic metre of lumber is 0.25 units of a cell phone. f. Finland's opportunity cost of one cubic metre of lumber is 0.22 units of a cell phone. g. Estonia should specialize in producing cell phones. h. Finland should specialize in producing lumber. Diff: 3 Type: SA Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

Table 2.14 Estonia Finland

Cell Phone 20 hours 18 hours

Lumber (cubic metres ) 5 hours 4 hours

77) Refer to Table 2.14. This table shows the number of labour hours required to produce a cell phone and a cubic metre of lumber in Estonia and Finland. a. If each country has a total of 3,600 labour hours to devote to the production of the two goods, draw the production possibilities frontier for each country. Put "Cell Phone" on the horizontal axis and "Lumber" on the vertical axis. Be sure to identify the intercept values on your graphs. b. Suppose each country allocates 55% of its labour hours to lumber production and 45% to the production of cell phones. Complete Table 2.15 below to show each country's output of the two products. Table 2.15: Production and Consumption With No Trade Cell Phone Lumber Output Output (cubic metres) Estonia Finland Total c. If the two countries do not trade and consume whatever they produce, identify the current production and consumption point for each country on their respective production possibilities frontiers. Label Estonia's consumption point "E" and Finland's consumption point "F." d. Suppose the two countries specialize and trade. Who should produce cell phones and who should produce lumber? Explain your answer. e. Complete Table 2.16 below to show each country's output with specialization. Table 2.16: Output With Specialization Cell Phone Output Estonia Finland Total

Lumber Output (cubic metres)

f. Did specialization increase the combined output for the two countries without any increase in resources? If so, by how much? g. Suppose Estonia and Finland agree to trade so that in exchange for 400 cubic metres of lumber, the exporter of lumber receives 90 cell phones. Complete Table 2.17 below to show each country's consumption bundle after trade. Table 2.17: Consumption With Trade Cell Phone

Lumber (cubic metres)

Estonia Finland

h. Show the consumption points after trade on each country's production possibilities frontier. Label these points "X" for Estonia and "Y" for Finland. i. Has trade made the two countries better off? Explain your answer. Answer: a.

b. Table 2.15: Production and Consumption With No Trade Cell Phone Lumber Output Output (cubic metres) Estonia 81 396 Finland 90 495 Total 171 891 c. See graph in part (a) d. Estonia should specialize in producing cell phones because it has a lower opportunity cost: 4 cubic metres of lumber as opposed to Finland's 4.5 cubic metres of lumber. Finland should specialize in producing lumber because it has a lower opportunity cost: 0.22 units of a cell phone as opposed to Estonia's 0.25 units of a cell phone. e. Table 2.16: Output With Specialization Cell Phone Lumber output Output (cubic metres) Estonia 180 0 Finland 0 900 Total 180 900 f. Yes, cell phone output increased by 9 units (from 171 units to 180 units) and lumber output increased by 9 cubic metres (from 891 cubic metres to 900 cubic metres).

g. Table 2.17: Consumption With Trade

Estonia Finland

Cell Phone 90 90

Lumber (cubic metres) 400 500

h. See graph in part (a) i. Yes, trade has enabled the two countries to consume outside their PPFs. Diff: 3 Type: ES Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 78) Suppose in the United States, the opportunity cost of producing an engine is 4 auto bodies. In Canada, the opportunity cost of producing an engine is 2 auto bodies. a. What is the opportunity cost of producing an auto body for the United States? b. What is the opportunity cost of producing an auto body for Canada? c. Which country has a comparative advantage in the production of auto bodies? d. Which country has a comparative advantage in the production of engines? Answer: a. For the United States, the opportunity cost of producing an auto body is 1/4 of an engine. b. For Canada, the opportunity cost of producing an auto body is 1/2 of an engine. c. The United States has a comparative advantage in the production of auto bodies. d. Canada has a comparative advantage in the production of engines. Diff: 3 Type: SA Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

2.3

Explain the basic idea of how a market system works

1) Which of the following is not a factor of production? A) an acre of farmland B) a drill press in a machine shop C) the manager of the local tire shop D) $1,000 in cash E) entrepreneurship Answer: D Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 2) An example of a factor of production is A) stock issued by Bombardier. B) the train cars exported by Bombardier. C) a snow machine produced by Bombardier. D) a worker hired by Bombardier. E) a bailout by the government of Bombardier. Answer: D Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 3) If a commercial dairy farm wants to raise funds to purchase feeding troughs, it does so in the A) output market. B) product market. C) factor market. D) dairy products market. E) resource market. Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

4) The natural resources used in production are made available in the A) goods and services market. B) product market. C) government market. D) factor market. E) resource market. Answer: D Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 5) When you purchase a new pair of jeans you do so in the A) factor market. B) input market. C) product market. D) resource market. E) output market. Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 6) The resource income earned by those who supply ________ is called wages. A) labour B) capital C) equipment D) entrepreneurship E) land Answer: A Diff: 1 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 7) Which of the following statements about an entrepreneur is false? A) organizes the other factors of production into a working unit B) develops the vision for the firm and funds the producing unit C) sells his or her entrepreneurial services in the output market D) risks the personal funds provided E) operates a business for profit Answer: C Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

8) The ________ demonstrates the roles played by households and firms in the market system. A) production possibilities frontier B) circular flow model C) theory of comparative advantage D) business cycle E) scarcity theory Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 9) Households A) have no influence on the circular flow in a market economy. B) purchase resources in the factor market. C) sell goods in the product market. D) sell resources in the factor market. E) buy resources in the factor market. Answer: D Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 10) Households ________ final goods and services in the ________ market. A) purchase; factor B) purchase; product C) sell; factor D) sell; product E) provide; open Answer: B Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 11) In the circular flow model, producers A) sell goods and services in the factor market. B) and households spend earnings from resource sales on goods and services in the factor market. C) hire resources sold by households in the factor market. D) spend earnings from resource sales on goods and services in the product market. E) supply labour, entrepreneurial ability, and other factors of production to firms. Answer: C Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

12) Which of the following is a flow in the circular flow model? A) the flow of goods and services from households to firms B) the flow of profit and the flow of revenue C) the flow of income earned by firms and the flow of expenditures earned by households D) the flow of revenue received by firms and the flow of payments to resource owners E) the flow of spending from firms to households Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Figure 2.15

13) Refer to Figure 2.15. One segment of the circular flow diagram in the figure shows the flow of labour services from market K to economic agents J. What is market K and who are economic agents J? A) K = factor markets; J = households B) K = product markets; J = households C) K = factor markets; J = firms D) K = product markets; J = firms E) K = product markets; J = factor markets Answer: C Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

14) Refer to Figure 2.15. One segment of the circular flow diagram in the figure shows the flow of wages and salaries from market K to economic agents M. What is market K and who are economic agents M? A) K = factor markets; M = households B) K = product markets; M = households C) K = factor markets; M = firms D) K = product markets; M = firms E) K = product markets; J = factor markets Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Figure 2.16

15) Refer to Figure 2.16. One segment of the circular flow diagram in the figure shows the flow of goods and services from market C to economic agents A. What is market C and who are economic agents A? A) C = factor markets; A = households B) C = product markets; A = households C) C = factor markets; A = firms D) C= product markets; A = firms E) C= product markets; A = factor markets Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 90 Copyright © 2024 Pearson Canada Inc.

Figure 2.17

16) Refer to Figure 2.17. One segment of the circular flow diagram in the figure shows the flow of funds from economic agents E to market F. Who are economic agents E and what is market F? A) E = households; F = product markets B) E = firms; F = product markets C) E = households; F = factor markets D) E = firms; F = factor markets E) C= product markets; A = factor markets Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 17) All of the following are examples of spending on factors of production in the circular flow model except A) Bima hires two students to work at his ice-cream store. B) "Get Fit Together" purchases 3 new treadmills for its gym. C) Iris buys a dozen roses for her mother's birthday. D) the Banyan Tree rents a much larger property so that it can add a restaurant to its facilities. E) Celeste buys fresh herbs at the farmers' market to use in her restaurant. Answer: C Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 91 Copyright © 2024 Pearson Canada Inc.

18) Which of the following is an example of spending on goods and services in the circular flow model? A) Belinda purchases a new computer for her tax-preparation business. B) Javier buys 800 square feet of wood flooring for his vacation home. C) Celeste buys fresh herbs at the farmers' market to use in her restaurant. D) Timmy purchases a new examination table for use in his veterinary clinic. E) Iris buys a dozen roses for her mother's birthday. Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 19) "An Inquiry into the Nature and Causes of the Wealth of Nations" published in 1776 was written by A) John Maynard Keynes. B) Karl Marx. C) Alfred Marshall. D) Adam Smith. E) John Stuart Mill. Answer: D Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.18

20) Refer to Figure 2.18. Which two arrows in the diagram depict the following transaction: LaDonna sells 20 pairs of sunglasses at the Oakley store? A) J and M B) J and G C) K and M D) K and G E) K and J Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 21) Refer to Figure 2.18. Which two arrows in the diagram depict the following transaction: Dorian Gray hires "Wild Oscar," a professional portrait artist, to paint his picture? A) J and M B) K and G C) K and M D) J and G E) M and G Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 93 Copyright © 2024 Pearson Canada Inc.

22) Refer to Figure 2.18. Which two arrows in the diagram depict the following transaction: Barney earns $250 for selling scissors and razors to Floyd's Barber Shop? A) J and M B) K and G C) K and M D) J and G E) M and G Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 23) Adam Smith's behavioural assumption about humans was that people A) typically act irrationally. B) usually act in a rational, self-interested way. C) are consistently greedy. D) typically act randomly. E) should not own property. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 24) All of the following countries come close to the free market benchmark except A) Canada. B) North Korea. C) Germany. D) Singapore. E) Japan. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

25) All of the following are critical functions of the government in facilitating the operation of a market economy except A) protecting private property. B) enforcing property rights. C) ensuring an equal distribution of income. D) enforcing contracts. E) providing a legal environment. Answer: C Diff: 2 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 26) The term "property rights" refers to A) the physical possession of a house which the owner legally purchased. B) the ability to exercise control over one's own resources within the confines of the law. C) the government's right to appropriate land from wealthy land owners to redistribute to peasants. D) the right of a business not to have its assets confiscated by the government. E) the right of government to expropriate land without compensation. Answer: B Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 27) A major factor contributing to the slow growth rate of less developed economies is A) the lack of enforceable property rights. B) the lack of natural resources. C) the lack of workers. D) the high rate of illiteracy. E) the high rate of corruption. Answer: A Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 28) A successful market economy requires A) a government-controlled banking system and government price controls. B) well-defined property rights and an independent court system. C) generous unemployment benefits for everyone in the labour force. D) an equitable distribution of income and E) placing limits on immigration. Answer: B Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 95 Copyright © 2024 Pearson Canada Inc.

29) Consider the following items: a. the novel "The DaVinci Code" by Dan Brown b. "The Spirited Shipper," an innovative wine shipping box c. a Swiss chef's award-winning recipe d. an original fabric design, for example, the fabric used for "Coach" bags and luggage Which of the items listed is an example of intellectual property? A) a and b only B) a and d only C) b and c only D) a, b, and c E) all of the items listed Answer: E Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 30) An organization of producers that limits the amount of a good produced is known as a A) free market organization. B) guild. C) collective. D) co-op. E) trade alliance. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 31) Stricter laws and regulations to protect intellectual property rights A) will help to create a more successful market system. B) will only benefit those companies whose intellectual property rights have in the past been ignored. C) will tend to have little impact on an economy since intellectual property is not tangible. D) will create a stronger illicit market for intellectual property. E) will encourage innovation in intellectual property. Answer: A Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

32) If a nation changes its laws to more actively enforce intellectual property rights, all of the following will most likely take place except A) more software companies will choose to export their products to that country. B) more film makers will choose to do business in that country. C) the illicit market for intellectual property will become more prosperous in that country. D) foreign investment in that country will increase. E) more companies will invest in research and development. Answer: C Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 33) In economies with no effective government, A) standards of living are typically very low. B) standards of living are typically very high. C) standards of living typically rise rapidly. D) people cease to be so materialistic. E) trade can flourish. Answer: A Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Special Feature: Apply the Concept: Too Little of a Good Thing 34) The payment received by suppliers of entrepreneurial skills is called interest. Answer: FALSE Diff: 1 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 35) In the circular flow model, households supply resources such as labour services in the product market. Answer: TRUE Diff: 1 Type: TF Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 36) Entrepreneurs bring together the factors of production to produce goods and services. Answer: TRUE Diff: 1 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

37) In a free market there are virtually no restrictions, or at best few restrictions on how factors of production can be employed. Answer: TRUE Diff: 1 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 38) Crude oil is not an example of a factor of production, but when crude oil is processed into gasoline, it is not a factor of production. Answer: FALSE Diff: 2 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 39) Each person goes about her daily business seeking to maximize her own self interests. In doing so, she contributes to the welfare of society at large. This is the idea underlying Adam Smith's "invisible hand." Answer: TRUE Diff: 2 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 40) What is the difference between product markets and factor markets? Answer: Product markets are markets for goods and services. Factor markets are markets for the factors of production, which are the inputs used to make goods and services. Diff: 1 Type: ES Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 41) How do firms and households interact in markets? Answer: Firms supply goods and services to households, and buy factors of production from households. Households supply factors of production to firms, and buy goods and services from firms. Diff: 1 Type: ES Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 42) What is meant by the term "free market"? Answer: A free market is a market with few government restrictions on how a good or service can be produced or sold or on how factors of production can be employed. Diff: 1 Type: ES Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

43) How does Adam Smith's idea of the "invisible hand" apply to the various parts, made by many different manufacturers in many different countries, that are used by Apple to produce an iPad? Answer: Smith used the "invisible hand" reference to explain why markets provide consumers with desired products and services. In the case of the iPad, the invisible hand of the market has led these parts manufacturers to contribute their knowledge and resources to the process that ultimately results in a product available for sale in the United States and around the world. Diff: 3 Type: ES Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Analytic Skills 44) Which of the following is a factor of production? A) a sofa produced by a furniture manufacturer B) 20 shares of Microsoft stock C) the janitor at the local elementary school D) $500 in cash E) entrepreneurship Answer: C Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 45) An example of a factor of production is A) a car produced by an auto manufacturer. B) a worker hired by an auto manufacturer. C) a loan granted to an auto manufacturer. D) the automobiles exported by an auto manufacturer. E) taxes paid by an auto manufacturer. Answer: B Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 46) If a microbrewery wants to purchase a new bottling machine, it does so in the A) factor market. B) output market. C) product market. D) alcoholic beverages market. E) government market. Answer: A Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

47) A worker is hired in a(n) A) goods and services market. B) product market. C) government market. D) factor market. E) input market. Answer: D Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 48) When you purchase a bicycle you do so in the A) resource market. B) product market. C) input market. D) factor market. E) labour market. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 49) The income earned by those who supply labour services is called A) wages and salaries. B) stock options. C) profit. D) bonus. E) taxes. Answer: A Diff: 1 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 50) Which of the following statements about an entrepreneur is true? A) An entrepreneur purchases other factors of production in the output market. B) An entrepreneur develops the vision for the firm and funds the producing unit. C) An entrepreneur sells entrepreneurial services in the output market. D) An entrepreneur does not face personal risk. E) An entrepreneur does not operate a business. Answer: B Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

51) The circular flow model demonstrates A) the role of the government in overseeing the market system. B) the roles played by households and firms in the market system. C) how shortages and surpluses are eliminated in a market. D) how demand and supply for goods and services are in equilibrium. E) the maximum attainable combinations of two products. Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 52) The circular flow shows us that A) firms and households depend on each other. B) firms make all the important decisions in the economy. C) households have no role in the economy beyond consuming products. D) firms are the ultimate consumers in the economy. E) a command economy is efficient. Answer: A Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 53) Firms A) have no influence on the circular flow in a market economy. B) purchase resources in the product market. C) sell goods in the product market. D) sell resources in the factor market. E) bring supply and demand into equilibrium. Answer: C Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 54) Households A) purchase final goods and services in the factor market. B) purchase final goods and services in the product market. C) purchase resources in the product market. D) purchase resources in the factor market. E) have no influence on the circular flow in a market economy. Answer: B Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

55) In the circular flow model, households A) sell goods and services in the input market. B) and firms spend earnings from resource sales on goods and services in the factor market. C) hire resources sold by firms in the factor market. D) spend earnings from resource sales on goods and services in the product market. E) have no influence on the circular flow in a market economy. Answer: D Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 56) Which of the following is not a flow in the circular flow model? A) the flow of resources to produce goods and services B) the flow of profit and the flow of revenue C) the flow of income earned by households D) the flow of payments to resource owners E) the flow of expenditures incurred by households Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.19

57) Refer to Figure 2.19. In the circular flow diagram, Market K represents A) households. B) product markets. C) firms. D) factor markets. E) government. Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 58) Refer to Figure 2.19. In the circular flow diagram, Economic Agents M represents A) households. B) product markets. C) firms. D) factor markets. E) government. Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

59) Which of the following are represented by the same flow in the circular flow model? A) the flow of goods and the flow of factors of production B) the flow of costs and the flow of revenue C) the flow of income earned from the sale of resources and the flow of expenditures on goods and services D) the flow of income received by households and the flow of tax revenues paid by firms E) the flow of expenditures on goods and services and the flow of tax revenues paid by firms Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 60) Which of the following statements is true about a simple circular flow model? A) Producers are neither buyers nor sellers in the product market. B) Households are neither buyers nor sellers in the input market. C) Producers are buyers in the factor market. D) Households are sellers in the product market. E) Firms are the owners and suppliers of factors of production. Answer: C Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.20

61) Refer to Figure 2.20. In the circular flow diagram, who are Economic Agents A and who are Economic Agents B? A) A = firms; B = households B) A = households; B = firms C) A = households; B = factor markets D) A= firms; B = product markets E) A= households; B = product markets Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.21

62) Refer to Figure 2.21. One segment of the circular flow diagram in Figure 2.21 shows the flow of funds from Market F to Economic Agents G. The funds represent spending on goods and services. What is Market F and who are Economic Agents G? A) F = factor markets; G = households B) F = product markets; G = households C) F = factor markets; G = firms D) F = product markets; G = firms E) F = product markets; G = factor markets Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 63) Which of the following is an example of spending on factors of production in the circular flow model? A) Tuon purchases a cappuccino at the student union. B) Laurence rents a car to drive to a wedding in Montreal. C) Yvette pays $50 to join a softball league. D) The "Lucky Ducky" casino buys a new craps table for the casino floor. E) Nader buys an economics textbook on Amazon. Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

64) Which of the following is not an example of spending on goods and services in the circular flow model? A) Amanda purchases a new electric guitar to pursue her hobby seriously. B) Chaitanya buys a new spa pedicure chair for her expanding nail salon business. C) Hernan buys a pizza at Papa C's. D) Lenny buys a new digital camera to take pictures at his son's graduation. E) The "Lucky Ducky" casino buys a new craps table for the casino floor. Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 65) Which of the following is an example of spending on goods and services in the circular flow model? A) Micah purchases a new wrench for his auto repair business. B) Chester buys a first-class ticket from Montreal to London for his long-awaited vacation. C) Toby buys a new lawn mower to use in his lawn care business. D) Lily purchases a new massage table for use in her therapy center. E) Chris buys a bottling system for his winery. Answer: B Diff: 2 Type: MC Topic: The Circular Flow Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Analytic Skills 66) Published in 1776, ________ was written by Adam Smith. A) The General Theory of Employment, Interest, and Money B) The Communist Manifesto C) The Declaration of Economics D) An Inquiry into the Nature and Causes of the Wealth of Nations E) Principles of Political Economy Answer: D Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.22

67) Refer to Figure 2.22. Which two arrows in the diagram depict the following transaction: Stanley purchases the novel Night of Sorrows for his summer reading pleasure? A) J and M B) J and G C) K and M D) K and G E) K and J Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 68) Refer to Figure 2.22. Which two arrows in the diagram depict the following transaction: Lizzie Haxem hires College Pro Painters, a painting company, to paint her home? A) J and M B) K and G C) K and M D) J and G E) K and J Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

69) Refer to Figure 2.22. Which two arrows in the diagram depict the following transaction: Carter earns a $400 commission for selling men's designer shoes at Moores? A) J and M B) K and G C) K and M D) J and G E) K and J Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 70) ________ behavioural assumption about humans was that people usually act in a rational, selfinterested way. A) Thomas Malthus's B) Adam Smith's C) Karl Marx's D) Janet Yellen's E) John Maynard Keynes's Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 71) Which of the following countries is currently furthest from the free market benchmark? A) the United States B) Japan C) Cuba D) France E) Canada Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

72) When BlackBerry made its Leap smart phone, it relied on A) the market to coordinate most of the production. B) its employees to coordinate most of the production. C) the federal government to coordinate most of the production. D) the guild of electronics engineers to coordinate most of the production. E) universities to coordinate most of the production. Answer: A Diff: 1 Type: MC Topic: Market Economies Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 73) A critical function of the government in facilitating the operation of a market economy is A) producing goods and services for low-income households. B) setting up and enforcing private property rights. C) ensuring an equal distribution of income to all citizens. D) controlling the market prices of essential services. E) eliminating social classes. Answer: B Diff: 2 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Special Feature: Apply the Concept: Too Little of a Good Thing 74) The ability to exercise control over one's own resources within the confines of the law refers to A) the free market. B) property rights. C) entrepreneurship. D) having an absolute advantage. E) the command system. Answer: B Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 75) The primary purpose of patents and copyrights is to A) provide owners with large profit forever. B) protect firms from being taken advantage of by competing firms. C) protect domestic firms from foreign competition. D) encourage the expenditure of funds on research and development to create new products. E) produce fewer goods and services. Answer: D Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 110 Copyright © 2024 Pearson Canada Inc.

76) If property rights are not well enforced, which of the following is not likely to occur? A) Fewer goods and services will be produced. B) Economic efficiency will be reduced. C) An economy will produce inside its production possibilities frontier. D) A significant number of people will be willing to invest in local businesses. E) Business deals are honoured. Answer: D Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 77) A successful market economy requires well-defined property rights and A) balanced supplies of all factors of production. B) an independent court system to adjudicate disputes based on the law. C) detailed government regulations. D) a safety net to ensure that those who cannot participate in the market economy can earn an income. E) anti-expropriation laws. Answer: B Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Special Feature: Apply the Concept: Too Little of a Good Thing 78) All of the following are considered intellectual property except A) books. B) films. C) software. D) shares of stock. E) music. Answer: D Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 79) In Canada, property rights are under the jurisdiction of A) both federal and provincial governments. B) provincial governments only. C) the federal government only. D) municipal government. E) the United Nations. Answer: A Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 111 Copyright © 2024 Pearson Canada Inc.

80) In most provinces, provincial property rights law is known as A) the Sale of Goods Act. B) the Property Rights Act. C) something different in each province. D) the Purchase and Sale Act. E) the Competition Act. Answer: A Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 81) A guild is A) a group of independent producers competing with each other. B) an organization of producers that limits the amount of a good produced. C) a group of nations who agree not to compete with each other. D) a nation that is a free market benchmark. E) an intergovernmental organization. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 82) In 18th century Europe, governments gave guilds legal authority to limit production of goods. This authority obstructed the market mechanism because the guild's actions prevented the forces of ________ from coordinating the self-interested decisions of producers and consumers. A) absolute advantage B) demand and supply C) opportunity cost D) nature E) government Answer: B Diff: 2 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

83) When a celebrity has the desire to have his image protected following his death, this is best described as an example of the protection of A) an invention. B) a patent. C) a trademark. D) intellectual property. E) privacy. Answer: D Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 84) In the desire to have a celebrity's image protected to prevent it from being used in ways he would not approve, a celebrity's estate A) will probably not be successful, since there are no laws regulating this kind of use in Canada. B) will have to be granted a patent declaring the celebrity's image a new product, and this will give the estate protection for 7 years. C) can rely on Canadian laws that protect intellectual property rights to prevent the unauthorized use of his image. D) will most likely be more successful in developing countries than in high-income countries, since property regulations are better enforced in developing countries. E) will pay Google to remove all images from the Internet. Answer: C Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 85) If Canada falls behind patent or copyright protection in other countries, which of the following would most likely occur? A) Innovating companies would likely expand their Canada-based research and development departments. B) More dollars would be spent on the development of new technology. C) Canadian companies would increase domestic investment in the development of more innovative products. D) Fewer patents would be issued to innovators and inventors. E) Going to court to enforce a patent or copyright will be successful. Answer: D Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Analytic Skills

86) The payment received by suppliers of entrepreneurial skills is called profit. Answer: TRUE Diff: 1 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 87) In the circular flow model, households demand resources such as labour services in the product market. Answer: FALSE Diff: 1 Type: TF Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 88) In economics, the term "free market" refers to a market where no sales tax is imposed on products sold. Answer: FALSE Diff: 1 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 89) In a free market there are virtually no restrictions, or at best few restrictions, on how a good or service can be produced or sold. Answer: TRUE Diff: 1 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 90) A stand of redwood trees is not an example of a factor of production but the harvested and processed redwood is a factor of production. Answer: FALSE Diff: 2 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 91) The idea underlying Adam Smith's "invisible hand" is that people tend to behave in ways that go unnoticed in society. Answer: FALSE Diff: 2 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

92) In a simple circular flow diagram, who supplies factors of production in markets and who buys these factors of production? Who supplies goods and services in markets and who buys these goods and services? Answer: Households supply factors of production and buy goods and services in markets. Firms buy factors of production and supply goods and services in markets. Diff: 2 Type: SA Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 93) List the four broad categories of factors of production. Answer: labour, capital, natural resources, and entrepreneurship Diff: 2 Type: SA Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 94) Define the term "property rights." Explain why the lack of well-defined and enforceable property rights is detrimental to the smooth functioning of a market system. Answer: The term "property rights" refers to the rights that individuals or firms have to the exclusive use of their resources, within the confines of the law. Well-defined and enforceable property rights provide the incentive for people and firms to invest resources and undertake risks. This encourages the production of a wide range of goods and services. Without property rights and the means to enforce these rights, no person would want to undertake such a risk. Diff: 2 Type: SA Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 95) Why are music, television, and movie companies concerned about their products being posted to Internet websites such as YouTube? Answer: These companies believe that their intellectual property rights are being violated when the unauthorized use of their material appears on these websites, and this reduces their ability to sell this material. Diff: 3 Type: SA Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

96) Adam Smith, the father of modern economics, wrote in his book, An Inquiry into the Nature and Causes of the Wealth of Nations, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner but from their regard to their own interest." Explain what he meant by that statement and how such behaviour promotes the wealth of a nation. Answer: The statements refer to the fact that people act in their own self-interest. For example, the butcher who sells meat and the baker who bakes bread carry out these activities because these tasks contribute to their livelihood, not because they are concerned about other people. Nevertheless, their actions benefited others. This is precisely one of the virtues of a market: people do not have to act virtuously to produce worthwhile outcomes. Producing goods and services that consumers value increases the wealth of a nation. Diff: 3 Type: SA Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 97) Identify whether each of the following transactions will take place in the factor market or in the product market: a. Shondra buys a Harley-Davidson Softail motorcycle. b. Aimee works 20 hours a week at a grocery store. c. Gustavo sells a warehouse to a produce delivery company. d. Cadbury increases employment at its Ontario plant. Answer: Transaction a takes place in the product market. Transactions b, c, and d take place in the factor market. Diff: 2 Type: SA Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Analytic Skills

Microeconomics, 4Ce (Hubbard) Chapter 3 Where Prices Come From: The Interaction of Supply and Demand 3.1

Discuss the variables that influence demand

1) The market for athletic shoes is becoming more competitive. The increase in competition in this market is an example of how the market responds to A) changes in consumer tastes. B) decreases in income. C) changes in expected future prices. D) decreases in the price of other categories of shoes. E) increases in the price of other categories of shoes. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytical Thinking Special Feature: Chapter Opener: A Basketball Player Takes a Tumble–And So Does Nike 2) If the sales of carbonated soft drinks continue to decline due to taxes on these beverages, this will likely A) increase the demand for premium water, because premium water and carbonated soft drinks are considered complements. B) increase the demand for premium water, because premium water and carbonated soft drinks are considered substitutes. C) decrease the demand for premium water, because premium water is considered an inferior good and carbonated soft drinks are considered normal goods. D) decrease the demand for premium water, because premium water is considered a normal good and carbonated soft drinks are considered inferior goods. E) not affect the demand for premium water, because premium water and carbonated soft drinks are unrelated goods. Answer: B Diff: 1 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Chapter Opener: How Smart Is Your Water?

3) What is the difference between an "increase in demand" and an "increase in quantity demanded"? A) There is no difference between the two terms; they both refer to a shift to the right of the demand curve. B) An "increase in demand" is represented by a rightward shift of the demand curve while an "increase in quantity demanded" is represented by a movement along a given demand curve. C) There is no difference between the two terms; they both refer to a movement along a given demand curve. D) An "increase in demand" is represented by a movement along a given demand curve, while an "increase in quantity demanded" is represented by a rightward shift of the demand curve. E) There is no difference between the two terms; they both refer to a shift to the left of the demand curve. Answer: B Diff: 1 Type: MC Topic: Demand vs. Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 4) The demand by all the consumers of a given good or service is the ________ for the good or service. A) market demand B) quantity demanded C) law of demand D) scheduled demand E) individual demand Answer: A Diff: 1 Type: MC Topic: Market Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 5) If, in response to an increase in the price of chocolate, the quantity demanded of chocolate decreases economists would describe this as A) a decrease in demand. B) a decrease in quantity demanded. C) a change in consumer income. D) a decrease in consumers' taste for chocolate. E) a change in demographics. Answer: B Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

6) By drawing a demand curve with ________ on the vertical axis and ________ on the horizontal axis, economists assume that the most important determinant of the demand for a good is the ________ of the good. A) quantity; price; quantity B) price; quantity; quantity C) price; quantity; price D) quantity; price; price E) quantity; quantity; price Answer: C Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 7) The law of demand implies, holding everything else constant, that A) as the price of bagels increases, the quantity of bagels demanded will decrease. B) as the price of bagels increases, the quantity of bagels demanded will increase. C) as the price of bagels increases, the demand for bagels will decrease. D) as the price of bagels decreases, the demand for bagels will decrease. E) as the price of bagels decreases, the demand for bagels will increase. Answer: A Diff: 1 Type: MC Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 8) If a demand curve shifts to the right, then A) demand has increased. B) quantity demanded has increased. C) demand has decreased. D) quantity demanded has decreased. E) demand and quantity demanded have stayed the same. Answer: A Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

9) Holding everything else constant, an increase in the price of yogurt will result in A) an increase in consumers' taste for yogurt. B) a decrease in the demand for yogurt. C) a decrease in the supply of yogurt. D) a decrease in the quantity of yogurt demanded. E) an increase in the demand for yogurt. Answer: D Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 10) A change in all of the following variables will change the market demand for a product except A) the price of the product. B) population and demographics. C) consumer income. D) consumer tastes. E) the number of firms in the market. Answer: A Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Table 3.1 Loose Leaf Tea Sunil's Mia's Rest of Market Market Price per kg Quantity Quantity Quantity Quantity (dollars) Demanded (kg) Demanded (kg) Demanded (kg) Demanded (kg) $8 4 0 30 6 7 2 40 5 9 3 51 4 12 5 64 3 15 8 90 11) Refer to Table 3.1. The table above shows the demand schedules for loose-leaf tea of two individuals (Sunil and Mia) and the rest of the market. At a price of $5, the quantity demanded in the market would be A) 51 kg. B) 63 kg. C) 76 kg. D) 90 kg. E) 146 kg. Answer: B Diff: 2 Type: MC Topic: Demand Schedules Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 4 Copyright © 2024 Pearson Canada Inc.

12) Refer to Table 3.1. The table above shows the demand schedules for loose-leaf tea of two individuals (Sunil and Mia) and the rest of the market. If the price of loose-leaf tea rises from $3 to $4, the market quantity demanded would A) decrease by 32 kg. B) increase by 64 kg. C) increase by 32 kg. D) decrease by 64 kg. E) stay the same. Answer: A Diff: 2 Type: MC Topic: Demand Schedules Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 13) The income effect of a price change refers to the impact of a change in A) income on the price of a good. B) demand when income changes. C) the quantity demanded when income changes. D) the price of a good on a consumer's purchasing power. E) the income that consumers have available to spend. Answer: D Diff: 3 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 14) Which of the following will shift the demand curve for a good? A) a change in the technology used to produce the good B) an increase in the price of the good C) a decrease in the price of a complementary good D) a decrease in the price of the good E) a change in the number of firms Answer: C Diff: 1 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

15) A movement along the demand curve for toothpaste would be caused by A) a change in the price of toothbrushes. B) a change in consumer income. C) a change in the price of toothpaste. D) a change in population. E) a change in the number of firms Answer: C Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 16) When the price of a normal good falls, consumers buy a larger quantity because of the ________ effect and the ________ effect. A) substitution; income B) normal; inferior C) substitute; complement D) supply; demand E) tastes; demographics Answer: A Diff: 1 Type: MC Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 17) If the price of grapefruit rises, the substitution effect due to the price change will cause A) a decrease in the demand for grapefruit. B) a decrease in the demand for oranges, a substitute for grapefruit. C) a decrease in the quantity demanded of grapefruit. D) a decrease in the quantity supplied of grapefruit. E) an increase in the number of citrus farmers. Answer: C Diff: 3 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

18) The ________ effect refers to the change in quantity demanded for a good that results from the effect of a change in the good's price on consumer's purchasing power. A) ceteris paribus B) population C) substitution D) income E) complement Answer: D Diff: 2 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 19) If an increase in income leads to in an increase in the demand for peanut butter, then peanut butter is A) a neutral good. B) a normal good. C) a necessity. D) a complement. E) an inferior good. Answer: B Diff: 1 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 20) If an increase in income leads to a decrease in the demand for popcorn, then popcorn is A) an inferior good. B) a neutral good. C) a necessity. D) a normal good. E) a complement. Answer: A Diff: 2 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

21) Whether a good is normal or inferior depends on A) people's attitudes. B) the price of the product. C) the taxes people pay when purchasing it. D) the quality of the product. E) the popularity of the product. Answer: A Diff: 2 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: The Transformation of Lobster from Inferior to Normal Good Figure 3.1

22) Refer to Figure 3.1. An increase in population would be represented by a change from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: C Diff: 2 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

23) Refer to Figure 3.1. A case in which consumers no longer cared for a product would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) A to 0. Answer: D Diff: 2 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 24) Refer to Figure 3.1. If the product represented is an inferior good, an increase in income would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 25) Refer to Figure 3.1. A decrease in the price of the product would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) A to 0. Answer: A Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

26) The Internet has created a new category in the book selling market, namely, the "barely used" book. How does the availability of barely used books affect the market for new books? A) The demand curve for new books shifts to the right. B) The demand curve for new books shifts to the left. C) The supply curve for new books shifts to the right. D) The supply curve for new books shifts to the left. E) The supply and demand curves will remain unchanged. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 27) Elvira decreased her consumption of bananas when the price of peanut butter increased. For Elvira, peanut butter and bananas are A) substitutes in consumption. B) both inferior goods. C) complements in consumption. D) both luxury goods. E) both unrelated goods. Answer: C Diff: 3 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 28) If the price of automobiles was to increase, then A) the demand for gasoline would decrease. B) the demand for gasoline would increase. C) the supply of gasoline would increase. D) the quantity demanded of gasoline would decrease. E) the demand for gasoline would remain unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

29) Suppose that when the price of raspberries increases, Lonnie increases his purchases of papayas. To Lonnie, A) raspberries and papayas are complements. B) raspberries and papayas are inferior goods. C) raspberries and papayas are normal goods. D) raspberries and papayas are substitutes. E) raspberries and papayas are unrelated. Answer: D Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 30) Suppose that when the price of hamburgers decreases, the Li family increases their purchases of ketchup. To the Li family, A) hamburgers and ketchup are complements. B) hamburgers and ketchup and substitutes. C) hamburgers and ketchup are normal goods. D) hamburgers are normal goods and hot dogs are inferior goods. E) hamburgers and ketchup are unrelated goods. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 31) Studies have shown links between calcium consumption and a reduction in osteoporosis. How does this affect the market for calcium? A) The calcium supply curve shifts to the right because of a change in tastes in favour of calcium. B) The calcium demand curve shifts to the right because of a change in tastes in favour of calcium. C) The calcium demand curve shifts to the left because this new information will increase the price of calcium. D) The calcium supply curve shifts to the left because this new information will increase the price of calcium. E) The calcium demand curve shifts to the left because this new information will affect expectations of osteoporosis. Answer: B Diff: 2 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

32) Technological advances have resulted in lower prices for digital cameras. What is the impact of this on the market for traditional (non-digital) cameras? A) The demand curve for traditional cameras shifts to the right. B) The supply curve for traditional cameras shifts to the right. C) The demand curve for traditional cameras shifts to the left. D) The supply curve for traditional cameras shifts to the left. E) The supply and demand curves will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 33) If the price of smartphones was to increase, then A) the demand for smartphone apps would decrease. B) the demand for smartphone apps would increase. C) the quantity of smartphone apps demanded would increase. D) the quantity of smartphone apps demanded would decrease. E) the demand for smartphone apps would remain unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 34) Technological advancements have led to lower prices and an increase in the sale of digital cameras. How does this affect the digital photo printing paper market? A) The demand curve for digital photo printing paper shifts to the right. B) The demand curve for digital photo printing paper shifts to the left. C) The supply curve for digital photo printing paper shifts to the right. D) The supply curve for digital photo printing paper shifts to the left. E) The supply and demand curves will remain unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

35) Buyers rush to purchase stocks in Ontario vineyards following a forecast of a 30 percent decline in this year's grape harvest. What happens in the Ontario wine market as a result of this announcement? A) The demand curve for Ontario wine shifts to the left in anticipation of higher prices in the future. B) The demand curve for Ontario wine shifts to the right in anticipation of higher prices in the future. C) The supply curve for Ontario wine shifts to the right in anticipation of higher prices in the future. D) The supply curve for Ontario wine shifts to the left in anticipation of lower quantities in the future. E) The supply and demand curves will remain unchanged. Answer: B Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 36) Generous farm subsidies have encouraged farmers to produce more corn and more wheat. How does this affect the market for fertilizer? A) The supply of fertilizer increases. B) The supply of fertilizer decreases. C) The demand for fertilizer increases. D) The demand for fertilizer decreases. E) The supply and demand curves will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 37) In June, buyers of titanium expect that the price of titanium will fall in July. What happens in the titanium market in June, holding everything else constant? A) The demand curve shifts to the right. B) The quantity demanded increases. C) The quantity demanded decreases. D) The demand curve shifts to the left. E) The supply and demand curves will remain unchanged. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

38) In January, buyers of gold expect that the price of gold will rise in February. What happens in the gold market in January, holding all else constant? A) The supply curve shifts to the right. B) The demand curve shifts to the left. C) The demand curve shifts to the right. D) The quantity demanded increases. E) The supply and demand curves will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 39) As incomes in Alberta fall people are drinking less craft beer and more beer produced by international brewers. Thus, an economist would consider beer produced by international brewers to be a(n) A) normal good. B) inferior good. C) complementary good. D) substitute good. E) unrelated good. Answer: B Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 40) Which of the following products would be most likely to see a rise in demand due a drop in incomes? A) instant ramen noodles B) lobster dinners C) new cars D) hotel rooms E) jewellery Answer: A Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

41) Which of the goods is most likely to see an increase in demand as a result of an aging population? A) health care B) university education C) energy drinks D) cars E) toys Answer: A Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 42) Which of the following is expected to occur as the population ages? A) The demand for baby clothes should increase. B) The demand for prescription drugs should decrease. C) The demand for medical services should increase. D) The demand for larger houses should increase. E) The demand for toys should increase. Answer: C Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 43) As the population ages, we would expect A) jobs in health care to increase. B) jobs in health care to decline at a faster rate than overall jobs in the economy. C) demand for medical services to decline, which would result in a decline in available jobs in the medical field. D) demand for large houses to increase. E) demand for toys and children's books should increase. Answer: A Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes

44) When deciding on which new products to develop, a firm must devote people, time, and money to designing a new product. Because any firm has only limited resources, it A) should wait until its competitors develop a similar product before deciding on devoting resources to its own product development. B) is not able to develop more than one new product at a time. C) must be certain that the product it chooses to develop will be successful or it will not be able to stay in business. D) faces a trade-off, because resources used to develop one product will not be available to develop another product. E) should wait until demographics change before developing a new product. Answer: D Diff: 1 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 45) The income effect of a price change refers to the change in the quantity demanded of a good that results from a change in purchasing power as a result of the price change. Answer: TRUE Diff: 2 Type: TF Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 46) Chips and salsa are complements. If the price of salsa decreases, the demand for chips will increase. Answer: TRUE Diff: 1 Type: TF Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 47) A normal good is a good for which the demanded increases as income decreases, holding everything else constant. Answer: FALSE Diff: 1 Type: TF Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 48) The income effect explains why there is an inverse relationship between the price of a product and the quantity of the product demanded. Answer: TRUE Diff: 1 Type: TF Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 16 Copyright © 2024 Pearson Canada Inc.

49) If consumers believe the price of iPads will decrease in the future, this will cause the demand for iPads to decrease now. Answer: TRUE Diff: 1 Type: TF Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 50) What is the ceteris paribus condition? Answer: The ceteris paribus condition is the requirement that when analyzing the relationship between two variables, such as price and quantity demanded, other variables must be held constant. Diff: 1 Type: ES Topic: Ceteris Paribus Condition Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 51) What are the two effects that explain the Law of Demand? Briefly explain each effect. Answer: The two effects that explain the Law of Demand are the income effect and the substitution effect. The income effect is the change in quantity demanded of a good that results from a change in purchasing power due to a change in the good's price. The substitution effect is the change in quantity demanded of a good that results from the effect of a change in the good's price making the good more or less expensive relative to other goods that are substitutes. Diff: 3 Type: ES Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 52) Explain the difference between a normal good and an inferior good. Answer: A normal good is something for which the demand increases when income rises and the demand decreases when income falls. An inferior good is something for which the demand decreases when income rises and the demand increases when income falls. Diff: 2 Type: ES Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

53) For each of the following pairs of products, state which are complements, which are substitutes, and which are unrelated. a. digital camera and memory stick b. 7Up and Mountain Dew c. swimsuits and flip-flops d. Tylenol and cat food e. photocopier and paper Answer: a. complements b. substitutes c. complements d. unrelated e. complements Diff: 1 Type: ES Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 54) The market for energy drinks has become very competitive. The increase in competition in this market is an example of how the market responds to A) decreases in the price of coffee (a substitute for the product). B) increases in income. C) changes in population. D) changes in consumer tastes. E) changes in expectations. Answer: D Diff: 2 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 55) A(n) ________ is represented by a rightward shift of the demand curve while a(n) ________ is represented by a movement along a given demand curve. A) increase in demand; decrease in demand B) increase in demand; increase in quantity demanded C) decrease in demand; decrease in quantity demanded D) increase in quantity demanded; increase in demand E) decrease in quantity demanded; increase in demand Answer: B Diff: 1 Type: MC Topic: Demand vs. Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

56) A demand curve shows the relationship between A) the price of a product and the quantity of the product demanded. B) the amount of a product sellers are willing to sell at a particular price and the amount consumers are willing to buy at that price. C) the quantity that consumers are willing and able to buy and the quantity that sellers are willing and able to offer. D) the price of a produce and the demand for the product. E) consumer tastes and preferences and the demand for the product. Answer: A Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 57) If, in response to a decrease in the price of coffee, the quantity demanded of coffee increases, economists would describe this as A) an increase in demand. B) an increase in quantity demanded. C) a change in consumer income. D) an increase in consumers' taste for coffee. E) a decrease in demand. Answer: B Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 58) By drawing a demand curve with price on the vertical axis and quantity on the horizontal axis, economists assume that the most important determinant of the demand for a good is A) consumer income. B) consumer tastes and preferences. C) the price of the good. D) the quality of the good. E) the quantity of the good. Answer: C Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

59) The law of demand implies, holding everything else constant, that as the price of pizza A) increases, the demand for pizza will increase. B) increases, the quantity of pizza demanded will decrease. C) decreases, the quantity of pizza demanded will decrease. D) decreases, the demand for pizza will increase. E) decreases, the demand for pizza remains unchanged. Answer: B Diff: 1 Type: MC Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 60) The phrase "demand has increased" means that A) a demand curve has shifted to the left. B) there has been an upward movement along a demand curve. C) there has been a downward movement along a demand curve. D) a demand curve has shifted to the right. E) a demand curve has not shifted. Answer: D Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 61) Holding everything else constant, a decrease in the price of GPS systems will result in A) a decrease in the quantity of GPS systems demanded. B) an increase in the demand for GPS systems. C) a decrease in the supply of GPS systems. D) an increase in the quantity of GPS systems demanded. E) an increase in the supply of GPS systems. Answer: D Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 62) A change in which variable will change the market demand for a product? A) prices of inputs B) expected future prices C) the number of firms in the market D) the quantity of the product supplied E) technological change Answer: B Diff: 1 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

Table 3.2 Kona Coffee Luke's Ravi's Rest of Market Market Price per Quantity Quantity Quantity Quantity kilogram Demanded (kg) Demanded (kg) Demanded (kg) Demanded (kg) (dollars) $10 3 0 23 8 9 3 32 6 14 7 68 5 18 12 85 4 22 18 110 63) Refer to Table 3.2. The table above shows the demand schedules for Kona coffee of two individuals (Luke and Ravi) and the rest of the market. At a price of $6, the quantity demanded in the market would be A) 36 kg. B) 68 kg. C) 89 kg. D) 110 kg. E) 123 kg. Answer: C Diff: 2 Type: MC Topic: Demand Schedules Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 64) Refer to Table 3.2. The table above shows the demand schedules for Kona coffee of two individuals (Luke and Ravi) and the rest of the market. If the price of Kona coffee rises from $4 to $5, the market quantity demanded would A) decrease by 35 kg. B) increase by 115 kg. C) increase by 35 kg. D) decrease by 115 kg. E) remain unchanged. Answer: A Diff: 2 Type: MC Topic: Demand Schedules Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

65) The ________ effect of a price change refers to the impact a change in the price of a good has on a consumer's purchasing power. A) income B) substitution C) demographics D) ceteris paribus E) complementary Answer: A Diff: 3 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 66) Which of the following will not shift the demand curve for a good? A) an increase in population B) an increase in the price of the good C) a decrease in the price of a substitute good D) an increase in consumer incomes E) an increase in the price of a complementary good Answer: B Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 67) A ________ demand curve for shampoo would be caused by a change in the price of shampoo. A) rightward shift of the B) leftward shift of the C) movement along the D) positively sloped E) negatively sloped Answer: C Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

68) The substitution effect of a price change refers to A) the change in quantity demanded that results from a change in price relative to other goods that are substitutes. B) the shift of a demand curve when the price of a substitute good changes. C) the movement along the demand curve due to a change in purchasing power brought about by the price change. D) the shift in the demand curve due to a change in purchasing power brought about by the price change. E) the change in quantity demanded that results from a change in price relative to other goods that are complements. Answer: A Diff: 3 Type: MC Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 69) If the price of potato chips falls, the substitution effect due to the price change will cause A) an increase in the demand for potato chips. B) an increase in the demand for corn chips, a substitute for potato chips. C) an increase in the quantity of potato chips demanded. D) a decrease in the quantity of potato chips demanded. E) the demand curve to remain unchanged. Answer: C Diff: 3 Type: MC Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 70) The income effect of a price change results in a A) shift to the right of the demand curve when income changes. B) movement along the demand curve due to a change in relative prices. C) shift of the demand curve due to a change in purchasing power brought about by the price change. D) movement along the demand curve due to a change in purchasing power brought about by the price change. E) shift to the left of the demand curve when income changes. Answer: D Diff: 2 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

71) The more substitutes there are for a good, A) the flatter the demand curve will be. B) the steeper the demand curve will be. C) the larger the income effect. D) the less important the price of the good will be. E) the smaller the income effect. Answer: A Diff: 3 Type: MC Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 72) If a decrease in income leads to a decrease in the demand for ice cream, then ice cream is A) a normal good. B) a neutral good. C) a complement. D) a necessity. E) an inferior good. Answer: A Diff: 1 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 73) If a decrease in income leads to an increase in the demand for macaroni, then macaroni is A) an inferior good. B) a neutral good. C) a necessity. D) a normal good. E) a complement. Answer: A Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

Figure 3.2

74) Refer to Figure 3.2. An increase in the price of a complement would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 75) Refer to Figure 3.2. A decrease in the expected future price of the product would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) A to 0. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

76) Refer to Figure 3.2. If the product represented is a normal good, an increase in income would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: C Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 77) Refer to Figure 3.2. An increase in the price of the product would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: B Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 78) How has the growing popularity of on-line shopping affected the market for clothing at retail department stores? A) The demand curve for clothing at retail department stores has shifted to the right. B) The demand curve for clothing at retail department stores has shifted to the left. C) The supply curve for clothing at retail department stores has shifted to the right. D) The supply curve for clothing at retail department stores has shifted to the left. E) The supply and demand curves will remain unchanged. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

79) Suppose that a recent study finds that stricter alcohol policies, such as raising the price of alcohol or banning the sale of alcohol close to university campuses, decrease the number of students who use marijuana. On the basis of this information, how would you describe alcohol and marijuana? A) The two goods are substitutes in consumption. B) There is no relationship between the two goods. C) The two goods are complements in consumption. D) They are both luxury goods in consumption. E) The two goods are unrelated in consumption. Answer: C Diff: 3 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 80) If the price of propane-fuelled gas BBQs decreased, then A) the demand for propane would decrease. B) the demand for propane would increase. C) the quantity of propane demanded would increase. D) the quantity of propane demanded would decrease. E) the demand for propane would remain unchanged. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 81) Suppose that when the price of hamburgers increases, the Ruiz family buys more hot dogs. To the Ruiz family, A) hamburgers and hot dogs are complements. B) hamburgers and hot dogs are inferior goods. C) hamburgers and hot dogs are normal goods. D) hamburgers and hot dogs are substitutes. E) hamburgers and hot dogs are unrelated. Answer: D Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

82) Suppose that when the price of ice cream increases, Liza buys less hot fudge. To Liza, A) ice cream and hot fudge are complements. B) ice cream and hot fudge and substitutes. C) ice cream and hot fudge are normal goods. D) ice cream is a normal good and hot fudge is an inferior good. E) ice cream is an inferior good and hot fudge is a normal good. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 83) Several studies have shown promising links between green tea consumption and cancer prevention. How will this affect the market for green tea? A) The quantity of green tea demanded will increase because of a change in tastes in favour of green tea. B) The green tea demand curve will shift to the right because of a change in tastes in favour of green tea. C) The green tea demand curve will shift to the left because this new information will increase the price of green tea. D) The quantity of green tea demanded will decrease because this new information will increase the price of green tea. E) The green tea demand will remain unchanged and cancer incidence will decrease. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 84) If the price of gasoline increases, what will be the impact in the market for public transportation? A) The demand curve for public transportation will shift to the right. B) The quantity of public transportation demanded will increase. C) The demand curve for public transportation will shift to the left. D) The quantity of public transportation demanded will decrease. E) The market for public transportation will remain unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

85) Many universities offer student bus passes (often included with student fees) in an effort to reduce demand for on campus parking. This means universities must believe that A) bus passes and on campus parking are substitutes. B) taking the bus is better for students. C) students are bad at parking. D) bus passes are normal goods. E) bus passes and on campus parking are complements. Answer: A Diff: 2 Type: MC Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 86) How does the increasing use of digital cameras affect the market for traditional camera film? A) The demand curve for traditional camera film shifts to the right. B) The quantity of traditional camera film demanded decreases. C) The quantity of traditional camera film demanded increases. D) The demand curve for traditional camera film shifts to the left. E) The demand curve for traditional camera film remains unchanged. Answer: D Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 87) Technological advancements have led to lower prices and an increase in sales of colour laser printers. How will this affect the market for laser printer toner cartridges? A) The demand curve for laser printer toner cartridges will shift to the right. B) The demand curve for laser printer toner cartridges will shift to the left. C) The quantity of laser printer toner cartridges demanded will increase. D) The quantity of laser printer toner cartridges demanded will decrease. E) The demand curve for laser printer toner cartridges remains unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

88) Buyers scrambled to secure stocks of Australian wool following a forecasted 11 percent decline in wool production. What will happen in the Australian wool market as a result of this announcement? A) The demand curve for Australian wool will shift to the left in anticipation of higher prices in the future. B) The demand curve for Australian wool will shift to the right in anticipation of higher prices in the future. C) The quantity of Australian wool demanded will increase in anticipation of higher prices in the future. D) The quantity of Australian wool demanded will decrease in anticipation of lower quantities in the future. E) The demand curve for Australian wool will remain unchanged until the price changes. Answer: B Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 89) Factory incentives on cell phones have encouraged consumers to upgrade their phones. How does this affect the market for Bluetooth headsets? A) It increases the quantity of Bluetooth headsets demanded. B) It decreases the quantity of Bluetooth headsets demanded. C) It increases demand for Bluetooth headsets. D) It decreases demand for Bluetooth headsets. E) It does not change demand for Bluetooth headsets. Answer: C Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 90) In January, buyers of gold expect that the price of gold will fall in February. What will happen in the gold market in January, holding everything else constant? A) The demand curve will shift to the right. B) The quantity demanded will increase. C) The quantity demanded will decrease. D) The demand curve will shift to the left. E) The demand curve remains unchanged. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

91) In September, buyers of silver expect that the price of silver will rise in October. What will happen in the silver market in September, holding all else constant? A) The quantity demanded will decrease. B) The demand curve will shift to the left. C) The demand curve will shift to the right. D) The quantity demanded will increase. E) The demand curve remains unchanged. Answer: C Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 92) Lobster is considered A) both a normal and inferior good, depending on location. B) an inferior good, and is unrelated to location. C) a normal good, and is unrelated to location. D) both a substitute and a complement good, depending on location. E) both high quality and poor quality, depending on location. Answer: A Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: The Transformation of Lobster from Inferior to Normal Good 93) During a recession, sales of microbrewed beer fall and demand for low-cost beer rise. This means A) the low-cost beer is of low quality. B) the beer is being sold in larger and larger containers. C) everyone likes microbrewed beer better than low-cost beer. D) the demand for microbrewed beer increases when income increases. E) the demand for microbrewed beer decreases when income decreases. Answer: E Diff: 1 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

94) Which of the following has occurred as the millennial generation has come of age? A) The demand for carbonated soft drinks has increased in the Canadian market. B) The demand for sporting goods has increased in the Canadian market. C) The demand for traditional fast food has decreased in the Canadian market. D) The demand for doughnuts and coffee has increased in the Canadian market. E) The demand for bottled water has decreased in the Canadian market. Answer: C Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 95) Which of the following generation categories has the smallest population in Canada in 2021? A) the millennials B) generation X C) the baby boomers D) the baby busters E) generation Z Answer: A Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 96) Using Richard Tedlow's "three phases of marketing," the premium bottled water industry is probably in A) the first phase, where a very large number of firms are each producing a relatively small volume of premium bottled water. B) the second phase, where one or a few brands have attained high market shares by selling a large number of bottles of premium water at lower prices. C) the third phase, where the dominant firms have rapidly introduced a large number of premium bottled water varieties. D) The market for premium bottled water is too young to categorize using the "three phases of marketing." E) The market for premium bottled water is too mature to categorize using the "three phases of marketing." Answer: B Diff: 1 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Apply the Concept: Forecasting the Demand for Premium Bottled Water

97) If virtual reality headsets are considered substitutes for game consoles, then a decline in the price of game consoles would, all else equal A) increase the demand for virtual reality headsets. B) decrease the demand for virtual reality headsets. C) increase the quantity of virtual reality headsets demanded. D) decrease the quantity of virtual reality headsets demanded. E) increase the price for virtual reality headsets. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 98) The income effect of a price change refers to the change in the quantity demanded of a good that results from a change in the price of a substitute product. Answer: FALSE Diff: 2 Type: TF Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 99) If the price of peaches (a substitute for plums) increases, the demand for plums will decrease. Answer: FALSE Diff: 1 Type: TF Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 100) An inferior good is a good for which the quantity demanded increases as the price decreases, holding everything else constant. Answer: FALSE Diff: 1 Type: TF Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 101) Once a good is considered inferior, it will always be considered inferior. Answer: FALSE Diff: 1 Type: TF Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: The Transformation of Lobster from Inferior to Normal Good

102) The substitution effect explains why there is an inverse relationship between the price of a product and the quantity of the product demanded. Answer: TRUE Diff: 1 Type: TF Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 103) If consumers believe the price of hybrid vehicles will decrease in the future, this will cause the demand for hybrid vehicles to decrease now. Answer: TRUE Diff: 1 Type: TF Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 104) What is the difference between a "change in demand" and a "change in quantity demanded"? Answer: A "change in demand" means the demand curve has shifted. This is caused by a change in any variable other than price that can influence the market demand of the good in question. A "change in quantity demanded" refers to a movement along the demand curve and this is caused by a change in the price of the good in question. Diff: 1 Type: ES Topic: Demand vs. Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 105) Explain the law of demand. Answer: The law of demand is the rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease. Diff: 3 Type: ES Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 106) Cole was discussing the market for cocoa beans with his friend John Schmidt. Cole said, "Ever since Venezuela announced that its cocoa harvest was its lowest ever in fifteen years, the price of cocoa beans has been rising and people are buying more. I think the demand for cocoa beans must be upward sloping." Is Cole right? Briefly explain why or why not. Answer: Cole has confused a change in demand (as a result of a change in the expected future price of cocoa beans) with a change in price. Following the announcement of the poor harvest, buyers expected that the price of cocoa beans would rise. In anticipation of higher prices in the future, demand increased; this led to a higher equilibrium price. As long as buyers believe that the price of cocoa beans will rise in the future, they will increase their demand today. Diff: 2 Type: ES Topic: Demand vs. Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 34 Copyright © 2024 Pearson Canada Inc.

107) State whether each of the following pairs of products are complements, substitutes, or unrelated. a. swim fins and scuba tanks b. Coca-Cola and Volkswagens c. printers and ink cartridges d. ice and ice chests e. Heineken and Corona Answer: a. complements b. unrelated c. complements d. complements e. substitutes Diff: 1 Type: ES Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Table 3.3

Price (dollars per bushel) 60 50 40 30 20

Quantity (thousands of bushels) 40 80 120 160 200

108) Refer to Table 3.3. Use the demand schedule for cherries to draw a graph of the demand curve. Be sure to label the demand curve and each axis, and show each point on the demand curve. Answer:

109) Draw a demand curve and label it D1. On the graph, illustrate an increase in demand and a decrease in demand, and label the curves D2 and D3, respectively. Starting on demand curve D1, explain the shift that would result from each of the following events: a. a decrease in income and the good is a normal good b. a decrease in income and the good is an inferior good c. an increase in the price of a substitute good d. an increase in the price of a complementary good e. a decrease in the taste for the good f. an increase in population g. a decrease in the expected future price of the good Answer:

a, d, e, and g would decrease demand, causing a shift from D1 to D3 b, c, and f would increase demand, causing a shift from D1 to D2 Diff: 2 Type: ES Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytical Thinking

3.2

Discuss the variables that influence supply

1) A supply schedule A) is a table that shows the relationship between the price of a product and the quantity of the product supplied. B) is a curve that shows the relationship between the price of a product and the quantity of the product supplied. C) is the relationship between the supply of a good and the cost of producing the good. D) is a table that shows the relationship between the price of a product and the quantity of the product that producers and consumers are willing to exchange. E) is a curve that shows the relationship between the price of a product and the quantity of the product that producers and consumers are willing to exchange. Answer: A Diff: 1 Type: MC Topic: Supply Schedules Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 2) If in the market for blueberries, the supply curve has shifted to the left, A) the supply of peaches has increased. B) the supply of peaches has decreased. C) the quantity of peaches supplied has increased. D) the quantity of peaches supplied has decreased. E) supply and quantity supplied have stayed the same. Answer: B Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 3) If, in the market for oranges, the supply has increased, then A) the supply curve for oranges has shifted to the right. B) the supply curve for oranges has shifted to the left. C) there has been a movement upwards along the supply curve for oranges. D) there has been a movement downwards along the supply curve for oranges. E) the supply curve for oranges has stayed the same. Answer: A Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

4) Last year, the Pottery Palace supplied 8,000 ceramic pots at $40 each. This year, the company supplied the same quantity of ceramic pots at $55 each. Based on this evidence, the Pottery Palace has experienced A) a decrease in supply. B) an increase in supply. C) an increase in the quantity supplied. D) a decrease in the quantity supplied. E) an increase in demand. Answer: A Diff: 2 Type: MC Topic: Supply Schedules Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 5) What is the difference between an "increase in supply" and an "increase in quantity supplied"? A) There is no difference between the two terms; they both refer to a shift of the supply curve. B) There is no difference between the two terms; they both refer to a movement along a supply curve. C) An "increase in supply" means the supply curve has shifted to the left while an "increase in quantity supplied" means at any given price supply has decreased. D) An "increase in supply" means the supply curve has shifted to the right while an "increase in quantity supplied" refers to a movement along a supply curve. E) An "increase in supply" refers to a movement along a supply curve, an "increase in quantity supplied" refers to a shift to the right of the supply curve. Answer: D Diff: 1 Type: MC Topic: Supply vs. Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 6) One would speak of a change in the quantity of a good supplied, rather than a change in supply, if A) supplier expectations about future prices change. B) the price of the good changes. C) the cost of producing the good changes. D) prices of substitutes in production change. E) the number of firms producing the good changes. Answer: B Diff: 1 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

7) Which of the following would cause a decrease in the supply of milk? A) an increase in the price of cookies (assuming that milk and cookies are complements) B) a decrease in the price of milk C) an increase in the price of a product that producers sell instead of milk D) an increase in the number of firms that produce milk E) a decrease in consumer income Answer: C Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 8) In October, market analysts predict that the price of platinum will fall in November. What happens in the platinum market in October, holding everything else constant? A) The supply curve shifts to the right. B) The supply curve shifts to the left. C) The quantity demanded shifts to the left. D) The demand curve shifts to the right. E) The supply and demand curves are unchanged. Answer: A Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

Figure 3.3

9) Refer to Figure 3.3. An increase in price of inputs would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 10) Refer to Figure 3.3. An increase in the number of firms in the market would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) A to 0. Answer: C Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

11) Refer to Figure 3.3. An increase in the price of substitutes in production would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 12) Refer to Figure 3.3. A decrease in the price of the product would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) A to 0. Answer: B Diff: 2 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 13) If Canada bans the importation of beluga caviar from the Caspian Sea, what happens in the market for caviar in Canada? A) The supply curve shifted to the left. B) The supply curve shifted to the right. C) The demand curve shifted to the right. D) The demand curve shifted to the left. E) The supply and demand curves are unchanged. Answer: A Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

14) Danielle Ocean pays for monthly pool maintenance for her home swimming pool. Last week the owner of the pool service informed Danielle that she will have to raise her monthly service fee because of increases in the price of pool chemicals. How is the market for pool maintenance services affected by this? A) There is an increase in the supply of pool maintenance services. B) There is a decrease in the demand for pool maintenance services. C) There is a decrease in the quantity of pool maintenance services supplied. D) There is a decrease in the supply of pool maintenance services. E) Supply and demand of pool maintenance services are unchanged. Answer: D Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 15) The popularity of digital cameras has enticed large discount stores like Walmart and Costco to offer digital photo printing services. How does this affect the digital photo printing market? A) The demand curve for digital photo printing services shifts to the right. B) The demand curve for digital photo printing services shifts to the left. C) The supply curve for digital photo printing services shifts to the right. D) The supply curve for digital photo printing services shifts to the left. E) The supply and demand curves are unchanged. Answer: C Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 16) Alberta ranchers can raise either cattle or sheep on their land. Which of the following would cause the supply of sheep to increase? A) an increase in the price of sheep B) a decrease in the price of cattle C) an increase in the demand for cattle D) an increase in the price of sheep feed E) an increase in the price of cattle Answer: B Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

17) Which of the following would shift the supply curve for music streaming apps to the right? A) an increase in the price of a substitute in production B) an increase in consumer income C) a decrease in the number of firms that produce music streaming apps D) a decrease in the price of an input used to produce music streaming apps E) a decrease in expected prices for music streaming apps Answer: D Diff: 3 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 18) If a firm has an incentive to increase supply now and decrease supply in the future, the firm expects that the A) price of its product will be lower in the future than it is today. B) price of its product will be higher in the future than it is today. C) price of inputs will be lower in the future than they are today. D) demand for the product will be lower in the future than it is today. E) number of firms in the market will increase. Answer: A Diff: 3 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 19) If a firm expects that the price of its product will be higher in the future than it is today, A) the firm will go out of business. B) the firm has an incentive to increase supply now and decrease supply in the future. C) the firm has an incentive to decrease quantity supplied now and increase quantity supplied in the future. D) the firm has an incentive to decrease supply now and increase supply in the future. E) the firm has an incentive to increase quantity supplied now and decrease quantity supplied in the future. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

20) The supply curve for watches A) shows the supply of watches consumers are willing and able to buy at any given price. B) shows the number of firms at any given price. C) shows the relationship between the quantity of watches firms supply and the quantity of watches consumers purchase. D) shows the relationship between the price of watches and the quantity of watches supplied. E) shows the relationship between the price of watches and the quantity of watches demanded. Answer: D Diff: 2 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 21) A decrease in the price of GPS systems will result in A) a smaller quantity of GPS systems supplied. B) a larger quantity of GPS systems supplied. C) a decrease in the demand for GPS systems. D) an increase in the supply of GPS systems. E) an increase in the demand for substitutes. Answer: A Diff: 1 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 22) An increase in the number of firms in a market will cause the quantity of a good supplied to increase. Answer: FALSE Diff: 1 Type: TF Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 23) A change in supply is represented by a shift of the supply curve. Answer: TRUE Diff: 1 Type: TF Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 24) An increase in the quantity of a product supplied is caused by an increase in the price of the product. Answer: TRUE Diff: 1 Type: TF Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

25) Quantity supplied refers to the amount of a good or service that a firm is willing and able to supply at a given price. Answer: TRUE Diff: 1 Type: TF Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 26) What is the law of supply? What does this law imply about the shape of the supply curve? Answer: The law of supply states that, holding everything else constant, an increase in price causes an increase in quantity supplied. The positive relationship between price and quantity supplied gives rise to an upward-sloping supply curve. Diff: 1 Type: ES Topic: Law of Supply Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 27) From a supply perspective, what impact would an increase in the price of motorcycles have on the market for motorcycles? Answer: An increase in the price of motorcycles would generate an increase in the quantity of motorcycles supplied in the market. Diff: 2 Type: ES Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 28) Indicate whether each of the following situations would shift the supply curve to the left, to the right, or not at all. a. An increase in the number of firms in the market b. An increase in the current price of the product c. A decrease in productivity d. An increase in the expected future price of a product e. A decrease in the price of an input Answer: a. Shift to the right b. No shift c. Shift to the left d. Shift to the left e. Shift to the right Diff: 2 Type: ES Topic: Shifts in Supply Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

29) A supply curve A) is a table that shows the relationship between the price of a product and the quantity of the product supplied. B) is a curve that shows the relationship between the price of a product and the quantity of the product supplied. C) is the relationship between the supply of a good and the cost of producing the good. D) is a curve that shows the relationship between the price of a product and the quantity of the product that producers and consumers are willing to exchange. E) is a table that shows the relationship between the price of a product and the quantity of the product that producers and consumers are willing to exchange. Answer: B Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 30) If, in the market for apples, the supply has decreased, then A) the supply curve for apples has shifted to the right. B) there has been a movement upwards along the supply curve for apples. C) the supply curve for apples has shifted to the left. D) there has been a movement downwards along the supply curve for apples. E) supply and quantity supplied has stayed the same. Answer: C Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 31) If, in the market for bananas, the supply curve has shifted to the right, then A) the supply of bananas has increased. B) the quantity of bananas supplied has increased. C) the supply of bananas has decreased. D) the quantity of bananas supplied has decreased. E) the supply curve for energy drinks to shift to the right. Answer: A Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

32) Last month, the Tecumseh Corporation supplied 400 units of three-ring binders at $6 per unit. This month, the company supplied the same quantity of binders at $4 per unit. Based on this evidence, Tecumseh has experienced A) a decrease in supply. B) an increase in supply. C) an increase in the quantity supplied. D) a decrease in the quantity supplied. E) an increase in demand. Answer: B Diff: 2 Type: MC Topic: Supply Schedules Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 33) ________ means the supply curve has shifted to the right, while ________ refers to a movement along a given supply curve in response to an increase in price. A) An increase in supply; a decrease in supply B) A decrease in supply; an increase in supply C) An increase in supply; an increase in quantity supplied D) A decrease in supply; a decrease in quantity supplied E) A decrease in quantity supplied; a decrease in supply. Answer: C Diff: 1 Type: MC Topic: Supply vs. Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 34) One would speak of a movement along a supply curve for a good, rather than a change in supply, if A) the cost of producing the good changes. B) supplier expectations about future prices change. C) the price of the good changes. D) prices of substitutes in production change. E) the number of firms changes. Answer: C Diff: 1 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

35) Which of the following would cause an increase in the supply of cheese? A) a decrease in the price of wine (assuming that cheese and wine are complements) B) an increase in the price of cheese C) an increase in the price of a product that producers sell instead of cheese D) an increase in the number of firms that produce cheese E) an increase in the cost of producing cheese Answer: D Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 36) If guarana (a key ingredient in many energy drinks) becomes less expensive, we would expect A) the supply curve for energy drinks to shift to the right. B) the supply curve for energy drinks to shift to the left. C) the demand curve for energy drinks to shift to the right. D) the demand curve for energy drinks to shift to the left. E) the supply curve for bottled water to shift to the right. Answer: A Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 37) In July, market analysts predict that the price of gold will rise in August. What happens in the gold market in July, holding everything else constant? A) The supply curve shifts to the right. B) The supply curve shifts to the left. C) The quantity demanded and the quantity supplied of gold increase. D) The demand curve shifts to the left. E) Supply and demand curves remain unchanged. Answer: B Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

Figure 3.4

38) Refer to Figure 3.4. A technological advancement would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: C Diff: 2 Type: MC Topic: Technological Change Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 39) Refer to Figure 3.4. An increase in the expected future price of the product would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

40) Refer to Figure 3.4. A decrease in the price of inputs would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) A to 0. Answer: C Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 41) Refer to Figure 3.4. An increase in the price of the product would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: A Diff: 2 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 42) If Canada removed the additional taxes it currently charges on French cheese, what would happen in the Canadian market for French cheese? A) The supply curve would shift to the left. B) The supply curve would shift to the right. C) The demand curve would shift to the right. D) The demand curve would shift to the left. E) The number of firms importing cheese will increase. Answer: B Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

43) George Gnat subscribes to a monthly pest control service for his home. Last week the owner of the service informed George that he will have to raise his monthly service fee because of increases in the price of gasoline used by his workers on their service trips. How is the market for pest control services affected by this? A) There is an increase in the supply of pest control services. B) There is a decrease in the demand for pest control services. C) There is a decrease in the quantity supplied of pest control services. D) There is a decrease in the supply of pest control services. E) There is no change in the supply and demand curves. Answer: D Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 44) The growing popularity of energy conservation has enticed large home improvement stores like Rona to offer tankless water heaters. How does the fact that home improvement stores now offer these products affect the tankless water heater market? A) The demand curve for tankless water heaters shifts to the right. B) The demand curve for tankless water heaters shifts to the left. C) The supply curve for tankless water heaters shifts to the right. D) The supply curve for tankless water heaters shifts to the left. E) The supply and demand curves for tankless water heaters are unchanged. Answer: C Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 45) Farmers can plant either wheat or lentils in their fields. Which of the following would cause the supply of lentils to increase? A) an increase in the price of lentils B) a decrease in the price of wheat C) an increase in the demand for wheat D) an increase in the price of soybean seeds E) an increase in the number of lentil crop farmers Answer: B Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

46) Which of the following would shift the supply curve for energy drinks to the left? A) a decrease in the expected future price of energy drinks B) an increase in consumer income (assuming that energy drinks are normal goods) C) a decrease in the number of firms that produce energy drinks D) a decrease in the price of an input used to produce energy drinks E) a decrease in the price of energy drinks Answer: C Diff: 3 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 47) It becomes common knowledge that planting mustard helps protect potato crops from numerous diseases. As a result we would expect A) an increase in the supply of mustard. B) a decrease in the supply of potatoes. C) a decrease in the supply of mustard. D) demand for mustard to increase. E) demand for potatoes to increase. Answer: A Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 48) If a firm expects that the price of its product will be lower in the future than it is today, A) the firm has an incentive to increase supply now and decrease supply in the future. B) the firm has an incentive to decrease supply now and increase supply in the future. C) the firm has an incentive to increase quantity supplied now and decrease quantity supplied in the future. D) the firm has an incentive to decrease quantity supplied now and increase quantity supplied in the future. E) the firm will not change supply until it knows for certain what will happen to its price. Answer: A Diff: 3 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

49) A firm has an incentive to decrease supply now and increase supply in the future if it expects that A) more firms will enter the market in the future. B) the prices of inputs used to produce its product will rise in the future. C) the price of its product will be lower in the future than it is today. D) the price of its product will be higher in the future than it is today. E) the technology used to produce its product will not change in the future. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 50) The supply curve for umbrellas A) shows the supply of umbrellas consumers are willing and able to buy at any given price. B) shows the supply of umbrellas consumers are willing and able to sell at any given price. C) shows the relationship between the quantity of umbrellas firms are willing and able to supply and the quantity of umbrellas consumers are willing and able to purchase. D) shows the relationship between the price of umbrellas and the quantity of umbrellas supplied. E) shows the relationship between the quantity of umbrellas firms are willing and able to buy and the quantity of umbrellas consumers are willing and able to sell. Answer: D Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 51) Which of the following would shift the supply curve for smartphones to the right? A) an increase in the price of a substitute in production B) an increase in consumer income (assuming that all smartphones are normal goods) C) a decrease in the number of firms that produce smartphones D) a decrease in the price of an input used to produce smartphones E) an increase in the price of smartphones Answer: D Diff: 3 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 52) A positive technological change will cause the quantity supplied of a good to increase. Answer: FALSE Diff: 1 Type: TF Topic: Technological Change Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

53) An increase in quantity supplied is represented by a rightward shift of the supply curve. Answer: FALSE Diff: 1 Type: TF Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 54) A decrease in the price of inputs will cause the supply curve for a product to shift to the right. Answer: TRUE Diff: 1 Type: TF Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 55) When all else equal, as the price of a product falls, the quantity supplied decreases. Answer: TRUE Diff: 1 Type: TF Topic: Law of Supply Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 56) What are the five most important variables that shift the market supply curve? Answer: Prices of inputs; technological change; prices of substitutes in production; the number of firms in the market; expected future prices Diff: 1 Type: ES Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 57) Would a change in the price of inline skates cause a change in the supply of inline skates? Why or why not? Answer: No, a change in the price of inline skates would not cause a change in the supply of inline skates. Rather, it would cause change in quantity supplied. Supply changes only when there is a change in any variable other than price that would affect the supply of the good in question. Diff: 2 Type: ES Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

58) Indicate whether each of the following situations would shift the supply curve to the left, to the right, or not at all. a. an increase in the price of an input b. an increase in productivity c. an increase in the price of a substitute in production d. a decrease in the expected future price of a product e. a decrease in the current price of the product Answer: a. shift to the left b. shift to the right c. shift to the left d. shift to the right e. no shift Diff: 2 Type: ES Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills Table 3.4 Price (dollars per bushel) 8 16 24 32 40

Quantity (thousands of bushels) 50 100 150 200 250

59) Refer to Table 3.4. Use the supply schedule for cherries to draw a graph of the supply curve. Be sure to label the supply curve and each axis, and show each point on the supply curve. Answer:

3.3

Use a graph to illustrate market equilibrium

1) Which of the following is the correct way to describe equilibrium in a market? A) At equilibrium, demand equals supply. B) At equilibrium, quantity demanded equals quantity supplied. C) At equilibrium, market forces no longer apply. D) At equilibrium, scarcity is eliminated. E) At equilibrium, surpluses are greater than shortages. Answer: B Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 2) At a product's equilibrium price, A) the product's demand curve is the same as the product's supply curve. B) the quantity of the product demanded is greater than the quantity of the product supplied. C) the quantity of the product demanded is less than the quantity of the product supplied. D) the product's demand curve crosses the product's supply curve. E) all consumers will be able to afford the product. Answer: D Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

Figure 3.5

3) Refer to Figure 3.5. The figure above shows the supply and demand curves for two markets: the market for original Picasso paintings and the market for designer jeans. Which graph most likely represents which market? A) Graph B represents the market for original Picasso paintings and Graph A represents the market for designer jeans. B) Graph A represents the market for original Picasso paintings and Graph B represents the market for designer jeans. C) Graph A represents both the market for original Picasso paintings and designer jeans. D) Graph B represents both the market for original Picasso paintings and designer jeans. E) Graph A and Graph B represent the market for original Picasso paintings but not for designer jeans. Answer: A Diff: 2 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 4) In 2016, forest fires forced the evacuation of Fort McMurray. Many of those evacuated went to Edmonton. As a result of the evacuation, what would we expect to see in the market for hotel rooms in Edmonton at the original equilibrium price? A) a surplus of hotel rooms B) the quantity demanded equal to the quantity supplied C) a shortage of hotel rooms D) an increase in the supply of hotel rooms. E) a decrease in the supply of hotel rooms. Answer: C Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

Figure 3.6

5) Refer to Figure 3.6. If the price is $10, A) there would be a surplus of 600 units. B) there would be a shortage of 600 units. C) there would be a surplus of 200 units. D) there would be a shortage of 200 units. E) there would be a surplus of 800 units. Answer: B Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 6) Refer to Figure 3.6. At a price of $10, how many units will be sold? A) 200 B) 400 C) 600 D) 700 E) 800 Answer: A Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

7) Refer to Figure 3.6. If the current market price is $10, the market will achieve equilibrium by A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded. E) a price decrease, decreasing the supply and decreasing the demand. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills Figure 3.7

8) Refer to Figure 3.7. At a price of $15, A) there would be a surplus of 4 units. B) there would be a shortage of 2 units. C) there would be a surplus of 6 units. D) there would be a shortage of 4 units. E) there would be a shortage of 6 units. Answer: A Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

9) Refer to Figure 3.7. At a price of $5, the quantity sold A) is 2 units. B) is 4 units. C) is 6 units. D) is 8 units. E) is 10 units. Answer: A Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 10) Refer to Figure 3.7. In a free market such as that depicted above, a surplus is eliminated by A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded. E) a price decrease, increasing the supply and decreasing the demand. Answer: C Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 11) Assume there is a shortage in the market for smartphones. Which of the following statements correctly describes this situation? A) The demand for smart phones is less than the supply of smartphones. B) Some consumers will be unable to obtain smartphones at the market price and will have an incentive to offer to buy the product at a higher price. C) The price of smartphones will rise in response to the shortage; as the price rises the quantity demanded will increase and the quantity supplied will decrease. D) The shortage will cause a decrease in the equilibrium price of smartphones. E) Any buyer who is willing and able to pay the price will find a seller for smartphones. Answer: B Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

12) In a perfectly competitive market, there are ________ buyers and ________ sellers. A) many; few B) few; many C) many; many D) few; few E) many; zero Answer: C Diff: 1 Type: MC Topic: Perfectly Competitive Market Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Figure 3.8

13) Refer to Figure 3.8. The figure above represents the market for canvas tote bags. Assume that the market price is $35. Which of the following statements is true? A) There is a surplus that will cause the price to decrease; quantity demanded will then increase and quantity supplied will decrease until the price equals $25. B) There is a surplus that will cause the price to decrease; quantity supplied will then increase and quantity demanded will decrease until the price equals $25. C) There will be a surplus that will cause the price to decrease; demand will then increase and supply will decrease until the price equals $25. D) There is a surplus that will cause the price to increase; quantity demanded will then decrease and quantity supplied will increase until the price equals $25. E) Equilibrium cannot be determined. Answer: A Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

14) Refer to Figure 3.8. The figure above represents the market for canvas tote bags. Assume that the price of tote bags is $15. At this price, A) the quantity demanded exceeds the quantity supplied of tote bags by 75. The price will eventually rise to $25 where quantity demanded will equal quantity supplied. B) the demand exceeds the supply of tote bags by 55. Some consumers will have an incentive to offer to buy tote bags at a higher price. C) there is a shortage, equal to 55 tote bags, that will be eliminated when the price rises to $25. D) there is a shortage equal to 55 tote bags; the price of tote bags will rise until demand is equal to supply. E) Equilibrium cannot be determined. Answer: C Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 15) Refer to Figure 3.8. The figure above represents the market for canvas tote bags. Assume that the price of tote bags is $15. At this price, A) the quantity demanded exceeds the quantity supplied of tote bags by 75. The price will eventually rise to $25 where quantity demanded will equal quantity supplied. B) the demand exceeds the supply of tote bags by 55. Some consumers will have an incentive to offer to buy tote bags at a higher price. C) there is a shortage equal to 55 tote bags; the price of tote bags will rise until demand is equal to supply. D) there is a shortage, equal to 55 tote bags, that will be eliminated when the price rises to $25. E) Equilibrium cannot be determined. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 16) Refer to Figure 3.8. The figure above represents the market for canvas tote bags. Compare the conditions in the market when the price is $50 and when the price is $35. Which of the following describes how the market differs at these prices? A) At each price there is a surplus; the surplus is greater at $35 than at $50. B) The difference between quantity supplied and quantity demanded is greater at $50 than at $35. C) At each price there is a surplus; firms will lower the equilibrium price in order to eliminate the surplus. D) At each price the supply of tote bags exceeds that demand for tote bags. E) Equilibrium cannot be determined. Answer: B Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

17) If, for a product, the quantity supplied exceeds the quantity demanded, the market price will fall until A) the quantity demanded exceeds the quantity supplied. The market will then be in equilibrium. B) quantity demanded equals quantity supplied. The equilibrium price will then be lower than the market price. C) all consumers will be able to afford the product. D) quantity demanded equals quantity supplied. The market price will then equal the equilibrium price. E) all firms supplying the product exit the market. Answer: D Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 18) Which of the following is evidence of a surplus of bananas? A) Firms raise the price of bananas. B) The price of bananas is lowered in order to increase sales. C) The equilibrium price of bananas rises due to an increase in demand. D) The quantity demanded of bananas is greater than the quantity supplied. E) The equilibrium price of bananas rises due to a decrease in demand. Answer: B Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 19) At auction, experts expect a Jacques Plante hockey card to get a higher price than Sidney Crosby's rookie card. Which of the following events would cause the price difference in these cards to get smaller? A) The demand for Crosby cards decreases. B) The supply of Crosby rookie cards increases. C) The demand for Crosby rookie cards increases and the supply of Plante cards increases. D) The demand for Crosby rookie cards decreases and the demand for Plante cards increases. E) The demand for Crosby rookie cards and the supply of Plante cards stays the same. Answer: C Diff: 1 Type: MC Topic: Law of Demand Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Special Feature: Solved Problem: Demand and Supply Both Count: A Tale of Two Cards

20) Auctions in recent years have resulted in higher prices paid for Jacques Plante (goalie) hockey cards than Sidney Crosby (forward) rookie cards. What is a reason for this difference in price? A) There is a surplus of Plante hockey cards and a shortage of Crosby rookie cards. B) Many people are more fascinated by hockey goalies than by hockey forwards. C) There are more Crosby rookie cards available for collectors to buy than there are Plante cards. D) Plante was the first goalie to wear a mask in a game; the demand for his cards rose as wealthy former goalies attempted to buy them as thanks for still having teeth. E) There are less Crosby rookie cards available for collectors to buy than there are Plante cards. Answer: C Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Special Feature: Solved Problem: Demand and Supply Both Count: A Tale of Two Cards 21) In response to a surplus the market price of a good will fall; as the price falls, the quantity demanded will increase and quantity supplies will decrease until equilibrium is reached. Answer: TRUE Diff: 2 Type: TF Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 22) Scarcity is defined as the situation that exists when the quantity demanded for a good is greater than the quantity supplied. Answer: FALSE Diff: 1 Type: TF Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 23) Market equilibrium occurs where supply equals demand. Answer: FALSE Diff: 1 Type: TF Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 24) Nearly a quarter of China's 1.3 billion people are under the age of 15. How will this affect high school enrollment over the next fifteen years? The labour market over the next fifteen years? Answer: The demand for high school education will increase. The supply of labour over the next 15 years will increase. Diff: 1 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

25) Currently, China buys more than 40% of the Canadian canola crop. In the summer of 2016 the Chinese government was planning to implement policies that would severely limit the ability of Canadian farmers to sell canola to China. If China were to stop buying Canadian canola what would happen in the market for Canadian canola? Answer: The demand curve for Canadian canola would shift to the left resulting in a lower market price for Canadian canola. Diff: 2 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 26) If the price of a product is above equilibrium, what forces it down? Answer: When the price is above equilibrium, a surplus occurs. Some producers who are unable to sell the product will have an incentive to offer to sell the product at a lower price. A lower price will simultaneously decrease the quantity supplied and increase the quantity demanded. This downward pressure on price continues until the surplus is eliminated and equilibrium is achieved. Diff: 2 Type: ES Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

Table 3.5

Price per Bushel $3 6 9 12 15 18 21 24

Quantity Demanded (bushels) 30,000 26,000 22,000 18,000 15,000 12,000 8,000 4,000

Quantity Supplied (bushels) 0 4,000 9,000 12,000 15,000 22,000 28,000 36,000

27) Refer to Table 3.5. The table contains information about the corn market. Use the table to answer the following questions. a. What are the equilibrium price and quantity of corn? b. Suppose the prevailing price is $9 per bushel. Is there a shortage or a surplus in the market? c. What is the quantity of the shortage or surplus? d. How many bushels will be sold if the market price is $9 per bushel? e. If the market price is $9 per bushel, what must happen to restore equilibrium in the market? f. At what price will suppliers be able to sell 22,000 bushels of corn? g. Suppose the market price is $21 per bushel. Is there a shortage or a surplus in the market? h. What is the quantity of the shortage or surplus? i. How many bushels will be sold if the market price is $21 per bushel? j. If the market price is $21 per bushel, what must happen to restore equilibrium in the market? Answer: a. Equilibrium price = $15; Equilibrium quantity = 15,000 bushels. b. There is a shortage. c. Shortage = 22,000 - 9,000 = 13,000 bushels. d. Quantity sold = 9,000 bushels. e. Price must rise. f. At $9 per bushel g. There is a surplus. h. Surplus = 28,000 - 8,000 = 20,000 bushels. i. Quantity sold = 8,000 bushels. j. Price must fall. Diff: 2 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

28) At market equilibrium, A) demand equals supply. B) quantity demanded equals quantity supplied. C) surpluses are greater than shortages. D) shortages are greater than surpluses. E) scarcity is eliminated. Answer: B Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 29) At a product's equilibrium price, A) anyone who needs the product will be able to buy the product, regardless of ability to pay. B) the federal government will provide the product to anyone who cannot afford it. C) not all sellers who are willing to accept the price will find buyers for their products. D) any buyer who is willing and able to pay the price will find a seller for the product. E) all consumers will be able to afford the product. Answer: D Diff: 1 Type: MC Topic: Demand vs. Quantity Demanded Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

Figure 3.9

30) Refer to Figure 3.9. The figure above shows the supply and demand curves for two markets: the market for original Michelangelo sculptures and the market for Ray Ban sunglasses. Which graph most likely represents which market? A) Graph B represents the market for original Michelangelo sculptures and Graph A represents the market for Ray Ban sunglasses. B) Graph A represents the market for original Michelangelo sculptures and Graph B represents the market for Ray Ban sunglasses. C) Graph A represents both the market for original Michelangelo sculptures and for Ray Ban sunglasses. D) Graph B represents both the market for original Michelangelo sculptures and for Ray Ban sunglasses. E) Graph A and Graph B represent the market for original Michelangelo sculptures but not for Ray Ban sunglasses. Answer: A Diff: 2 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 31) In 2016 there was a severe forest fire in Alberta, which forced the evacuation of Fort McMurray and the shutdown of many oil sands operations. As a result, there was less crude oil produced in Alberta than normal. At the pre-fire equilibrium price (i.e., at the initial equilibrium price), we would expect to see A) a surplus of gasoline. B) the quantity demanded equal to the quantity supplied. C) a shortage of gasoline. D) an increase in the demand for gasoline. E) a decrease in the demand for gasoline. Answer: C Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

Figure 3.10

32) Refer to Figure 3.10. If the price is $25, A) there would be a surplus of 300 units. B) there would be a shortage of 300 units. C) there would be a surplus of 200 units. D) there would be a shortage of 200 units. E) there would be a surplus of 500 units. Answer: A Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 33) Refer to Figure 3.10. At a price of $25, how many units will be sold? A) 400 B) 500 C) 600 D) 700 E) 800 Answer: B Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

34) Refer to Figure 3.10. If the current market price is $25, the market will achieve equilibrium through A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded. E) a price increase, decreasing the supply and decreasing the demand. Answer: C Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills Figure 3.11

35) Refer to Figure 3.11. At a price of $5, A) there would be a surplus of 4 units. B) there would be a scarcity of 4 units. C) there would be a shortage of 6 units. D) there would be a shortage of 4 units. E) there would be a shortage of 2 units. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

36) Refer to Figure 3.11. At a price of $15, the quantity sold A) is 2 units. B) is 4 units. C) is 6 units. D) is 8 units. E) is 10 units. Answer: A Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 37) Refer to Figure 3.11. In a free market such as that depicted above, a shortage is eliminated by A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded. E) a price increase, decreasing the supply and decreasing the demand. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 38) Assume there is a surplus in the market for hybrid automobiles. Which of the following statements correctly describes this situation? A) The supply of hybrid automobiles is less than the demand for hybrid automobiles. B) Some consumers will be unable to obtain hybrid automobiles at the market price and will have an incentive to offer to buy the product at a higher price. C) The price of hybrid automobiles will fall in response to the surplus; as the price falls the quantity demanded will increase and the quantity supplied will decrease. D) The surplus will cause an increase in the equilibrium price of hybrid automobiles. E) The demand of hybrid automobiles is greater than the supply for hybrid automobiles. Answer: C Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

39) Which of the following describes a characteristic of a perfectly competitive market? A) There are many buyers but few sellers. B) There are many sellers but few buyers. C) There are many buyers and sellers. D) Equilibrium is achieved when demand equals the supply. E) Equilibrium is achieved when demand is greater than the supply. Answer: C Diff: 1 Type: MC Topic: Perfectly Competitive Market Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Figure 3.12

40) Refer to Figure 3.12. The figure above represents the market for coffee grinders. Assume that the market price is $21. Which of the following statements is true? A) There is a shortage that will cause the price to increase; quantity demanded will then decrease and quantity supplied will increase until the price equals $25. B) There is a shortage that will cause the price to increase; quantity supplied will then decrease and quantity demanded will increase until the price equals $25. C) There is a shortage that will cause the price to increase; demand will then decrease and supply will increase until the price equals $25. D) There is a shortage that will cause the price to decrease; quantity demanded will then increase and quantity supplied will decrease until the price equals $25. E) There is a surplus that will cause the price to decrease; quantity supplied will then increase and quantity demanded will decrease until the price equals $25. Answer: A Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 72 Copyright © 2024 Pearson Canada Inc.

41) Refer to Figure 3.12. The figure above represents the market for coffee grinders. Assume that the price of coffee grinders is $50. At this price A) the quantity supplied exceeds the quantity demanded by 100. The price will eventually fall to $25 where quantity demanded will equal quantity supplied. B) the supply exceeds demand by 90. Some producers will have an incentive to offer to sell coffee grinders at a lower price. C) there is a surplus equal to 90 coffee grinders that will be eliminated when the price falls to $25. D) there is a surplus equal to 90 coffee grinders, and the price of coffee grinders will fall until demand is equal to supply. E) there is a surplus equal to 100 coffee grinders that will be eliminated when the price falls to $15. Answer: C Diff: 3 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 42) Refer to Figure 3.12. The figure above represents the market for coffee grinders. Compare the conditions in the market when the price is $15 and when the price is $21. Which of the following describes how the market differs at these prices? A) At each price there is a shortage; the shortage is greater at $15 than at $21. B) The difference between quantity supplied and quantity demanded is greater at $21 than at $15. C) At each price there is a shortage; firms will raise the equilibrium price in order to eliminate the shortage. D) At each price the demand for coffee grinders exceeds the supply of coffee grinders. E) At each price there is a surplus; the surplus is greater at $21 than at $15. Answer: A Diff: 3 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 43) If the quantity demanded for a product exceeds the quantity supplied, the market price will rise until A) the quantity demanded equals the quantity supplied. The product will then no longer be scarce. B) quantity demanded equals quantity supplied. The equilibrium price will then be greater than the market price. C) only wealthy consumers will be able to afford the product. D) quantity demanded equals quantity supplied. The market price will then equal the equilibrium price. E) the number of firms supplying the product decreases. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

44) Which of the following is evidence of a shortage of chocolate? A) Firms lower the price of chocolate. B) The price of chocolate is raised in order to increase sales. C) The equilibrium price of chocolate falls due to a decrease in demand. D) The quantity of chocolate demanded is greater than the quantity supplied. E) The quantity of chocolate supplied is greater than the quantity demanded. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 45) If the demand for Sidney Crosby hockey cards is greater than the demand for Jacques Plante hockey cards, what would have to be true for the market equilibrium prices for these hockey cards to be equal? A) The supply of Crosby hockey cards would have to be less than the supply of Plante hockey cards. B) The supply of Plante hockey cards would have to be less than the supply of Crosby hockey cards. C) The supply of Crosby hockey cards and the supply of Plante hockey cards would have to be equal. D) The demand of Crosby hockey cards would have to be less than the demand of Plante hockey cards. E) If the demand for Crosby hockey cards is greater than the demand for Plante hockey cards, the market equilibrium price for Crosby hockey cards will always be greater than the market equilibrium price for Plante hockey cards. Answer: B Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Special Feature: Solved Problem: Demand and Supply Both Count: A Tale of Two Cards 46) New technology which would allow ordinary windows to be replaced with solar cells would have what impact on the market for solar electricity, all else equal? A) a shift of the demand curve to the right and an increase in price B) a shift in the demand curve to the right and a reduction in price C) a shift in the supply curve to the left and an increase in price D) a shift in the demand curve to the left and reduction in price E) a shift of the supply curve to the left and a decrease in price Answer: A Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 47) In response to a shortage, the market price of a good will rise; as the price rises, demand will decrease and supply will increase until equilibrium is reached. Answer: FALSE Diff: 2 Type: TF Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 74 Copyright © 2024 Pearson Canada Inc.

48) A surplus is defined as the situation that exists when the quantity of a good supplied is greater than the quantity demanded. Answer: TRUE Diff: 1 Type: TF Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 49) Market equilibrium occurs where the quantity supplied is equal to the quantity demanded. Answer: TRUE Diff: 1 Type: TF Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 50) What is the difference between a market equilibrium and a competitive market equilibrium? Answer: A market equilibrium is a situation in which quantity demanded equals quantity supplied. A competitive market equilibrium is a market equilibrium with many buyers and sellers. Diff: 2 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

51) Consider the collectors' market for first editions of two popular children's books, Harry Potter and the Order of the Phoenix by J. K. Rowling and Ruby in the Smoke by Philip Pullman. Sales of the Harry Potter novel are much greater than sales of Ruby in the Smoke, yet the price of the Harry Potter novel is much lower than the price of Pullman's novel. a. On one large diagram, draw a demand and supply graph for first editions of Harry Potter and the Order of the Phoenix and another demand and supply graph for first editions of Ruby in the Smoke. b. Show how it is possible for the price of the Harry Potter novel to be much lower than the price of Pullman's novel, even though the demand for the Harry Potter novel is much greater than the demand for Ruby in the Smoke. c. Provide a written explanation to accompany your graphical illustration. Answer: a. and b. See the figure below.

c. The demand for the Harry Potter novel is much greater than the demand for the Pullman novel yet the latter commands a higher price. The only way this can be true is if the supply of the Harry Potter book is much greater than the supply of the Pullman novel. Indeed, this is true. Following the success of earlier Harry Potter novels, the publisher increased the quantity supplied of the first edition of J. K. Rowling's later book, Harry Potter and the Order of the Phoenix. Pullman's novels, on the other hand, have enjoyed only modest success. Diff: 3 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills Special Feature: Solved Problem: Demand and Supply Both Count: A Tale of Two Cards

52) In much of Europe, the legal age to obtain a driver's license is 18. If the legal driving age in Canada was changed to 18, how would this affect the market for new automobiles and the market for automobile insurance? Answer: The demand for new automobiles would decrease, as would the demand for automobile insurance. (This impact on the demand for new automobiles would likely be very small, with a slightly larger impact on the market for automobile insurance as the overwhelming majority of car owners are over 18 years old, as are most drivers.) Diff: 1 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

Table 3.6

Price per Bushel $2 4 6 8 10 12 14 16

Quantity Demanded (bushels) 40,000 36,000 30,000 24,000 20,000 18,000 12,000 6,000

Quantity Supplied (bushels) 0 4,000 8,000 16,000 20,000 28,000 36,000 40,000

53) Refer to Table 3.6. The table contains information about the sorghum market. Use the table to answer the following questions. a. What are the equilibrium price and quantity of sorghum? b. Suppose the prevailing price is $6 per bushel. Is there a shortage or a surplus in the market? c. What is the quantity of the shortage or surplus? d. How many bushels will be sold if the market price is $6 per bushel? e. If the market price is $6 per bushel, what must happen to restore equilibrium in the market? f. At what price will suppliers be able to sell 36,000 bushels of sorghum? g. Suppose the market price is $14 per bushel. Is there a shortage or a surplus in the market? h. What is the quantity of the above shortage or surplus? i. How many bushels will be sold if the market price is $14 per bushel? j. If the market price is $14 per bushel, what must happen to restore equilibrium in the market? Answer: a. equilibrium price = $10; equilibrium quantity = 20,000 bushels b. there is a shortage c. shortage = 30,000 - 8,000 = 22,000 bushels d. quantity sold = 8,000 bushels e. price must rise f. at $4 per bushel g. there is a surplus h. surplus = 36,000 - 12,000 = 24,000 bushels i. quantity sold = 12,000 bushels j. price must fall Diff: 2 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

3.4

Use demand and supply graphs to predict changes in prices and quantities

1) Let D = demand, S = supply, P = equilibrium price, Q = equilibrium quantity. What happens in the market for tropical hardwood trees if the governments restrict the amount of forest lands that can be logged? A) D decreases, S no change, P and Q decrease B) S decreases, D no change, P increases, Q decreases C) D and S decrease, P and Q increase D) D no change, S decreases, P increases, Q increases E) D no change, S decreases, P decreases, Q decreases Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 2) In 2016, Canadian wheat and barley crops produced more grain than they usually do. In the market for grains, A) the supply curve shifted to the right, resulting in a decrease in the equilibrium price. B) the supply curve shifted to the left, resulting in an increase in the equilibrium price. C) the demand curve shifted to the right, resulting in an increase in the equilibrium price. D) the demand curve shifted to the left, resulting in a decrease in the equilibrium price. E) there was an increase in the price for grains. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 3) Olive oil producers want to sell more olive oil at a higher price. Which of the following events would have this effect? A) an increase in the price of olive oil presses B) a decrease in the cost of transporting olive oil to markets C) an increase in the price of land used to plant olives D) Research finds that consumption of olive oil reduces the risk of heart disease. E) an increase in the number of olive oil producers Answer: D Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

4) Which of the following would cause both the equilibrium price and equilibrium quantity of cotton (assume that cotton is a normal good) to increase? A) an increase in consumer income B) a drought that sharply reduces cotton output C) a decrease in consumer income D) unusually good weather that results in a bumper crop of cotton E) an increase in the number of cotton farmers. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 5) Which of the following would cause the equilibrium price of white bread to decrease and the equilibrium quantity of white bread to increase? A) a decrease in the price of flour B) an increase in the price of flour C) an increase in the price of rye bread, a substitute for white bread D) an increase in the price of butter, a complement for white bread E) a decrease in the number of bakeries Answer: A Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 6) Assume that the hourly price for the services of tarot card readers has risen and sales of these services have also risen. One can conclude that A) the law of demand has been violated. B) the number of tarot card readers has increased. C) the demand for tarot card readers has increased. D) tarot card readers are deliberately charging high prices. E) the supply of tarot card readers has increased. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

7) Prices of BC Merlot wine (assume that this is a normal good) have risen steadily in recent years. Over this same period, prices for French oak barrels used for wine storage have dropped and consumer incomes have risen. Which of the following best explains the rising prices of BC Merlots? A) The supply curve for Merlot has shifted to the right while the demand curve for Merlot has shifted to the left. B) The demand curve for Merlot has shifted to the right more than the supply curve has shifted to the right. C) The demand curve and the supply curve for Merlot have both shifted to the left. D) The supply curve for Merlot has shifted to the right more than the demand curve has shifted to the right. E) The supply curve for Merlot has shifted to the left while the demand curve for Merlot has shifted to the right. Answer: B Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 8) In recent years the cost of producing organic produce in Canada has decreased largely due to technological advancement. At the same time, more and more Canadians prefer organic produce over conventional produce. Which of the following best explains the effect of these events in the organic produce market? A) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price. B) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price. C) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in both the equilibrium price and the equilibrium quantity. D) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity. E) Both the supply and demand curves have shifted to the left. As a result, there has been a decrease in both the equilibrium price and the equilibrium quantity. Answer: B Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

9) An article in the Wall Street Journal in early 2001 noted two developments in the market for laser eye surgery. The first development concerned side effects from the surgery, including blurred vision. The second development was that the companies renting eye-surgery machinery to doctors had reduced their charges. In the market for laser eye surgeries, these two developments A) decreased demand and decreased supply, resulting in a decrease in the equilibrium quantity and an increase in the equilibrium price of laser eye surgeries. B) decreased demand and increased supply, resulting in an increase in both the equilibrium quantity and the equilibrium price of laser eye surgeries. C) decreased demand and increased supply, resulting in a decrease in the equilibrium price and an uncertain effect on the equilibrium quantity of laser eye surgeries. D) decreased demand and increased supply, resulting in a decrease in both the equilibrium price and the equilibrium quantity of laser eye surgeries. E) increased demand and decreased supply, resulting in a decrease in the equilibrium quantity and an increase in the equilibrium price of laser eye surgeries. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 10) An increase in the demand for lobster due to changes in consumer tastes, accompanied by a decrease in the supply of lobster as a result of bad weather reducing the number of fishermen trapping lobster, will result in A) a decrease in the equilibrium quantity of lobster and no change in the equilibrium price. B) an increase in the equilibrium price of lobster and no change in the equilibrium quantity. C) an increase in the equilibrium price of lobster; the equilibrium quantity may increase or decrease. D) a decrease in the equilibrium quantity of lobster; the equilibrium price may increase or decrease. E) a decrease in the equilibrium price of lobster and no change in the equilibrium quantity. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Special Feature: Solved Problem: High Demand and Low Prices in the Lobster Market

Figure 3.13

12) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for women's clothing. Which panel best describes what happens in this market when the wages of seamstresses rise? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (c) Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 13) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for almonds. Which panel best describes what happens in this market when there is an increase in the productivity of almond harvesters? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 14) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for Fruitopia, a soft drink. Which panel describes what happens in the market for Fruitopia when the price of Snapple, a substitute product, decreases? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

15) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for potatoes and that steak and potatoes are complements. What panel describes what happens in this market when the price of steak rises? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 16) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for rice. What happens in this market if buyers expect the price of rice to fall? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 17) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for used clothing, an inferior good. Which panel describes what happens in this market as a result of a decrease in income? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (b) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

18) Positive technological change in the production of smart phones caused the price to fall. Holding everything else constant, how would this affect the market for smart phone apps (a complement to smartphones)? A) The supply of apps would increase and the equilibrium price of apps would decrease. B) The demand for apps would increase and the equilibrium price of apps would increase. C) The demand for apps would decrease because consumers could afford to buy fewer smart phones and apps. D) The demand for apps would increase and the equilibrium price of apps would decrease. E) The demand for apps would decrease and the equilibrium price of apps would decrease. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 19) Assume that both the demand curve and the supply curve for smart phones shift to the right but the demand curve shifts more than the supply curve. As a result A) both the equilibrium price and quantity of smart phones will increase. B) the equilibrium price of smart phones will increase; the equilibrium quantity may increase or decrease. C) the equilibrium price of smart phones may increase or decrease; the equilibrium quantity will increase. D) the equilibrium price of smart phones will decrease; the equilibrium quantity may increase or decrease. E) both the equilibrium price and quantity of smart phones will decrease. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

20) "The price of compact LED lights fell because of improvements in production technology. As a result, the demand for incandescent light bulbs decreased. This caused the price of incandescent light bulbs to fall; as the price of incandescent light bulbs fell the demand for incandescent light bulbs decreased even further." Evaluate this statement. A) The statement is false. A decrease in the price of compact LED lights would decrease the demand for incandescent light bulbs, but a decrease in the price of incandescent light bulbs would not cause the demand for incandescent light bulbs to decrease. B) The statement is false because the demand for incandescent light bulbs would increase as the price of compact LED lights fell. C) The statement is false because compact LED lights producers would not reduce their prices as a result of improvements in technology; doing so would reduce their profits. D) The statement is false because it confuses the law of demand with the law of supply. E) The statement is true. A decrease in the price of compact LED lights would decrease the demand for incandescent light bulbs, and a decrease in the price of incandescent light bulbs would cause the demand for incandescent light bulbs to decrease. Answer: A Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Figure 3.14

22) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If worms eat half the apple crop, how will the market equilibrium point change? A) The equilibrium point will move from A to B. B) The equilibrium point will move from A to C. C) There will be no change in the equilibrium point. D) The equilibrium point will move from A to E. E) The equilibrium point will move from A to B to C. Answer: A Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 23) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D2 and S2 (point E). Which of the following changes would cause the equilibrium to change to point A? A) a positive change in the technology used to produce apples and decrease in the price of oranges, a substitute for apples B) an increase in the wages of apple workers and a decrease in the price of oranges, a substitute for apples C) an increase in the number of apple producers and a decrease in the number of apple trees as a result of disease D) a decrease in the wages of apple workers and an increase in the price of oranges, a substitute for apples E) an increase in the number of apple producers and an increase in the number of apple trees Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 24) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If there is an increase in the wages of apple workers and an increase in the price of oranges, a substitute for apples, the equilibrium could move to which point? A) The equilibrium point will move from A to B. B) The equilibrium point will move from A to C. C) The equilibrium point will move from A to E. D) There will be no change in the equilibrium point. E) Cannot be determined. Answer: E Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

25) Which of the following statements is true? A) An increase in demand causes a change in equilibrium price; the change in price does not cause a further change in demand or supply. B) A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in demand. C) If both demand and supply increase, there must be an increase in equilibrium price; equilibrium quantity may either increase or decrease. D) If demand decreases and supply increases, one cannot determine if equilibrium price will increase or decrease without knowing which change is greater. E) An increase in supply causes equilibrium price to fall; the decrease in price then results in an increase in demand. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 26) A decrease in the equilibrium price for a product will result A) when the quantity demanded for the product exceeds the quantity supplied. B) when there is a decrease in supply and a decrease in demand for the product. C) when there is an increase in supply and a decrease in demand for the product. D) when there is a decrease in demand and a decrease in the number of firms producing the product. E) when there is a decrease in demand and an increase in the price of inputs for producing the product. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 27) Hurricane Juan hit Halifax in 2003. The storm caused over $300 million in damage. In the effort to repair the damage, the prices of basic building materials and contractors increased dramatically. Many residents complained of profiteering and price gouging by contractors and home improvement stores. Which of the following offers the best explanation of the price increases people were seeing? A) The hurricane reduced the number of suppliers of building materials. B) The hurricane created an artificial shortage of building materials. C) The hurricane caused an increase in the demand for building materials. D) Firms shipped plywood and other materials to locations not affected by the storm. E) The hurricane increased the number of suppliers of building materials. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

28) Which of the following would cause a decrease in the equilibrium price and an increase in the equilibrium quantity of salmon? A) a decrease in demand greater than the increase in supply B) an increase in supply greater than the increase in demand C) a decrease in supply less than the increase in demand D) an increase in demand greater than the decrease in supply E) an increase in supply equal to the increase in demand Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 29) Select the phrase that correctly completes the following statement. "A decrease in the number of manufacturers caused a decrease in the supply of smartphones. As a result A) the price of smartphones increased and the demand for sailboats decreased." B) the equilibrium quantity of smartphones increased." C) the price of smartphones increased and the quantity of smartphones demanded decreased." D) the price of smartphones increased. The higher price caused the supply of smartphones to increase." E) the equilibrium price of smartphones decreased." Answer: C Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 30) What would happen in the market for laser eye surgery if provincial health plans started to cover a portion of the price of voluntary procedures? A) Demand will increase, but this will not shift the supply curve. B) Supply will increase, but this will not shift the demand curve. C) Demand and supply will both increase. D) Demand will increase and supply will decrease. E) Demand will decrease and supply will decrease. Answer: A Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

31) If provinces decide to cover part of the price of voluntary laser eye surgery and more doctors decide to enter the field of laser eye surgery, what will happen in the market for laser eye surgery as a result of these two factors? A) Demand will increase, but these two factors will not shift the supply curve. B) Supply will increase, but these two factors will not shift the demand curve. C) Demand and supply will both increase. D) Demand and supply will both decrease. E) Cannot be determined. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 32) Photovoltaic cells (solar panels) have been in use since the 1970s. Recently, new technology has been developed which some think will allow regular windows to be replaced with solar panels. If this technology works as these people expect what will happen in the market for solar energy? A) The new technology will cause the supply of solar energy to shift to the right and the price of solar energy to fall. B) The new technology caused an increase in the supply of solar energy and an increase in the price of solar energy. C) The new technology caused a decrease in the demand for solar energy. D) The new technology caused an increase in the quantity of solar energy supplied. E) Cannot be determined. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember: A Change in a Good's Price Does Not Cause the Demand or Supply Curve to Shift

33) "Because apples and oranges are substitutes, an increase in the price of oranges will cause the demand for apples to increase. This initial shift in demand for apples results in a higher price for apples; this higher price will cause the demand curve for apples to shift to the right." Which of the following correctly comments on this statement? A) The statement will be true if consumer tastes for apples and oranges do not change. B) The statement is false because a change in the price of apples would not change the demand for apples. C) The statement is false because oranges are inferior goods; apples are normal goods. D) The statement is false because one cannot assume that apples and oranges are substitutes for all consumers. E) The statement is false because oranges are normal goods; apples are inferior goods. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember: A Change in a Good's Price Does Not Cause the Demand or Supply Curve to Shift 34) The demand for lobster is higher at Christmas than in February. If the equilibrium price of lobster is lower at Christmas than in February, then A) the supply of lobster is lower in February than at Christmas. B) consumers' tastes for lobster are greater in February than at Christmas. C) there is a surplus of lobster at Christmas and a shortage of lobster in February. D) there are more substitutes for lobster at Christmas than there are in February. E) lobsters are inferior goods at Christmas, and normal goods in February. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Special Feature: Solved Problem: High Demand and Low Prices in the Lobster Market 35) All else equal, an increase in the number of firms producing energy drinks will A) shift the supply curve for energy drinks to the right. B) shift the supply curve for energy drinks to the left. C) shift the demand curve for energy drinks to the right. D) shift the demand curve for energy drinks to the left. E) leave the supply and demand curves unchanged. Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Chapter Opener: How Smart Is Your Water?

36) All else equal, a successful marketing campaign for energy drinks would cause the equilibrium price of energy drinks to ________ and the equilibrium quantity of energy drinks to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) stay the same; stay the same Answer: A Diff: 1 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 37) If the demand for a product increases and the supply of the same product increases, the equilibrium price will increase. Answer: FALSE Diff: 3 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 38) As the number of firms in a market decreases, the supply curve will shift to the left and the equilibrium price will rise. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 39) If the number of firms producing mouthwash increases and consumer preference for mouthwash increases, the equilibrium price of mouthwash will definitely increase. Answer: FALSE Diff: 2 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 40) If the demand curve for a product shifts to the left and the supply curve for the product shifts to the left, the equilibrium quantity will decrease. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

41) Discuss the correct and incorrect economic analysis in the following statements. "Unifor (the union that represents Canadian auto workers, among other industries) has successfully negotiated a 9 percent increase in wages for its workers. This increase in the wage rate causes an increase in demand for automobiles, since many consumers now have greater incomes, and also causes a decrease in supply of automobiles because the cost of production has increased. These effects cancel each other out resulting in no change in the equilibrium price and quantity in the automobile market." Answer: The wage rate is a determinant of the supply of automobiles, but not a determinant of the demand for automobiles (Unifor's auto workers make up a very small portion of the population). The increase in the wage rate will shift the automobile supply curve to the left along a given demand curve. This will result in a higher equilibrium price and a lower equilibrium quantity in the market for automobiles. Diff: 2 Type: ES Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 42) Explain how it would be possible for the equilibrium price and equilibrium quantity to both increase in the market for motorcycles if consumer preference for motorcycles increases and the number of motorcycle manufacturers decreases. Answer: An increase in consumer preference will shift the demand curve to the right, which increases the equilibrium price and the equilibrium quantity. A decrease in the number of manufacturers will shift the supply curve to the left, which will increase the equilibrium price and decrease the equilibrium quantity. In both cases, the equilibrium price increases. For the equilibrium quantity to increase, the rightward shift in demand resulting from the increase in consumer preference must be more than the leftward shift in supply which results from the decrease in manufacturers. Diff: 2 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 43) In each of the following situations, list what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is a normal good. a. The population increases and the price of inputs increase. b. The price of a complement increases and technology advances. c. The number of firms in the market increases and income increases. d. Price is expected to increase in the future. e. Consumer preference increases and the price of a substitute in production decreases. Answer: a. Price increases; Quantity may increase or decrease. b. Price decreases; Quantity may increase or decrease. c. Quantity increases; Price may increase or decrease. d. Price increases; Quantity may increase or decrease. e. Quantity increases; Price may increase or decrease. Diff: 3 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

44) Let D = demand, S = supply, P = equilibrium price, Q = equilibrium quantity. What happens in the market for solar panels if the government offers tax breaks to encourage manufacturers to produce more solar panels? A) D increases, S no change, P and Q increase B) S increases, D no change, P decreases, Q increases C) D and S increase, P and Q decrease D) D no change, S increases, P decreases, Q decreases E) D no change, S decreases, P decreases, Q decreases Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 45) Hurricane Arthur interrupted shipments of crude oil to refineries in eastern Canada. In the market for gasoline, A) the supply curve shifted to the left, resulting in an increase in the equilibrium price. B) the supply curve shifted to the right, resulting in an increase in the equilibrium price. C) the demand curve shifted to the left, resulting in a decrease in the equilibrium price. D) the demand curve shifted to the right, resulting in an increase in the equilibrium price. E) there was a decrease in the price for crude oil. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 46) Electric car enthusiasts want to buy more electric cars at a lower price. All of the following events would have this effect except A) technological advancement in the production of electric car batteries. B) an increase in the number of manufacturers of electric cars. C) a decrease in the price of lithium, which is used in the electric car batteries. D) an increase in the price of gasoline. E) an increase in the cost of transporting electric cars to markets. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

47) Which of the following would cause both the equilibrium price and equilibrium quantity of ramen to increase? A) an increase in consumer income, and ramen is a normal good B) a strike that sharply reduces ramen output C) a decrease in consumer income, and ramen is an inferior good D) ramen is found to contain unhealthy preservatives E) an increase in the price of chopsticks, a complement for ramen Answer: C Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 48) Which of the following would cause the equilibrium price of ketchup to increase and the equilibrium quantity of ketchup to decrease? A) a decrease in the price of tomatoes B) an increase in the price of tomatoes C) an increase in the price of mustard, a substitute for ketchup D) an increase in the price of French fries, a complement for ketchup E) an increase in ketchup manufacturers Answer: B Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 49) Assume that the hourly price for the services of personal trainers has risen and sales of these services have also risen. One can conclude that A) the law of demand has been violated. B) the number of personal trainers has increased. C) the demand for personal trainers has increased. D) personal trainers are deliberately charging high prices. E) there is an increase in the number of personal trainers. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

50) Prices of commercial airline tickets have fallen in recent months. Over this same period, the price of jet fuel has risen and consumer incomes have fallen. Which of the following best explains the falling prices of airline tickets? A) The demand curve for airline tickets and the supply curve of airline tickets have shifted to the left. B) The demand curve for airline tickets and the supply curve of airline tickets have shifted to the right. C) The demand curve for airline tickets has shifted to the left more than the supply curve has shifted to the left. D) The supply curve for airline tickets has shifted to the left more than the demand curve has shifted to the left. E) The supply curve of airline tickets and the demand curve for airline tickets have remained unchanged. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 51) In recent years the cost of producing wines in Canada has increased, largely due to rising rent for vineyards. At the same time, an increasing number of Canadians say they prefer wine to beer. Which of the following best explains the effect of these events on the wine market? A) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price. B) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity. C) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in both the equilibrium price and the equilibrium quantity. D) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity. E) Both the supply and demand curves have shifted to the left. As a result, there has been a decrease in the equilibrium price and the equilibrium quantity. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

52) Studies have shown that drinking one glass of red wine per day may help prevent heart disease. Assume this is true. Suppose that a fungal disease destroys a large portion of the grape harvest of B.C. vineyards. In the market for red wine, these two developments would A) increase demand and increase supply, resulting in an increase in the equilibrium quantity and a decrease in the equilibrium price of red wine. B) increase demand and decrease supply, resulting in a decrease in both the equilibrium quantity and the equilibrium price of red wine. C) increase demand and decrease supply, resulting in an increase in the equilibrium price and an uncertain effect on the equilibrium quantity of red wine. D) increase demand and decrease supply, resulting in an increase in both the equilibrium price and the equilibrium quantity of red wine. E) decrease demand and decrease supply, resulting in a decrease in the equilibrium price and the equilibrium quantity of red wine. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 53) A decrease in the demand for eggs due to changes in consumer tastes, accompanied by a decrease in the supply of eggs as a result of an outbreak of Avian flu, will result in A) a decrease in the equilibrium quantity of eggs and no change in the equilibrium price. B) a decrease in the equilibrium price of eggs and no change in the equilibrium quantity. C) a decrease in the equilibrium price of egg; the equilibrium quantity may increase or decrease. D) a decrease in the equilibrium quantity of eggs; the equilibrium price may increase or decrease. E) a decrease in the equilibrium price of eggs and an increase in the equilibrium quantity. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

Figure 3.15

54) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for Blu-ray discs. Which panel best describes what happens in this market if there is a substantial increase in the price of Blu-ray players? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (d) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking

55) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for laptop computers. Which panel best describes what happens in this market when the price of computer hard drives falls? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 56) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for tuna. Which panel best describes what happens in this market when there is a decrease in the productivity of commercial fishermen? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (d) Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 57) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for frozen yogurt. Which panel describes what happens in the market for frozen yogurt when the price of ice cream, a substitute product, increases? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking

58) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for mustard and that bratwurst and mustard are complements. Which panel describes what happens in this market when the price of bratwurst falls? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 59) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for coffee. Which panel describes what happens in this market if buyers expect the price of coffee to rise? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (c) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 60) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for ramen noodles, an inferior good. Which panel describes what happens in this market as a result of an increase in income? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking

61) Positive technological change in the production of chicken caused the price of chicken to fall. Holding everything else constant, how would this affect the market for pork (a substitute for chicken)? A) The supply of pork would increase and the equilibrium price of pork would decrease. B) The demand for pork would decrease and the equilibrium price of pork would decrease. C) The demand for pork would increase because consumers could afford to buy more chicken and pork. D) The demand for pork would decrease and the equilibrium price of pork would increase. E) The supply of pork would decrease and the equilibrium price of pork would increase. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 62) Assume that both the demand curve and the supply curve for tablet computers shift to the left but the demand curve shifts more than the supply curve. As a result, A) both the equilibrium price and quantity of tablet computers will decrease. B) the equilibrium price of tablet computers will decrease; the equilibrium quantity may increase or decrease. C) the equilibrium price of tablet computers may increase or decrease; the equilibrium quantity will decrease. D) the equilibrium price of tablet computers will increase; the equilibrium quantity may increase or decrease. E) both the equilibrium price and quantity of tablet computers will increase. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 63) "The price of digital cameras fell because of improvements in production technology. As a result, the demand for film cameras decreased. This caused the price of film cameras to fall; as the price of film cameras fell, the demand for film cameras decreased even further." Evaluate this statement. A) The statement is false because the demand for film cameras would increase as the price of digital cameras fell. B) The statement is false. A decrease in the price of digital cameras would decrease the demand for film cameras, but a decrease in the price of film cameras would not cause the demand for film cameras to decrease. C) The statement is false because it confuses the law of demand with the law of supply. D) The statement is false because digital camera producers would not reduce their prices as a result of improvements in technology; doing so would reduce their profits. E) The statement is true. A decrease in the price of digital cameras would decrease the demand for film cameras, and a decrease in the price of film cameras would cause the demand for film cameras to decrease. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 102 Copyright © 2024 Pearson Canada Inc.

Figure 3.16

64) Refer to Figure 3.16. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point A). If the price of motorcycle engines increases, and the wages of motorcycle manufacturers increase, how will the equilibrium point change? A) The equilibrium point will move from A to E. B) The equilibrium point will move from A to B. C) The equilibrium point will move from A to C. D) The equilibrium will first move from A to B, then return to A. E) Cannot be determined. Answer: B Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 65) Refer to Figure 3.16. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point A). If there is a surplus of motorcycles, how will the equilibrium point change? A) The equilibrium point will move from A to B. B) The equilibrium point will move from A to C. C) There will be no change in the equilibrium point. D) The equilibrium point will move from A to E. E) Cannot be determined. Answer: C Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 103 Copyright © 2024 Pearson Canada Inc.

66) Refer to Figure 3.16. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D2 and S1 (point C). Which of the following changes would cause the equilibrium to change to point B? Assume that motorcycle insurance is a complement to motorcycles. A) a positive change in the technology used to produce motorcycles and a decrease in the price of motorcycle insurance B) an increase in the wages of motorcycle workers and a decrease in the price of motorcycle insurance C) an increase in the number of motorcycle producers and an increase in the number of consumers who prefer riding motorcycles D) an increase in the wages of motorcycle workers and an increase in the price of motorcycle insurance E) a decrease in the number of motorcycle producers and a decrease in the number of consumers who prefer riding motorcycles Answer: B Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 67) Refer to Figure 3.16. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point A). If there is an increase in the wages of motorcycle workers and an increase in the price of motorcycle insurance (a complement to motorcycles), the equilibrium could move to which point? A) A B) B C) C D) E E) Cannot be determined. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

68) Which of the following statements is true? A) An increase in demand causes an increase in equilibrium price; the increase in price causes supply to increase. B) A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in quantity demanded. C) If both demand and supply decrease, there must be a decrease in equilibrium price; equilibrium quantity may either increase or decrease. D) If demand increases and supply decreases, one cannot determine if equilibrium price will increase or decrease without knowing which change is greater. E) A decrease in supply causes equilibrium price to fall; the decrease in price then results in an increase in quantity demanded. Answer: B Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 69) An increase in the equilibrium price for a product will result A) when the quantity demanded for the product exceeds the quantity supplied. B) when there is a decrease in supply and an increase in demand for the product. C) when there is a decrease in supply and a decrease in demand for the product. D) when there is an increase in demand and an increase in the number of firms producing the product. E) when there is an increase in supply and a decrease in demand for the product. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 70) Tuition rises almost every year, yet universities seem to have more and more students every year. What would explain this? A) The demand for university education is rising more slowly than supply. B) The supply of the university education had decreased and the demand for university education remained unchanged. C) The demand for university education is rising more quickly than supply. D) The supply of university education and demand for university education are both falling. E) The supply of university education and demand for university education are both increasing. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

71) Which of the following would cause an increase in the equilibrium price and a decrease in the equilibrium quantity of watermelon? A) a decrease in demand and an increase in supply B) a decrease in supply C) an increase in demand and an increase in supply greater than the increase in demand D) an increase in demand and an increase in supply E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 72) Select the phrase that correctly completes the following statement. "A decrease in the number of manufacturers caused a decrease in the supply of sailboats. As a result, ________." A) the price of sailboats increased and the demand for sailboats decreased B) the equilibrium quantity of sailboats increased C) the price of sailboats increased and the quantity demanded of sailboats decreased D) the price of sailboats increased and the higher price caused the supply of sailboats to increase E) the equilibrium quantity of sailboats decreased Answer: C Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 73) Suppose a positive technological change in the production of disease-resistant corn caused the price of corn to fall. Holding everything else constant, how would this affect the market for wheat (a substitute for corn)? A) The supply of wheat would increase and the equilibrium price of wheat would decrease. B) The demand for wheat would decrease and the equilibrium price of wheat would decrease. C) The demand for wheat would increase because consumers could afford to buy more wheat and corn. D) The demand for wheat would decrease and the equilibrium price of wheat would increase. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

74) The price of lobster is typically lower in the summer than in the spring. Which of the following explanations for this difference is given in the textbook? A) Hot, humid weather usually reduces the demand for lobster. B) People who usually eat lobster in other seasons substitute less expensive fish when they go on vacation; this drives down the demand for lobster. C) The supply of lobster is greater in the summer than in the spring. D) Import restrictions are eased in the summer; as more lobsters are imported the price of lobster falls. E) The supply and demand of lobster is greater in the spring than in the summer. Answer: C Diff: 1 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Solved Problem: High Demand and Low Prices in the Lobster Market 75) "Because Coke and Pepsi are substitutes, a decrease in the price of Pepsi will cause the demand for Coke to decrease. This initial shift in demand for Coke results in a lower price for Coke; this lower price will cause the demand curve for Coke to shift to the left." Which of the following correctly comments on this statement? A) The statement will be true if consumer tastes for Coke and Pepsi do not change. B) The statement is false because a change in the price of Coke would not change the demand for Coke. C) The statement is false because Pepsi is an inferior good; Coke is a normal good. D) The statement is false because one cannot assume that Coke and Pepsi are substitutes for all consumers. E) The statement is false because Pepsi is a normal good; Coke is an inferior good. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember: A Change in a Good's Price Does Not Cause the Demand or Supply Curve to Shift 76) All else equal, a ________ of orange juice used in breakfast drinks would shift the ________ curve/s for breakfast drinks to the left. A) surplus; demand B) surplus; supply C) shortage; supply D) shortage; demand E) surplus; supply and demand Answer: C Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking

77) All else equal, a shortage of orange juice would cause the A) equilibrium quantity of breakfast drinks to increase and the equilibrium price of breakfast drinks to decrease. B) equilibrium price of breakfast drinks to increase and the equilibrium quantity of breakfast drinks to decrease. C) equilibrium price and quantity of breakfast drinks to increase. D) equilibrium price and quantity of breakfast drinks to decrease. E) no change in equilibrium price or quantity. Answer: B Diff: 1 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 78) If the demand for a product increases and the supply of the same product decreases, the equilibrium price will increase. Answer: TRUE Diff: 3 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 79) As the number of firms in a market increases, the supply curve will shift to the left and the equilibrium price will rise. Answer: FALSE Diff: 2 Type: TF Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 80) If the population increases and input prices increase, the equilibrium price of a product will definitely increase. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 81) If the demand for a product decreases and the supply of the product does not change, equilibrium price and equilibrium quantity will both increase. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

82) Discuss the correct and incorrect economic analysis in the following statements. "If a disease kills a large number of turkeys, the supply of turkeys will decrease. This will result in a price increase, which will then cause the supply of turkeys to increase." Answer: The supply of turkeys will decrease, resulting in a higher equilibrium price and a lower equilibrium quantity, but the higher price will not shift the supply curve for turkeys. Diff: 2 Type: ES Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 83) If pilots and flight attendants agree to wage and benefit reductions in the wake of financial difficulties in the airline industry, what impact would this have on the supply and demand in the market for airline service, assuming no other changes take place in this market? Answer: A reduction of wages and benefits will shift the supply curve to the right, but will not shift the demand curve. This will decrease the equilibrium price and increase the equilibrium quantity in the market for airline service. Diff: 3 Type: ES Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 84) Atlantic salmon is an increasingly popular dish. It is also increasingly produced using aquaculture (fish farming) on Canada's east coast. If a hurricane destroys aquaculture facilities, how will this affect the equilibrium price and quantity of Atlantic salmon? Answer: The supply curve for Atlantic salmon would shift to the left, resulting in a higher equilibrium price and lower equilibrium quantity. Diff: 2 Type: ES Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking

85) In each of the following situations, list what would happen to the equilibrium price and the equilibrium quantity for a particular product that is an inferior good. a. Population decreases and productivity increases. b. Income increases and the price of inputs increase. c. The number of firms in the market decreases and income decreases. d. Consumer preference decreases and the price of a complement increases. e. The price of a substitute in consumption increases and the price of a substitute in production increases. Answer: a. Price decreases; quantity may increase or decrease. b. Quantity decreases; price may increase or decrease. c. Price increases; quantity may increase or decrease. d. Price decreases; quantity decreases. e. Price increases; quantity may increase or decrease. Diff: 3 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

86) According to the Australian Wool Innovation, severe drought conditions in Australia contributed to the lowest level of wool production in 50 years. This record low production has driven up prices sharply in Australian wool markets. Meanwhile, the price of raw cotton increased significantly for the first time in many years. a. Illustrate these observations with one demand and supply graph for the market for Australian wool and another demand and supply graph for raw cotton. b. Make sure that your graphs clearly show (1) the initial equilibrium before the decrease in the supply of Australian wool and (2) the final equilibrium. c. Use arrows to indicate any shifts in the demand and supply curves for each market. d. Label your graphs fully and write an explanation of your work. Answer: a, b, and c, see the figure below.

d. In the Australian wool market, the supply curve shifts to the left as a result of the drought. This leads to an increase in the equilibrium price of wool and a decrease in the equilibrium quantity. The higher price of wool causes buyers to substitute cotton for wool, thereby increasing the demand for cotton. In the cotton market, the demand curve for cotton moves to the right along a given supply curve, resulting in a higher equilibrium price and higher equilibrium quantity of cotton. Diff: 3 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

3.5

Use quantitative demand and supply analysis

1) The following equations represent the demand and supply for bird feeders. QD = 35 - P QS = -5 + 3P What is the equilibrium price (P) and quantity (Q - in thousands) of bird feeders? A) P = $10; Q = 25 thousand B) P = $35; Q = 20 thousand C) P = $20; Q = 20 thousand D) P = $5; Q = 30 thousand E) P = $35; Q = 30 thousand Answer: A Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 2) If the price of garlic is represented by the equation P = 25 - QD, then the corresponding quantity of garlic demanded is represented by the equation A) QD = P - 25. B) QD = P + 25. C) QD = 25 - P. D) QD = 1 + 25P. E) QD = 1 - 25P. Answer: C Diff: 1 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 3) If the quantity of tacos demanded is represented by the equation QD = 20 - 0.5P, then the corresponding price of tacos is represented by the equation A) P = 0.5QD + 10. B) P = 40 - 2QD. C) P = 10 - 2QD. D) P = QD + 40. E) P = QD - 40. Answer: B Diff: 1 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills

4) If the quantity of nail polish supplied is represented by the equation QS = -3 + 2P, then the corresponding price of nail polish is represented by the equation A) P = 0.5QS + 1.5. B) P = 2QS + 6. C) P = 2QS - 6. D) P = 1.5 - 0.5QS. E) P = 1.0 - 1.5QS. Answer: A Diff: 1 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills Table 3.7 Demand P = 50 - QD

Supply P = 10 + 1/3 QS

QD = 50 - P

QS = 3P - 30

5) Refer to Table 3.7. The equations above describe the demand and supply for Aunt Maud's Premium Hand Lotion. What are the equilibrium price and quantity (in thousands) for Aunt Maud's Lotion? A) $20 and 30 thousand B) $30 and 20 thousand C) $60 and 30 thousand D) $20 and 60 thousand E) $60 and 20 thousand Answer: A Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 6) Refer to Table 3.7. The equations above describe the demand and supply for Aunt Maud's Premium Hand Lotion. The equilibrium price and quantity for Aunt Maud's lotion are $20 and 30 thousand units. What is the value of consumer surplus? A) $300 thousand B) $450 thousand C) $900 thousand D) $1,500 thousand E) $3,000 thousand Answer: B Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills

7) Refer to Table 3.7. The equations above describe the demand and supply for Aunt Maud's Premium Hand Lotion. The equilibrium price and quantity for Aunt Maud's lotion are $20 and 30 thousand units. What is the value of producer surplus? A) $600 thousand B) $300 thousand C) $150 thousand D) $30 thousand E) $130 thousand Answer: C Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 8) Refer to Table 3.7. The equations above describe the demand and supply for Aunt Maud's Premium Hand Lotion. The equilibrium price and quantity for Aunt Maud's lotion are $20 and 30 thousand units. What is the value of economic surplus in this market? A) $600 thousand B) $1,050 thousand C) $1,500 thousand D) $2,100 thousand E) $2,500 thousand Answer: A Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 9) You are given the following market data for Venus automobiles in Saturnia. Demand: P = 35,000 - 0.5Q Supply: P = 8,000 + 0.25Q where P = Price and Q = Quantity. a. Calculate the equilibrium price and quantity. b. Calculate the consumer surplus in this market. c. Calculate the producer surplus in this market. Answer: a. Quantity = 36,000: {35,000 - 0.5Q = 8,000 + 0.25Q; 27,000 = 0.75Q; Q = 36,000.} Price = $17,000: {P = 35,000 - 0.5(36,000); P = 35,000 - 18,000; P = $17,000.} b. Consumer surplus = (0.5)($35,000 - $17,000) × 36,000 = $324 million c. Producer Surplus = (0.5)(17,000 - 8,000) × 36,000 = $162 million. Diff: 3 Type: ES Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills

10) The demand and supply equations for the peach market are: Demand: P = 24 - 0.5Q Supply: P = -6 + 2.5Q where P = price per bushel, and Q = quantity (in thousands). a. Calculate the equilibrium price and quantity. b. Suppose the government guaranteed producers a price of $24 per bushel. What would be the effect on quantity supplied? Provide a numerical value. c. By how much would the $24 price change the quantity of peaches demanded? Provide a numerical value. d. Would there be a shortage or surplus of peaches? e. What is the size of this shortage or surplus? Provide a numerical value. Answer: a. Quantity = 10 thousand bushels: {24 - 0.5Q = -6 + 2.5Q; 30 = 3Q; Q = 10} Price = $19: {P = 24 - 0.5(10); P = 24 - 5; P = $19} b. Quantity supplied would increase to 12 thousand bushels: {24 = -6 + 2.5Q; 30 = 2.5Q; Q = 12} c. Quantity demanded would fall to zero bushels: {24 = 24 - 0.5Q; 0 = -0.5Q; Q = 0} d. There would be a surplus. e. Surplus = 12,000 - 0 = 12 thousand bushels. Diff: 2 Type: ES Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills

Microeconomics, 4Ce (Hubbard) Chapter 4 Economic Efficiency, Government Price Setting, and Taxes 4.1

Distinguish between the concepts of consumer surplus and producer surplus

1) The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays is called A) producer surplus. B) the substitution effect. C) the income effect. D) market price. E) consumer surplus. Answer: E Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 2) Provincial governments in BC, Manitoba, Ontario and Quebec have various forms of rent control. Rent control A) puts a legal limit on the rent that landlords can charge for an apartment. B) is a price floor which sets a minimum rent for apartments. C) only applies to those apartments which are owned and rented out by the local government. D) is a government policy which limits apartment rental to those people whose incomes are less than $50,000 per year. E) is in place to protect the landlords against inflation. Answer: A Diff: 1 Type: MC Topic: Price Ceilings Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Special Feature: Chapter Opener: Should The Government Control Apartment Rents? 3) In a province with rent-controlled apartments, all of the following are true except A) apartments usually rent for rates lower than the market rate. B) apartments are often in shorter supply than they would be without rent control. C) it usually takes more time to find an apartment than it would without rent control. D) landlords have an incentive to rent more apartments than they would without rent control. E) landlords are not willing to maintain the apartments in presence of rent control. Answer: D Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Special Feature: Chapter Opener: Should The Government Control Apartment Rents?

4) Paul goes to SportChek to buy a new tennis racquet. He is willing to pay $200 for a new racquet, but buys one on sale for $125. Paul's consumer surplus from the purchase is A) $325. B) $200. C) $125. D) $75. E) $150. Answer: D Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 5) Lucinda buys a new gaming system for $500. She receives consumer surplus of $175 from the purchase. How much does Lucinda value her GPS system? A) $175 B) $250 C) $500 D) $325 E) $675 Answer: E Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 6) Willingness to pay measures A) the maximum price a buyer is willing to pay for a product minus the amount the buyer actually pays for it. B) the amount a seller actually receives for a good minus the minimum amount the seller is willing to accept for the good. C) the maximum price that a buyer is willing to pay for a good. D) the maximum price a buyer is willing to pay minus the minimum price a seller is willing to accept. E) the price at which the buyer buys the good. Answer: C Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

7) Consumers are willing to purchase a product up to the point where A) the marginal benefit of consuming the product is equal to the marginal cost of consuming it. B) the consumer surplus is equal to the producer surplus. C) the marginal benefit of consuming the product equals the area below the supply curve and above the market price. D) the price of the good becomes minimum. E) the marginal benefit of consuming a product is equal to its price. Answer: E Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 8) Marginal benefit is equal to the ________ benefit to a consumer receives from consuming one more unit of a good or service. A) total B) unintended C) additional D) surplus E) maximum Answer: C Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 9) Which of the following statements best describes the concept of consumer surplus? A) "Sobeys was having a sale on Chapman's ice cream so I bought 6 litres." B) "I was ready to pay $300 for a new leather jacket that I had seen in Hudson's Bay, but I ended up paying only $180." C) "I paid $130 for a printer last week. This week the same store is selling the same printer for $110." D) "I sold my Blu-ray copy of Ben-Hur for $18 at a garage sale, although I was willing to sell it for $10." E) "I sold a used book on Kijiji for $70, although I was willing to sell it for $50." Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

10) Each point on a(n) ________ curve shows the willingness of consumers to purchase a product at different prices. A) demand B) supply C) production possibilities D) marginal cost E) average cost Answer: A Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 11) If the market price of a polo shirt is $25, consumers will keep on buying shirts until the consumer surplus from last polo shirt purchased is A) minimized. B) maximized. C) $25. D) zero. E) more than $25. Answer: D Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Table 4.1 Consumer Tom Dick Harriet

Willingness to Pay $40 30 25

12) Refer to Table 4.1. The table above lists the highest prices three consumers, Tom, Dick and Harriet, are willing to pay for a short-sleeved polo shirt. If the price of one of the shirts is $28 dollars A) Tom will buy two shirts, Dick will buy one shirt and Harriet will buy no shirts. B) Tom will receive $12 of consumer surplus from buying one shirt. C) Tom and Dick receive a total of $70 of consumer surplus from buying one shirt each. Harriet will buy no shirts. D) Harriet will receive $25 of consumer surplus since she will buy no shirts. E) Dick and Harriet will not be able to buy any shirts at the given price. Answer: B Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

13) Refer to Table 4.1. The table above lists the highest prices three consumers, Tom, Dick and Harriet, are willing to pay for a short-sleeved polo shirt. If the price of the shirts falls from $28 to $20, A) consumer surplus increases from $14 to $35. B) Tom will buy two shirts; Dick and Harriet will each buy one shirt. C) consumer surplus will increase from $70 to $95. D) Harriet will receive more consumer surplus than Tom or Dick. E) due to lower price, everyone wants to buy 2 shirts. Answer: A Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills Table 4.2 Consumer Anya Basil Celeste Dralon Esther

Willingness to Pay $24 20 15 12 7

14) Refer to Table 4.2. The table above lists the highest prices five consumers are willing to pay for a theater ticket. If the price of one of the tickets is $18, A) Anya and Basil will each buy two tickets. B) Basil will receive $2 of consumer surplus from buying one ticket. C) Anya and Basil receive a total of $26 of consumer surplus from buying one ticket each. No one else will buy a ticket. D) Celeste, Dralon, and Esther will receive a total of $34 of consumer surplus since they will buy no tickets. E) Celeste will buy one ticket and receive a surplus of -$3. Answer: B Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 15) Refer to Table 4.2. The table above lists the highest prices five consumers are willing to pay for a theater ticket. If the price of one of the tickets is $10, A) everyone will buy a ticket except for Esther. B) only Anya and Basil will buy tickets. C) Celeste's consumer surplus is $25. D) the total consumer surplus from the purchase of tickets will be $61. E) everyone will buy a ticket. Answer: A Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 5 Copyright © 2024 Pearson Canada Inc.

16) Refer to Table 4.2. The table above lists the highest prices five consumers are willing to pay for a theater ticket. If the price of one ticket is $25, A) everyone will buy a ticket. B) consumer surplus will be maximized. C) Anya's consumer surplus is $1. D) no one will buy a ticket. E) only Anya and Basil will buy a ticket. Answer: D Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 17) Refer to Table 4.2. The table above lists the highest prices five consumers are willing to pay for a theater ticket. If the price of one ticket rises from $10 to $19, A) only three tickets will be sold. B) consumer surplus decreases from $31 to $6. C) consumer surplus increases from $44 to $71. D) no one will buy a ticket. E) only Anya will buy a ticket. Answer: B Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 18) Refer to Table 4.2. The table above lists the highest prices five consumers are willing to pay for a theater ticket. If the price of one ticket falls from $25 to $10, A) only three tickets will be sold. B) consumer surplus decreases from $24 to $12. C) consumer surplus increases from $0 to $31. D) everyone will buy a ticket. E) only Anya and Celeste will buy a ticket. Answer: C Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking

19) Marginal cost is A) the total cost of producing one unit of a good or service. B) the average cost of producing a good or service. C) the difference between the lowest price a firm would have been willing to accept and the price it actually receives. D) the difference between total revenue and total cost. E) the additional cost to a firm of producing one more unit of a good or service. Answer: E Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Table 4.3 The Lethbridge Kid's Marginal Cost Cowboy Hats (dollars) 1st hat $24 2nd hat 30 3rd hat 38 4th hat 46 20) Refer to Table 4.3. The table above lists the marginal cost of cowboy hats produced by The Lethbridge Kid, a firm that specializes in producing western wear. If the market price of The Lethbridge Kid's cowboy hat is $40, A) The Lethbridge Kid will produce four hats. B) producer surplus will be equal to $16. C) producer surplus will be equal to $28. D) there will be a surplus; as a result, the price will fall to $24. E) only one hat will be sold and producer surplus will be $6. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

21) Refer to Table 4.3. The table above lists the marginal cost of cowboy hats produced by The Lethbridge Kid, a firm that specializes in producing western wear. If the price of cowboy hats increases from $40 to $46, A) consumers will buy no cowboy hats. B) the marginal cost of producing the third cowboy hat will increase to $46. C) producer surplus will rise from $28 to $46. D) producer surplus will rise from $38 to $46. E) producer surplus will be zero since no one will buy any hats at this price. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 22) Refer to Table 4.3. The table above lists the marginal cost of cowboy hats produced by The Lethbridge Kid, a firm that specializes in producing western wear. If the market price of cowboy hats is $35, The Lethbridge Kid will produce A) 1 hat. B) 2 hats. C) 3 hats. D) 4 hats. E) 0 hats Answer: B Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 23) Refer to Table 4.3. The table above lists the marginal cost of cowboy hats produced by The Lethbridge Kid, a firm that specializes in producing western wear. If the market price of cowboy hats is $50, how many hats will be produced? A) 0 B) 1 C) 2 D) 4 E) 5 Answer: D Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

24) Refer to Table 4.3. The table above lists the marginal cost of cowboy hats produced by The Lethbridge Kid, a firm that specializes in producing western wear. If the market price of cowboy hats is $50, producer surplus is A) $0. B) $4. C) $62. D) $138. E) $145. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 25) Refer to Table 4.3. The table above lists the marginal cost of cowboy hats produced by The Lethbridge Kid, a firm that specializes in producing western wear. If the price of cowboy hats decreases from $38 to $30, A) consumer surplus will rise by $6. B) the marginal cost of producing the third cowboy hat will fall to $30. C) producer surplus will fall from $22 to $6. D) producer surplus will rise from $8 to $24. E) consumer surplus will fall by $8. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

Table 4.4 Quantity of Tippi's Tap Shoes 1st pair 2nd pair 3rd pair 4th pair

Marginal Cost (dollars) $35 55 80 105

26) Refer to Table 4.4. The table above lists the marginal cost of tap shoes by Tippi, a firm that specializes in producing dance shoes. If the market price for a pair of Tippi's tap shoes is $70, A) Tippi will produce three pairs. B) producer surplus from the first pair is $20. C) producer surplus will equal $50. D) there will be a surplus; as a result, the price will fall to $55. E) producer surplus from two pairs will be $40. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 27) Refer to Table 4.4. The table above lists the marginal cost of tap shoes by Tippi, a firm that specializes in producing dance shoes. If the market price for a pair of tap shoes is $85, Tippi will produce A) 1 pair. B) 2 pairs. C) 3 pairs. D) 4 pairs. E) 0 pairs. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 28) Refer to Table 4.4. The table above lists the marginal cost of tap shoes by Tippi, a firm that specializes in producing dance shoes. If the price for a pair of tap shoes increases from $85 to $110, A) consumers will buy no tap shoes. B) the marginal cost of producing the third pair of tap shoes will increase to $85. C) producer surplus will rise from $85 to $165. D) there will be a surplus of tap shoes. E) there will be a shortage of tap shoes. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 10 Copyright © 2024 Pearson Canada Inc.

29) Refer to Table 4.4. The table above lists the marginal cost of tap shoes by Tippi, a firm that specializes in producing dance shoes. If the market price for a pair of tap shoes is $50, how many pairs will be produced? A) 0 B) 1 C) 2 D) 3 E) 4 Answer: B Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 30) Refer to Table 4.4. The table above lists the marginal cost of tap shoes by Tippi, a firm that specializes in producing dance shoes. If the market price for a pair of tap shoes is $100, producer surplus is A) $5. B) $65. C) $130. D) $240. E) $260. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 31) Refer to Table 4.4. The table above lists the marginal cost of tap shoes by Tippi, a firm that specializes in producing dance shoes. If the price for a pair of tap shoes decreases from $100 to $75, A) consumer surplus will equal $0. B) the marginal cost of producing the third pair will fall to $55. C) producer surplus will fall from $130 to $60. D) producer surplus will rise from $55 to $80. E) consumer surplus will increase by $75. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking

32) The area ________ the market supply curve and ________ the market price is equal to the total amount of producer surplus in a market. A) above; above B) above; below C) below; above D) below; below E) none of the above is the correct answer. Answer: B Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 33) The total amount of producer surplus in a market is equal to A) the difference between quantity supplied and quantity demanded. B) the area above the market supply curve and below the market price. C) the area above the market supply curve. D) the area between the demand curve and the supply curve below the market price. E) the area above the market price and below the demand curve. Answer: B Diff: 2 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 34) Consumer surplus in a market for a product would be equal to ________ if the market price was zero. A) zero B) the area between the supply curve and the demand curve C) the area above the supply curve D) the area under the demand curve E) the area above the demand curve Answer: D Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 35) Which of the following statements is true? A) Consumer surplus measures the total benefit from participating in a market. B) When a market is in equilibrium, consumer surplus equals producer surplus. C) Consumer surplus measures the net benefit from participating in a market. D) Producer surplus measures the total benefit received by producers from participating in a market. E) Total surplus in the market is equal producer surplus minus consumer surplus. Answer: C Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 12 Copyright © 2024 Pearson Canada Inc.

36) A ________ curve shows the marginal cost of producing one more unit of a good or service. A) demand B) supply C) production possibilities D) marginal benefit E) average total cost Answer: B Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 37) A demand curve shows A) the willingness of consumers to buy a product at different prices. B) the willingness of consumers to substitute one product for another product. C) the relationship between the price of a product and the demand for the product. D) the relationship between the price of a product and the total benefit consumers receive from the product. E) the difference between the cost of a product and its price in the market. Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

Figure 4.1

Figure 4.1 shows Arnold's demand curve for burritos. 38) Refer to Figure 4.1. Arnold's marginal benefit from consuming the second burrito is A) $1.00. B) $1.50. C) $2.00. D) $4.50. E) $5.00. Answer: C Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 39) Refer to Figure 4.1. Arnold's marginal benefit from consuming the third burrito is A) $1.25. B) $1.50. C) $2.50. D) $6.00. E) $9.00. Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

40) Refer to Figure 4.1. Arnold's marginal benefit from consuming the fourth burrito is A) $0. B) $1.00. C) $2.50. D) $3.00. E) $3.50. Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 41) Refer to Figure 4.1. If the market price is $3.00, what is the maximum number of burritos that Arnold will buy? A) 0 B) 1 C) 2 D) 3 E) 4 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 42) Refer to Figure 4.1. What is the total amount that Arnold is willing to pay for 2 burritos? A) $2.00 B) $4.50 C) $7.50 D) $10.00 E) $15.00 Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 43) Refer to Figure 4.1. If the market price is $2.00, what is Arnold's consumer surplus? A) $0.50 B) $1.00 C) $1.50 D) $3.00 E) $3.50 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 15 Copyright © 2024 Pearson Canada Inc.

44) Refer to Figure 4.1. If the market price is $1.50, what is the consumer surplus on the first burrito? A) $0.50 B) $1.00 C) $1.50 D) $7.50 E) $10.00 Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 45) Refer to Figure 4.1. If the market price is $1.50, what is the consumer surplus on the second burrito? A) $0.50 B) $1.00 C) $1.50 D) $3.50 E) $4.00 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 46) Refer to Figure 4.1. If the market price is $1.50, what is Arnold's consumer surplus? A) $1.50 B) $2.25 C) $3.00 D) $4.75 E) $5.00 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 47) Refer to Figure 4.1. If the market price is $1.00, what is the consumer surplus on the third burrito? A) $0.50 B) $1.00 C) $1.50 D) $2.50 E) $3.00 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

48) Refer to Figure 4.1. If the market price is $1.00, what is Arnold's consumer surplus? A) $1.00 B) $2.00 C) $6.00 D) $7.00 E) $9.00 Answer: C Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 49) Refer to Figure 4.1. What is the total amount that Arnold is willing to pay for 4 burritos? A) $1.00 B) $4.00 C) $5.00 D) $7.00 E) $9.00 Answer: D Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 50) Refer to Figure 4.1. If the market price is $1.00, what is the maximum number of burritos that Arnold will buy? A) 0 B) 1 C) 2 D) 3 E) 4 Answer: E Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 51) Suppliers will be willing to sell a product only if A) the price received is less than the additional cost of producing the product. B) the price received is at least equal to the additional cost of producing the product. C) the price is higher than the average cost of producing the product. D) the price received is at least double the additional cost of producing the product. E) the price is less than their average cost. Answer: B Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 17 Copyright © 2024 Pearson Canada Inc.

52) The difference between the ________ and the ________ from the sale of a product is called producer surplus. A) lowest price a firm would have been willing to accept; price it actually receives B) highest price a firm would have been willing to accept; lowest price it was willing to accept C) cost to produce a product; price a firm actually receives D) cost to produce a product; profit received E) total cost; total revenue Answer: A Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Figure 4.2

53) Refer to Figure 4.2. What area represents producer surplus at a price of P2? A) A + B B) B + D C) A + C D) A + B + C E) A + B + C + D + E Answer: D Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

54) Refer to Figure 4.2. What area represents the increase in producer surplus when the market price rises from P1 to P2? A) B + D B) A + C + E C) C + E D) A + B E) C + D Answer: D Diff: 2 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 55) Refer to Figure 4.2. What area represents producer surplus at a price of P1? A) C B) A + C C) C + E D) A + C + E E) A + C + D + E Answer: A Diff: 1 Type: MC Topic: Private Goods Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 56) Refer to Figure 4.2. What area represents the decrease in producer surplus when the market price falls from P2 to P1? A) C + E B) A + C + E C) A + B D) B + D E) A + C + D + E Answer: C Diff: 1 Type: MC Topic: Private Goods Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking

57) Economists who analyzed data on millions of Uber rides estimated the consumer surplus attributed to Uber. For the four largest markets, these economists estimated that the total consumer surplus from Uber for one year was A) almost $0. B) $13.30 per customer. C) $2.88 billion. D) $6.76 billion. E) $10 billion. Answer: D Diff: 1 Type: MC Topic: Private Goods Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking Special Feature: Apply the Concept: The Consumer Surplus from Uber 58) Consumer surplus is the difference between the highest price someone is willing to pay for a product and the price he actually pays for the product. Answer: TRUE Diff: 1 Type: TF Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 59) The total amount of consumer surplus in a market is equal to the area below the demand curve. Answer: FALSE Diff: 1 Type: TF Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 60) Marginal cost is the additional cost to a firm of producing one more unit of a good or service. Answer: TRUE Diff: 1 Type: TF Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 61) What is producer surplus? What does producer surplus measure? Answer: Producer surplus is the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. Producer surplus measures the net benefit received by producers from participating in a market. Diff: 1 Type: ES Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

62) Assume the market price for lemon grass is $4.00 per pound, but most buyers are willing to pay more than the market price. At the market price of $4.00, the quantity of lemon grass demanded is 1,500 pounds per month, and quantity demanded does not reach zero until the price reaches $30.00 per pound. Construct a graph showing this data, calculate the total consumer surplus in the market for lemon grass, and show the consumer surplus on the graph. Answer:

The total consumer surplus is (1/2 × $26 × 1,500) = $19,500. Diff: 2 Type: ES Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

63) The marginal cost for Java Joe's to produce its first cup of coffee is $0.75. Its marginal cost to produce its second cup of coffee is $1.25. Its marginal cost increases by $0.50 for each additional cup of coffee it produces. Suppose the market price for coffee is $2.25. Construct a graph showing the producer surplus for each cup of coffee Java Joe's will sell. How many cups of coffee will Java Joe's sell? What is the value of the producer surplus Java Joe's receives for each cup of coffee it sells? Answer: 97

Java Joe will sell 3 cups of coffee, the point where its marginal cost is equal to the market price. The producer surplus of the first cup of coffee is $1.50. The producer surplus of the second cup of coffee is $1.00. The producer surplus of the third cup of coffee is $0.50. Diff: 2 Type: ES Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 64) The difference between the ________ for a good and the ________ is called consumer surplus. A) highest price a consumer is willing to pay; lowest price a consumer is willing to pay B) lowest price a consumer is willing to pay; price the consumer actually pays C) highest price a consumer is willing to pay; price the consumer actually pays D) price the consumer actually pays; actual cost to the producer E) price a consumer is willing to pay; cost to the producer Answer: C Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

65) There are over 1.8 million apartments and houses for rent in Canada. Which of the following statements about these rental units is correct? A) All are subject to rent control. B) Only some of the units in B.C., Manitoba, Ontario, and Quebec are subject to rent controls. C) All are subject to price floors. D) Only about 55% of all units are subject to price controls. E) Rental apartments market is free, there is no control on rents in Canada. Answer: B Diff: 1 Type: MC Topic: Price Ceilings Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Special Feature: Chapter Opener: Should The Government Control Apartment Rents? 66) Assume that in Winnipeg all apartments are subject to rent control, but in Saskatoon only half of the apartments are rent controlled. Which of the following is most likely to be true? A) Rent controls have no impact in the rental apartments market. B) It will be easier to find an affordable apartment in Winnipeg since rents will be low across the board. C) It will be easier to find an affordable apartment in Saskatoon, either a rent-controlled apartment or another apartment at a reasonable price. D) It will be impossible to rent an apartment in either city at any price. E) It will be difficult to find a rent-controlled apartment in Winnipeg or Saskatoon. Answer: E Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Special Feature: Chapter Opener: Should The Government Control Apartment Rents? 67) Juanita goes to the Hardware Emporium to buy a new circular saw. She is willing to pay $120 for a new saw, but buys one on sale for $85. Juanita's consumer surplus from the purchase is A) $35. B) $85. C) $95. D) $120. E) $205. Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

68) Marco goes to the pet store to buy a dozen Koi fish for his new Koi pond. He is willing to pay $200 for the dozen fish, but buys them for a total of $140. Marco's consumer surplus from the purchase is A) $5. B) $60. C) $140. D) $200. E) $250. Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 69) Monique buys a new television for $795. She receives consumer surplus of $355 from the purchase. How much does Monique value her television? A) $355 B) $440 C) $795 D) $1150 E) $1250 Answer: D Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 70) Brett buys a new cell phone for $100. He receives consumer surplus of $80 from the purchase. How much does Brett value his cell phone? A) $200 B) $180 C) $100 D) $80 E) $20 Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

71) The maximum price that someone is willing to pay for a good measures A) consumer surplus. B) marginal benefit. C) willingness to pay. D) producer surplus. E) market price. Answer: C Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 72) A consumer is willing to purchase a product up to the point where A) she spends all of her income. B) the marginal benefit is equal to the price of the product. C) the quantity demanded is equal to the quantity supplied. D) she is indifferent between consuming and saving. E) she has bought everything she wanted to buy. Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 73) The additional benefit to a consumer from consuming one more unit of a good or service A) is equal to consumer surplus. B) is equal to the opportunity cost of consuming the good or service. C) is equal to maximum benefit a consumer can receive. D) is equal to economic surplus. E) is equal to marginal benefit. Answer: E Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

74) Which of the following statements best describes the concept of consumer surplus? A) "I paid $89 for a microwave oven last week. This week the same store is selling the same microwave oven for $69." B) "I sold my hard copy of Mocking Jay to a used book store for $10, even though I was willing to sell it for $5." C) "Sears was having a sale on party socks so I bought 5 pairs." D) "I was going to pay $200 for new sunglasses that I had seen at the Oakley store, but I ended up paying only $140 for the same sunglasses." E) "Walmart was having off-season sale so I bought 3 pairs of shoes." Answer: D Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 75) Each point on a demand curve shows A) the willingness of consumers to purchase a product at different prices. B) the consumer surplus received from purchasing a given quantity of a product. C) the economic surplus received from purchasing a given quantity of a product. D) the legally determined maximum price that sellers may charge for a given quantity of a product. E) the price that consumers must pay in order to purchase the product. Answer: A Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Table 4.5 Consumer Curly Moe Larry

Willingness to Pay $50 30 15

76) Refer to Table 4.5. The table above lists the highest prices three consumers, Curly, Moe, and Larry, are willing to pay for a bottle of champagne. If the price of a bottle is $24 dollars, A) Curly will buy two bottles, Moe will buy one bottle, and Larry will buy no bottles. B) Curly will receive $26 of consumer surplus from buying a bottle. C) Curly and Moe receive a total of $80 of consumer surplus from buying one bottle each. Larry will buy no bottles. D) Larry will receive $15 of consumer surplus since he will buy no bottles. E) No one will buy any bottle since they wanted to enjoy it together. Answer: B Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

77) Refer to Table 4.5. The table above lists the highest prices three consumers, Curly, Moe, and Larry, are willing to pay for a bottle of champagne. If the price of champagne falls from $24 to $14, A) consumer surplus increases from $32 to $53. B) Curly will buy four bottles, Moe will buy two bottles, and Larry will buy one bottle. C) consumer surplus will increase from $80 to $95. D) Larry and Moe will receive more consumer surplus than Curly. E) Larry will receive the maximum surplus of all. Answer: A Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 78) Refer to Table 4.5. The table above lists the highest prices three consumers, Curly, Moe, and Larry, are willing to pay for a bottle of champagne. If the price of one of the bottles is $27 dollars, total consumer surplus will be A) $0. B) $14. C) $26. D) $53. E) $60. Answer: C Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 79) Refer to Table 4.5. The table above lists the highest prices three consumers, Curly, Moe, and Larry, are willing to pay for a bottle of champagne. If the price of one of the bottles is $95 dollars, total consumer surplus will be A) $0. B) $35. C) $80. D) $95. E) $110. Answer: A Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking

Table 4.6 Consumer Violet Walter Xavier Yolanda Zachary

Willingness to Pay $48 40 30 24 14

80) Refer to Table 4.6. The table above lists the highest prices five consumers are willing to pay for a concert ticket. If the price of one of the tickets is $36, A) Violet and Walter will each buy two tickets. B) Walter will receive $4 of consumer surplus from buying one ticket. C) Violet and Walter receive a total of $52 of consumer surplus from buying one ticket each. No one else will buy a ticket. D) Xavier, Yolanda, and Zachary will receive a total of $68 of consumer surplus since they will buy no tickets. E) no one will buy a ticket. Answer: B Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 81) Refer to Table 4.6. The table above lists the highest prices five consumers are willing to pay for a concert ticket. If the price of one of the tickets is $20, A) everyone will buy a ticket except for Zachary. B) only Violet and Walter will buy tickets. C) Xavier's consumer surplus is $50. D) the total consumer surplus from the purchase of tickets will be $122. E) everyone will buy a ticket. Answer: A Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking

82) Refer to Table 4.6. The table above lists the highest prices five consumers are willing to pay for a concert ticket. If the price of one ticket is $50, A) everyone will buy a ticket. B) consumer surplus will be maximized. C) Violet's consumer surplus is $2. D) no one will buy a ticket. E) consumer surplus will be $20. Answer: D Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 83) Refer to Table 4.6. The table above lists the highest prices five consumers are willing to pay for a concert ticket. If the price of one ticket rises from $20 to $38, A) only three tickets will be sold. B) consumer surplus decreases from $62 to $12. C) consumer surplus increases from $88 to $142. D) no one will buy a ticket. E) only one ticket will be sold. Answer: B Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 84) Refer to Table 4.6. The table above lists the highest prices five consumers are willing to pay for a concert ticket. If the price of one ticket falls from $50 to $20, A) only three tickets will be sold. B) consumer surplus decreases from $48 to $24. C) consumer surplus increases from $0 to $62. D) everyone will buy a ticket. E) consumer surplus will be $30. Answer: C Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking

85) The additional cost to a firm of producing one more unit of a good or service is the A) minimum cost. B) total cost. C) opportunity cost. D) average cost. E) marginal cost. Answer: E Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Table 4.7

Marko's Polos 1st shirt 2nd shirt 3rd shirt 4th shirt

Marginal Cost (dollars) $7 10 15 20

86) Refer to Table 4.7. The table above lists the marginal cost of polo shirts by Marko's, a firm that specializes in producing men's clothing. If the market price of Marko's polo shirts is $18, A) Marko's will produce four shirts. B) producer surplus from the first shirt is $18. C) producer surplus will equal $22. D) there will be a surplus; as a result, the price will fall to $7. E) Marko will not be able to sell any shirts because the price is too high. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 87) Refer to Table 4.7. The table above lists the marginal cost of polo shirts by Marko's, a firm that specializes in producing men's clothing. If the price of polo shirts increases from $18 to $20, A) consumers will not be able to buy any polo shirts. B) the marginal cost of producing the third polo shirt will increase to $20. C) producer surplus will rise from $22 to $28. D) there will be a surplus of polo shirts. E) price is too high to sell any shirts. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

88) Refer to Table 4.7. The table above lists the marginal cost of polo shirts by Marko's, a firm that specializes in producing men's clothing. If the market price of Marko's polo shirts is $13, Marko's will produce A) 1 shirt. B) 2 shirts. C) 3 shirts. D) 4 shirts. E) 0 shirts. Answer: B Diff: 2 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 89) Refer to Table 4.7. The table above lists the marginal cost of polo shirts by Marko's, a firm that specializes in producing men's clothing. If the market price of Marko's polo shirts is $30, Marko's will produce A) 0 shirts. B) 1 shirt. C) 2 shirts. D) 3 shirts. E) 4 shirts. Answer: E Diff: 2 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 90) Refer to Table 4.7. The table above lists the marginal cost of polo shirts by Marko's, a firm that specializes in producing men's clothing. If the market price of Marko's polo shirts is $30, producer surplus is A) $0. B) $16. C) $52. D) $68. E) $76. Answer: D Diff: 2 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking

91) Refer to Table 4.7. The table above lists the marginal cost of polo shirts by Marko's, a firm that specializes in producing men's clothing. If the price of polo shirts decreases from $15 to $10, A) consumers will buy no polo shirts. B) the marginal cost of producing the third polo shirt will increase to $25. C) producer surplus will fall from $13 to $3. D) there will be a shortage of polo shirts. E) producer surplus will go to zero. Answer: C Diff: 3 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 92) The area above the market supply curve and below the market price is equal to A) the total amount of producer surplus in a market. B) the marginal cost of the last unit produced. C) the total amount of economic surplus in a market. D) the total cost of production. E) the total surplus in the market. Answer: A Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 93) Consumer surplus in a market for a product would be equal to the entire area under the demand curve if A) producer surplus was equal to zero. B) marginal cost was equal to the market price. C) the product was produced in a perfectly competitive market. D) the market price was zero. E) the market is in equilibrium. Answer: D Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

94) The area above the market supply curve and below the market price is equal to the A) consumer surplus. B) producer surplus. C) marginal benefit. D) marginal cost. E) total surplus in the market. Answer: B Diff: 2 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 95) Which of the following statements is not true? A) Consumer surplus measures the difference between the highest price a consumer is willing to pay for a product and the price she actually pays. B) Marginal benefit is the additional benefit to a consumer from consuming one more unit of a product. C) Consumer surplus measures the net benefit from participating in a market. D) Producer surplus measures the total benefit received by producers from participating in a market. E) Total surplus in the market is equal the consumer surplus plus producer surplus. Answer: D Diff: 2 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 96) A supply curve shows A) the quantities sold at different prices. B) the marginal cost of producing one more unit of a good or service. C) the marginal benefit from buying one more unit of a good or service. D) the total cost of producing different quantities of a good or service. E) the average cost of various quantities a good or service. Answer: B Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 97) The willingness of consumers to buy a product at different prices is shown on a(n) A) demand curve. B) supply curve. C) production possibilities frontier. D) marginal cost curve. E) average cost curve. Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 33 Copyright © 2024 Pearson Canada Inc.

Figure 4.3

Figure 4.3 shows Kendra's demand for ice-cream cones curve. 98) Refer to Figure 4.3. Kendra's marginal benefit from consuming the second ice cream cone is A) $6.50. B) $6.00. C) $3.00. D) $2.50. E) $2.25. Answer: C Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 99) Refer to Figure 4.3. If the market price is $2.50, what is the consumer surplus on the second ice cream cone? A) $10.50 B) $1.50 C) $3.00 D) zero E) $0.50 Answer: E Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

100) Refer to Figure 4.3. Kendra's marginal benefit from consuming the first ice cream cone is A) $9.00. B) $7.50. C) $3.50. D) $2.50. E) $1.50. Answer: C Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 101) Refer to Figure 4.3. If the market price is $2.50, what is Kendra's consumer surplus? A) $10.00 B) $9.00 C) $2.50 D) $1.50 E) zero Answer: D Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 102) Refer to Figure 4.3. What is the total amount that Kendra is willing to pay for 3 ice cream cones? A) $2.50 B) $7.50 C) $9.00 D) $12.00 E) $13.50 Answer: C Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 103) Refer to Figure 4.3. If the market price is $2.50, what is the maximum number of ice cream cones that Kendra will buy? A) 1 B) 2 C) 3 D) 4 E) 0 Answer: C Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 35 Copyright © 2024 Pearson Canada Inc.

104) Refer to Figure 4.3. Kendra's marginal benefit from consuming the third ice cream cone is A) $13.00. B) $2.50. C) $1.50. D) $0.50. E) zero. Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 105) Refer to Figure 4.3. If the market price is $2.50, what is the consumer surplus on the first ice cream cone? A) $0.50. B) $1.00. C) $3.50. D) $9.00. E) $12.00. Answer: B Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 106) Refer to Figure 4.3. If the market price is $2.50, what is the consumer surplus on the second ice cream cone? A) $0.50 B) $1.50 C) $3.00 D) $10.50 E) $12.00 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

107) Refer to Figure 4.3. If the market price is $2.50, what is the consumer surplus on the third ice cream cone? A) $0 B) $0.50 C) $1.50 D) $2.50 E) $3.50 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 108) Refer to Figure 4.3. If the market price is $3.50, what is the consumer surplus on the first ice cream cone? A) $0 B) $0.50 C) $3.50 D) $9.00 E) $12.00 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 109) Refer to Figure 4.3. If the market price is $3.50, what is Kendra's consumer surplus? A) $9.00 B) $7.50 C) $3.50 D) $2.50 E) $0 Answer: E Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking

110) Refer to Figure 4.3. If the market price is $3.00, what is the consumer surplus on the first ice cream cone? A) $0.50 B) $1.00 C) $5.50 D) $9.00 E) $12.00 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 111) Refer to Figure 4.3. If the market price is $3.00, what is the consumer surplus on the second ice cream cone? A) $0 B) $0.50 C) $3.00 D) $5.50 E) $10.00 Answer: A Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 112) Refer to Figure 4.3. If the market price is $3.00, what is Kendra's consumer surplus? A) $6.50 B) $5.50 C) $2.50 D) $0.50 E) zero Answer: D Diff: 1 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking

113) Refer to Figure 4.3. What is the total amount that Kendra is willing to pay for 1 ice cream cone? A) $0.50 B) $3.50 C) $9.00 D) $10.50 E) $13.50 Answer: B Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 114) Refer to Figure 4.3. What is the total amount that Kendra is willing to pay for 2 ice cream cones? A) $1.50 B) $3.00 C) $5.50 D) $6.50 E) $10.50 Answer: D Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 115) Refer to Figure 4.3. What is the total amount that Kendra is willing to pay for 3 ice cream cones? A) $2.50 B) $7.50 C) $9.00 D) $10.00 E) $13.50 Answer: C Diff: 2 Type: MC Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytical Thinking 116) Suppliers will be willing to supply a product in all of the following situations except A) the price received is greater than the additional cost of producing the product. B) the price received is at least equal to the additional cost of producing the product. C) the price received is equal to the additional cost of producing the product. D) the price received is less than the additional cost of producing the product. E) the supplier will not be willing to sell in any of the above situations. Answer: D Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

117) The difference between the lowest price a firm would have been willing to accept and the price it actually receives from the sale of a product is called A) marginal cost. B) profit. C) marginal revenue. D) price differential. E) producer surplus. Answer: E Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking Figure 4.4

118) Refer to Figure 4.4. What area represents producer surplus at a price of P1? A) C B) A + C C) C + E D) A + C + E E) A + B + C Answer: A Diff: 1 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills

119) Refer to Figure 4.4. What area represents the decrease in producer surplus when the market price falls from P2 to P1? A) C + E B) A + C + E C) A + B D) B + D E) B Answer: C Diff: 2 Type: MC Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Analytic Skills 120) Producer surplus is the difference between the highest price someone is willing to pay and the price they actually pay. Answer: FALSE Diff: 1 Type: TF Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 121) The total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price. Answer: TRUE Diff: 1 Type: TF Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 122) The additional cost to a firm of producing one more unit of a good or service is equal to producer surplus. Answer: FALSE Diff: 1 Type: TF Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking 123) What is consumer surplus? Why would policy makers be interested in consumer surplus? Answer: Consumer surplus is the difference between what a consumer is willing to pay for a product and what she actually pays. Since consumer surplus measures the benefit that consumers receive from a good as they themselves perceive it, it serves as a good measure of economic well-being. Thus, if policy makers care about consumers preferences, they could use this measure to make normative judgments about market outcomes. Diff: 2 Type: ES Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

124) Assume the market price for tangerines is $18.00 per bushel. At the market price, tangerine growers are willing to supply a quantity of 12,000 bushels per week. The quantity supplied drops to zero when the price falls to $5.00 per bushel. Construct a graph showing this data, calculate the total producer surplus in the market for tangerines, and show the total producer surplus on the graph. Answer:

The total producer surplus is (1/2 × $13 × 12,000) = $78,000. Diff: 2 Type: ES Topic: Producer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

125) The market price for coffee is $2.25 per cup. Austin is willing to pay $5.00 per cup, Colin is willing to pay $4.00 per cup, Lucy is willing to pay $3.00 per cup, and Ike is willing to pay $2.00 per cup. Construct a graph showing the consumer surplus for each cup of coffee purchased. How many cups of coffee will be purchased? What is the value of the consumer surplus each of the four consumers receives from their coffee purchases? Answer:

Three cups of coffee will be purchased. Austin's consumer surplus is $2.75. Colin's consumer surplus is $1.75. Lucy's consumer surplus is $0.50. Ike receives no consumer surplus since he will not be willing to purchase a cup of coffee. Diff: 2 Type: ES Topic: Consumer Surplus Learning Outcome: 4.1 Distinguish between the concepts of consumer surplus and producer surplus AACSB: Reflective Thinking

4.2

Understand the concept of economic efficiency

1) In a competitive market equilibrium, A) total consumer surplus equals total producer surplus. B) marginal benefit and marginal cost are maximized. C) consumers and producers benefit equally. D) the marginal benefit equals the marginal cost of the last unit sold. E) producers always gain more surplus than consumers. Answer: D Diff: 1 Type: MC Topic: Competitive Equilibrium Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 2) Economic efficiency in a competitive market is achieved when A) economic surplus is equal to consumer surplus. B) consumers and producers are satisfied. C) the marginal benefit equals the marginal cost from the last unit sold. D) producer surplus equals the total amount firms receive from consumers minus the cost of production. E) producers gain more surplus than consumers. Answer: C Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

Figure 4.5

Figure 4.5 shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18. 3) Refer to Figure 4.5. What is the value of consumer surplus at a price of $18? A) $40 B) $60 C) $120 D) $180 E) $240 Answer: B Diff: 1 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 4) Refer to Figure 4.5. What is the value of producer surplus at a price of $18? A) $140 B) $240 C) $300 D) $340 E) $720 Answer: A Diff: 1 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

5) Refer to Figure 4.5. What is the value of the deadweight loss at a price of $18? A) $100 B) $180 C) $660 D) $1,040 E) 0 Answer: A Diff: 1 Type: MC Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 6) Refer to Figure 4.5. At a price of $18, consumers are willing to buy 40 kilograms of tiger shrimp. Is this an economically efficient quantity? A) Yes, because this is the quantity sellers are willing to sell. B) Yes, otherwise consumers would not buy 40 units. C) Yes, because $18 shows what consumers are willing to pay for the product. D) No, the marginal cost of the 40th unit exceeds the marginal benefit of the 40th unit. E) No, the marginal benefit of the 40th unit exceeds the marginal cost of that 80th unit. Answer: E Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 7) ________ refers to the reduction in economic surplus resulting from not being in competitive equilibrium. A) Marginal cost B) Producer atrophy C) Deadweight loss D) Economic shortage E) Consumer surplus Answer: C Diff: 1 Type: MC Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

8) Economic surplus A) does not exist when a competitive market is in equilibrium. B) is equal to the sum of consumer surplus and producer surplus. C) is the difference between quantity demanded and quantity supplied when the market price for a product is greater than the equilibrium price. D) is equal to the difference between consumer surplus and producer surplus. E) is the profit earned by the producers by selling the good in the market. Answer: B Diff: 1 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 9) ________ is maximized in a competitive market when marginal benefit equals marginal cost. A) Deadweight loss B) Marginal profit C) Economic surplus D) Selling price E) Profit of producers Answer: C Diff: 2 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 10) Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which A) the sum of consumer surplus and producer surplus is at a maximum. B) economic surplus is minimized. C) the sum of the benefits to firms is equal to the sum of the benefits to consumers. D) the sum of consumer surplus and producer surplus is minimized. E) economic efficiency is unrelated to benefits of consumers or producers. Answer: A Diff: 2 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

11) Maximizing economic surplus means A) the sum of net benefits to consumers and producers is as big as it can be. B) the economy is producing as many extra goods as is possible. C) all consumers in society are as well off as they can be. D) the gap between marginal benefit and marginal cost is maximized. E) producers are making maximum profits by charging the highest possible price. Answer: A Diff: 2 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 12) In a competitive market, if marginal benefit is less than marginal cost, A) the net benefit to consumers from participating in the market is less than the net benefit to producers. B) the government must force producers to raise prices in order to achieve economic efficiency. C) the quantity sold is greater than the equilibrium quantity. D) the quantity sold is less than the equilibrium quantity. E) the quantity sold is equal the quantity demanded. Answer: C Diff: 3 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 13) In a competitive market the demand curve shows the ________ received by consumers and the supply curve shows the ________. A) utility; average cost B) marginal benefit; marginal cost C) economic surplus; opportunity cost D) net benefit; net cost E) consumer surplus; producer surplus Answer: B Diff: 1 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

Figure 4.6

14) Refer to Figure 4.6. The figure above represents the market for pecans. Assume that this is a competitive market. At a price of $9, A) the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently low. B) producers should lower the price to $3 in order to sell the quantity demanded of 4,000. C) consumers' willingness to pay is greater than producers' willingness to sell, therefore, output produced is inefficiently low. D) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently low. E) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently high. Answer: E Diff: 2 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 15) Refer to Figure 4.6. The figure above represents the market for pecans. Assume that this is a competitive market. If the price of pecans is $3, A) economic surplus is maximized. B) not enough consumers want to buy pecans. C) the quantity supplied is less than the economically efficient quantity. D) the quantity supplied is economically efficient but the quantity demanded is economically inefficient. E) the market will clear at this price because consumers will buy the entire amount supplied. Answer: C Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

16) Refer to Figure 4.6. The figure above represents the market for pecans. Assume that this is a competitive market. If the price of pecans is $3, what changes in the market would result in an economically efficient output? A) The price would increase, the quantity supplied would decrease, and the quantity demanded would increase. B) The quantity supplied would increase, the quantity demanded would decrease and the equilibrium price would increase. C) The price would increase, the demand would decrease and the supply would increase. D) The price would increase, the quantity demanded would decrease and the quantity supplied would increase. E) The price should stay the same and producers should supply more quantity at this price. Answer: D Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 17) Refer to Figure 4.6. The figure above represents the market for pecans. Assume that this is a competitive market. If 8,000 pounds of pecans are sold, A) the deadweight loss is equal to economic surplus. B) producer surplus equals consumer surplus. C) the marginal benefit of each of the 8,000 pounds of pecans equals $9. D) marginal benefit is equal to marginal cost. E) the marginal benefit is greater than marginal cost. Answer: D Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 18) Refer to Figure 4.6. The figure above represents the market for pecans. Assume that this is a competitive market. Which of the following is true? A) If the price of pecans is $3, the output will be economically efficient but there will be a deadweight loss. B) If the price of pecans is $9, consumers will purchase more than the economically efficient output. C) Both 4,000 kilograms and 12,000 kilograms are economically inefficient rates of output. D) If the price of pecans is $3, producers will sell 12,000 kilograms of pecans but this output will be economically inefficient. E) Market is in equilibrium if the price is anywhere between $3 and $9. Answer: C Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

19) If equilibrium is achieved in a competitive market, A) there is no deadweight loss. B) the deadweight loss will be maximized. C) the deadweight loss will equal the sum of consumer surplus and producer surplus. D) the deadweight loss will be the same as the opportunity cost of the last unit of output sold. E) the government will have to intervene to reduce the deadweight loss. Answer: A Diff: 1 Type: MC Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 20) If there is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and consumer surplus plus producer surplus is maximized, then A) maximum deadweight loss occurs. B) economic efficiency is achieved. C) profits are maximized. D) costs are minimized. E) producers are gaining at the expense of consumers. Answer: B Diff: 2 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 21) Economic efficiency is a market outcome in which the marginal benefit of consumers is equal to the marginal cost of production and the sum of consumer surplus and producer surplus is maximized. Answer: TRUE Diff: 1 Type: TF Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 22) Deadweight loss refers to the reduction in economic surplus resulting from a market not being in competitive equilibrium. Answer: TRUE Diff: 1 Type: TF Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 23) The sum of consumer surplus and producer surplus is called economic surplus. Answer: TRUE Diff: 1 Type: TF Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

24) Will equilibrium in a market always result in an outcome that is economically efficient? Explain. Answer: An economically efficient outcome means that at the equilibrium price the marginal benefit of the last unit of output sold is equal to its marginal cost. This will occur only in markets that are competitive (many buyers and many sellers) and there are no price controls. Diff: 1 Type: ES Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 25) The graph below represents the market for walnuts. Identify the values of the marginal benefit and the marginal cost at the output levels of 2,000 kilograms, 4,000 kilograms and 6,000 kilograms. At each of these output levels, state whether output is inefficiently high, inefficiently low, or economically efficient.

Answer: Output level = 2,000 kg: marginal benefit = $3.50, marginal cost = $2.50, output is inefficiently low. Output level = 4,000 kg: marginal benefit = $3.00, marginal cost = $3.00, output is economically efficient. Output level = 6,000 kg: marginal benefit = $2.50, marginal cost = $3.50, output is inefficiently high. Diff: 1 Type: ES Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

26) The graph below represents the market for lychee nuts. The equilibrium price is $7.00 per bushel, but the market price is $5.00 per bushel. Identify the areas representing consumer surplus, producer surplus, and deadweight loss at the equilibrium price of $7.00 and at the market price of $5.00.

Answer: At the equilibrium price of $7.00: Consumer surplus is represented by area A + B. Producer surplus is represented by area C + D + E. There is no deadweight loss. At the market price of $5.00: Consumer surplus is represented by area A + C. Producer surplus is represented by area E. Deadweight loss is represented by area B + D. Diff: 2 Type: ES Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 27) In a competitive market equilibrium the ________ equals the ________ of the last unit sold. A) total profit; marginal benefit B) total cost; marginal cost C) profit; selling price D) price; quantity E) marginal benefit; marginal cost Answer: E Diff: 1 Type: MC Topic: Competitive Equilibrium Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 53 Copyright © 2024 Pearson Canada Inc.

28) When the marginal benefit equals the marginal cost of the last unit sold in a competitive market, A) the net benefit of consumers is equal to the net benefit of producers. B) an economically efficient level of output is produced. C) producer surplus is equal to consumer surplus. D) total benefit is equal to total cost. E) the outcome is economically inefficient. Answer: B Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking Figure 4.7

Figure 4.7 shows the market for granola. The market is initially in equilibrium at a price of P1 and a quantity of Q1. Now suppose producers decide to cut output to Q2 in order to raise the price to P2. 29) Refer to Figure 4.7. What area represents consumer surplus at P2? A) A B) B C) B + C D) B + D E) A + B + D + F Answer: A Diff: 1 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

30) Refer to Figure 4.7. What area represents producer surplus at P2? A) A + B + D B) B + D C) B + D + G D) B + C + D E) B + C + D + E Answer: B Diff: 1 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 31) Refer to Figure 4.7. What area represents the deadweight loss at P2? A) C + E + H B) G + H C) C + H D) B + C E) C + E Answer: E Diff: 1 Type: MC Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 32) Refer to Figure 4.7. At the price P2, consumers are willing to buy Q2 pounds of granola. Is this an economically efficient quantity? A) No, the marginal benefit of the last unit (Q2) exceeds the marginal cost of that last unit. B) Yes, otherwise consumers would not buy Q2 units. C) Yes, because the price P2 shows what consumers are willing to pay for the product. D) No, the marginal cost of the last unit (Q2) exceeds the marginal benefit of the last unit. E) No, because at P2 there is a shortage of the good in the market. Answer: A Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

33) Refer to Figure 4.7 What area represents consumer surplus at the equilibrium price of P1? A) A B) A + B + C C) A + D + E D) A + B + C + D E) A + B + C + D + E Answer: B Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 34) Refer to Figure 4.7 What area represents producer surplus at the equilibrium price of P1? A) A + B + D B) D + E C) D + E + G D) D + E + G + H E) A + B + C + D + E Answer: B Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 35) Refer to Figure 4.7 What area represents the deadweight loss at the equilibrium price of P1? A) C + E + H B) G + H C) C + E D) C + G + H E) There is no deadweight loss at the price of P1. Answer: E Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking

36) Refer to Figure 4.7 At the equilibrium price of P1, consumers are willing to buy Q1 pounds of granola. Is this an economically efficient quantity? A) No, the marginal benefit of the last unit (Q1) exceeds the marginal cost of that last unit. B) Yes, because marginal cost is zero at the price of P1. C) Yes, because P1 is the price where marginal benefit equals marginal cost. D) No, the marginal cost of the last unit (Q1) exceeds the marginal benefit of the last unit. E) Provided information is not sufficient to determine whether the quantity is economically efficient or not. Answer: C Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 37) Deadweight loss refers to A) the opportunity cost to firms from producing the equilibrium quantity in a competitive market. B) the sum of consumer and producer surplus. C) the loss of economic surplus when the marginal benefit equals the marginal cost of the last unit produced. D) the reduction in economic surplus resulting from not being in competitive equilibrium. E) the loss that occurs because there is conflict of interest among consumers and producers. Answer: D Diff: 1 Type: MC Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 38) Deadweight loss represents A) the lost net benefit to society from an inefficiency. B) the lost consumer surplus for a price increase. C) the producer surplus lost when new firms enter a market. D) the lower efficiency of American producers from using an outdated system of weights and measures (pounds, gallons, inches, etc.). E) the loss that society must face when markets are in equilibrium. Answer: A Diff: 1 Type: MC Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

39) The sum of consumer surplus and producer surplus is equal to A) the deadweight loss. B) the economic surplus. C) zero. D) total profit. E) total revenue. Answer: B Diff: 1 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 40) Economic surplus is maximized in a competitive market when A) quantity demand is more than quantity supply. B) the deadweight loss equals the sum of consumer surplus and producer surplus. C) marginal benefit equals marginal cost. D) producers sell the quantity that consumers are willing to buy. E) consumers are willing to buy the entire quantity at any price. Answer: C Diff: 2 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 41) ________ is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which the sum of consumer surplus and producer surplus is at a maximum. A) Economic efficiency B) Consumer efficiency C) Producer efficiency D) Deadweight efficiency E) Marginal efficiency Answer: A Diff: 2 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

42) If, in a competitive market, marginal benefit is greater than marginal cost, A) the net benefit to consumers from participating in the market is greater than the net benefit to producers. B) the government must force producers to lower prices in order to achieve economic efficiency. C) the quantity sold is greater than the equilibrium quantity. D) market price is too high for consumers to buy the good. E) the quantity sold is less than the equilibrium quantity. Answer: E Diff: 3 Type: MC Topic: Competitive Equilibrium Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 43) In a competitive market the ________ curve shows the marginal benefit received by consumers and the ________ curve shows the marginal cost to producers. A) demand; supply B) supply; demand C) demand; market demand D) supply; market supply E) price; quantity Answer: A Diff: 1 Type: MC Topic: Competitive Equilibrium Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

Figure 4.8

44) Refer to Figure 4.8. The figure above represents the market for iced tea. Assume that this is a competitive market. At a price of $3, A) the marginal cost of iced tea is greater than the marginal benefit; therefore, output is inefficiently low. B) producers should lower the price to $1 in order to sell 10,000 iced teas. C) the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently low. D) the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently high. E) quantity supply of iced tea is less than quantity demand for iced tea, hence there is a shortage of ice tea. Answer: C Diff: 2 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 45) Refer to Figure 4.8. The figure above represents the market for iced tea. Assume that this is a competitive market. If the price of iced tea is $1, A) the quantity supplied is less than the economically efficient quantity. B) the quantity supplied is economically efficient but the quantity demanded is economically inefficient. C) economic surplus is maximized. D) not enough consumers want to buy iced tea. E) producers would want to sell any quantity consumers are willing to purchase at this price. Answer: A Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

46) Refer to Figure 4.8. The figure above represents the market for iced tea. Assume that this is a competitive market. If the price of iced tea is $3, what changes in the market would result in an economically efficient output? A) The price would decrease, the quantity supplied would increase, and the quantity demanded would decrease. B) The quantity supplied would decrease, the quantity demanded would increase, and the equilibrium price would decrease. C) The price would decrease, the demand would increase, and the supply would decrease. D) The price would decrease, quantity demanded would increase, and quantity supplied would decrease. E) Government invention would be needed to ensure efficiency in the market. Answer: D Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 47) Refer to Figure 4.8. The figure above represents the market for iced tea. Assume that this is a competitive market. If 20,000 units of iced tea are sold, A) the deadweight loss is equal to economic surplus. B) producer surplus equals consumer surplus. C) the marginal benefit of each of the 20,000 units of iced tea equals $3. D) there is a deadweight loss equal to 10,000 units of ice tea. E) marginal benefit is equal to marginal cost. Answer: E Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills 48) Refer to Figure 4.8. The figure above represents the market for iced tea. Assume that this is a competitive market. Which of the following is true? A) If the price of iced tea is $3, the output will be economically efficient, but there will be a deadweight loss. B) If the price of iced tea is $3, consumers will purchase more than the economically efficient output. C) Both 10,000 and 30,000 are economically inefficient rates of output. D) If the price of iced tea is $3, producers will sell 30,000 units of iced tea, but this output will be economically inefficient. E) Market is producing economically efficient outcome at price of $1. Answer: C Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

49) Refer to Figure 4.8. The figure above represents the market for iced tea. Assume that this is a competitive market. If the price of iced tea is $3, A) the quantity supplied is greater than the economically efficient quantity. B) the quantity demanded is economically efficient but the quantity supplied is economically inefficient. C) economic surplus is maximized. D) too many consumers want to buy iced tea. E) no one wants to buy iced tea. Answer: A Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 50) Refer to Figure 4.8. The figure above represents the market for iced tea. Assume that this is a competitive market. If the price of iced tea is $1, what changes in the market would result in an economically efficient output? A) The price would increase, the quantity supplied would increase, and the quantity demanded would decrease. B) The quantity supplied would increase, the quantity demanded would decrease, and the equilibrium price would increase. C) The price would increase, the demand would increase, and the supply would decrease. D) The price would increase, quantity demanded would increase, and quantity supplied would decrease. E) No changes are required; the output is already efficient. Answer: A Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 51) Refer to Figure 4.8. The figure above represents the market for iced tea. Assume that this is a competitive market. If 10,000 units of iced tea are sold, A) the deadweight loss is equal to economic surplus. B) producer surplus equals consumer surplus. C) the marginal benefit of each of the 10,000 units of iced tea equals $3. D) marginal benefit is less than marginal cost. E) there is a surplus of iced tea in the market. Answer: C Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking

52) In a competitive market, when there is no deadweight loss, A) consumer surplus is minimized. B) producer surplus is minimized. C) consumer surplus plus producer surplus is minimized. D) consumer surplus plus producer surplus is maximized. E) procurer surplus is more than consumer surplus. Answer: D Diff: 1 Type: MC Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 53) Economic efficiency is achieved when there is a market outcome in which the marginal benefit to consumers of consuming last unit of output is equal to its marginal cost of production and A) economic surplus plus consumer surplus equals producer surplus. B) consumer surplus plus producer surplus is maximized. C) economic surplus is minimized. D) the difference between consumer surplus and producer surplus is maximized. E) economic surplus is less than producer surplus. Answer: B Diff: 2 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 54) Producing more output than the equilibrium quantity results in economic inefficiency because A) producers and consumers are gaining equal surplus. B) there is no deadweight loss at greater quantity of output. C) the willingness of consumers to pay for the good is less than the willingness of producers to sell. D) producer surplus is higher than consumer surplus. E) consumer surplus is higher than producer surplus. Answer: C Diff: 2 Type: MC Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 55) There will be no deadweight loss if the marginal benefit to consumers is equal to the marginal cost of production and the sum of consumer surplus and producer surplus is maximized. Answer: TRUE Diff: 1 Type: TF Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

56) The difference between consumer surplus and producer surplus in a market is equal to the deadweight loss. Answer: FALSE Diff: 1 Type: TF Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 57) Equilibrium in a competitive market results in the greatest amount of economic surplus from the production of a good or service. Answer: TRUE Diff: 1 Type: TF Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking 58) If marginal benefit is greater than marginal cost, output is inefficiently high. Answer: FALSE Diff: 1 Type: TF Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 59) If the market price is at equilibrium, the deadweight loss is maximized. Answer: FALSE Diff: 1 Type: TF Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 60) If the market price is at equilibrium, the producer surplus is minimized. Answer: FALSE Diff: 1 Type: TF Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 61) The sum of consumer surplus and producer surplus is called economic surplus. Answer: TRUE Diff: 1 Type: TF Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking

62) There will be no deadweight loss if the marginal benefit to consumers is equal to the marginal cost of production and the sum of consumer surplus and producer surplus is maximized. Answer: TRUE Diff: 1 Type: TF Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 63) If marginal benefit is less than marginal cost, output is inefficiently high. Answer: TRUE Diff: 1 Type: TF Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 64) If the market price is at equilibrium, the deadweight loss is zero. Answer: TRUE Diff: 1 Type: TF Topic: Economic Efficiency Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytical Thinking 65) What is deadweight loss? When is deadweight loss equal to zero? Answer: Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. Deadweight loss is equal to zero when the sum of consumer surplus and producer surplus is maximized, which occurs when the market is in competitive equilibrium. Diff: 1 Type: ES Topic: Deadweight Loss Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Reflective Thinking

66) The graph below represents the market for alfalfa. The market price is $7.00 per bushel. Identify the areas representing consumer surplus, producer surplus, and economic surplus.

Answer: Consumer surplus is represented by area A. Producer surplus is represented by area B. Economic surplus is represented by area A + B. Diff: 1 Type: ES Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

67) The graph below represents the market for alfalfa. The equilibrium price is $7.00 per bushel, but the market price is $9.00 per bushel. Identify the areas representing consumer surplus, producer surplus, and deadweight loss at the equilibrium price of $7.00 and at the market price of $9.00.

Answer: At the equilibrium price of $7.00: Consumer surplus is represented by area A + B + C. Producer surplus is represented by area D + E. There is no deadweight loss. At the market price of $9.00: Consumer surplus is represented by area A. Producer surplus is represented by area B + D. Deadweight loss is represented by area C + E. Diff: 2 Type: ES Topic: Economic Surplus Learning Outcome: 4.2 Understand the concept of economic efficiency AACSB: Analytic Skills

4.3

Explain the economic effect of government-imposed price floors and price ceilings

Table 4.8 Hourly Wage (dollars) $7.50 8.50 9.50 10.50 11.50 12.50

Quantity of Labour Supplied 530,000 550,000 570,000 590,000 610,000 630,000

Quantity of Labour Demanded 650,000 630,000 610,000 590,000 570,000 550,000

Table 4.8 shows the demand and supply schedules for the labour market in the city of Oshawa. 1) Refer to Table 4.8. What is the equilibrium hourly wage (W*) and the equilibrium quantity of labour (Q*)? A) W* = $10.50; Q* = 590,000 B) W* = $11.50; Q* = 570,000 C) W* = $9.50; Q* = 570,000 D) W* = $10.50; Q* = 1,200,000 E) W* = $12.50; Q* = 630,000 Answer: A Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy 2) Refer to Table 4.8. If a minimum wage of $9.50 an hour is mandated, what is the quantity of labour demanded? A) 40,000 B) 570,000 C) 590,000 D) 600,000 E) 610,000 Answer: E Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy

3) Refer to Table 4.8. If a minimum wage of $9.50 an hour is mandated, what is the quantity of labour supplied? A) 40,000 B) 570,000 C) 610,000 D) 590,000 E) 1,180,000 Answer: B Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy 4) Refer to Table 4.8. If a minimum wage of $9.50 is mandated, there will be A) a shortage of 20,000 units of labour. B) a surplus of 20,000 units of labour. C) a shortage of 40,000 units of labour. D) a surplus of 40,000 units of labour. E) no shortage or surplus of labour. Answer: D Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy 5) Refer to Table 4.8. Suppose that the quantity of labour demanded decreases by 80,000 at each wage level. What are the new free market equilibrium hourly wage and the new equilibrium quantity of labour? A) W = $8.50; Q = 550,000 B) W = $12.50; Q = 630,000 C) W = $9.50; Q = 570,000 D) W = $9.50; Q = 590,000 E) W = $8.50; Q = 590,000 Answer: A Diff: 3 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy

6) Which of the following is not a consequence of minimum wage laws? A) Low skilled workers are hurt because minimum wage reduces the number of jobs providing low skilled workers with training. B) Employers will be reluctant to offer low-skill workers jobs with training. C) Producers have an incentive to offer workers non-wage benefits such as extra health and dental care benefits and convenient working hours rather than a higher wage. D) Some workers benefit when the minimum wage is increased. E) Unemployment increases as a result of minimum wage law. Answer: C Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 7) Rent control is an example of A) a subsidy for low-skilled workers. B) a price floor. C) a price ceiling. D) a black market. E) tax on employers. Answer: C Diff: 1 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 8) To affect the market outcome, a price ceiling A) must be set below the black market price. B) must be set below the legal price. C) must be set below the price floor. D) must be set below the equilibrium price. E) must be set above the equilibrium price. Answer: D Diff: 1 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

9) In order to prevent a massive surplus of milk, the government A) forces everyone to purchase at least 2 litres of milk a week. B) requires all producers to acquire one of a limited number of licences. C) buys any extra milk that producers would like to sell at the regulated price. D) converts any surplus milk into ice cream. E) exports the extra milk produced. Answer: B Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 10) Economists refer a to a market where buying and selling take place at prices that violate government price regulations as A) a free market. B) an outlaw market. C) a noncompetitive market. D) a restricted market. E) a black market. Answer: E Diff: 1 Type: MC Topic: Black Markets Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

Figure 4.9

Figure 4.9 shows the market for apartments in Springfield. Recently, the government imposed a rent ceiling of $1,000 per month. 11) Refer to Figure 4.9. With rent control, the quantity supplied is 200 apartments. Suppose apartment owners ignore the law and rent this quantity for the highest rent they can get. What is the highest rent they can get per month? A) $1,000 B) $1,500 C) $2,000 D) $2,300 E) $3,000 Answer: C Diff: 3 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 12) Refer to Figure 4.9. What is the value of consumer surplus after the imposition of the ceiling? A) $120,000 B) $230,000 C) $270,000 D) $430,000 E) $460,000 Answer: B Diff: 3 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 72 Copyright © 2024 Pearson Canada Inc.

13) Refer to Figure 4.9. What is the value of producer surplus after the imposition of the ceiling? A) $40,000 B) $100,000 C) $300,000 D) $430,000 E) $460,000 Answer: A Diff: 3 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 14) Refer to Figure 4.9. What is the value of the portion of producer surplus transferred to consumers as a result of the rent ceiling? A) $40,000 B) $100,000 C) $125,000 D) $140,000 E) $230,000 Answer: B Diff: 3 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 15) Refer to Figure 4.9. What is the value of the deadweight loss after the imposition of the ceiling? A) $50,000 B) $125,000 C) $140,000 D) $175,000 E) $260,000 Answer: A Diff: 3 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills

16) Which term refers to a legally established minimum price that firms may charge? A) a price ceiling B) a subsidy C) a price floor D) a tariff E) a tax Answer: C Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 17) In order to be binding, a price ceiling A) must lie above the free market equilibrium price. B) must lie below the free market equilibrium price. C) must coincide with the free market equilibrium price. D) must be high enough for firms to earn a profit. E) will always be binding regardless of market equilibrium price. Answer: B Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 18) A minimum wage law dictates A) the minimum quantity of labour that a firm must employ. B) that all firms should stay at the labour market equilibrium. C) the highest wage that firms must pay for labour. D) the minimum qualifications for labour. E) the lowest wage that firms may pay for labour. Answer: E Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy

Figure 4.10

Figure 4.10 shows the demand and supply curves for the almond market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at Pf. 19) Refer to Figure 4.10. What area represents consumer surplus after the imposition of the price floor? A) A + B + E B) A + B C) A + B + E + F D) A E) A + B + C Answer: D Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 20) Refer to Figure 4.10. What is the area that represents producer surplus after the imposition of the price floor? A) A + B + E B) B + E C) B + E + F D) B + C + D E) B + C + D + E Answer: B Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 75 Copyright © 2024 Pearson Canada Inc.

21) Refer to Figure 4.10. What area represents the portion of consumer surplus that has been transferred to producer surplus as a result of the price floor? A) B B) B + C C) B + E D) E E) C Answer: A Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 22) Refer to Figure 4.10. What area represents the deadweight loss after the imposition of the price floor? A) C + D + G B) F + G C) C + D D) C + D + F E) C + D + F + G Answer: C Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 23) One of the stated purposes of price floors in the milk and poultry markets is A) to help prevent obesity. B) to support smaller grocery stores from unfair competition from chain stores. C) to raise revenue for the government. D) to ensure people receive sufficient quantity of these products. E) to ensure that farmers receive a fair price for their products. Answer: E Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

24) Sen, Rybczynski, and Van de Wall studied the impact of minimum wages in Canada and found A) there was a large reduction in employment in provinces with high minimum wages. B) there was a large increase in employment in provinces with high minimum wages. C) a 10 percent increase in the minimum wage decreased teen unemployment by 3 to 5 percent. D) increases in the price of fast food were caused primarily by increases in the minimum wage. E) there was no correlation between minimum wage and unemployment of unskilled workers. Answer: C Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy 25) Which of the following is a policy that would raise incomes of low-skilled workers without creating additional unemployment? A) an earned income tax credit B) a higher minimum wage C) stricter requirements on firms to hire low skilled workers D) increased opportunities for teenagers to leave school early E) a competitive market equilibrium Answer: A Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy 26) Which of the following is not a result of imposing a rent ceiling? A) Some consumer surplus is converted to producer surplus. B) There is a reduction in the quantity supplied of apartments. C) There is an increase in the quantity demanded of apartments. D) The marginal benefit of the last apartment rented is greater than the marginal cost of supplying it. E) There is a shortage of rental apartments in the market. Answer: A Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

27) In the economic sense, almost everything is scarce. ________ of a good or service occurs when the quantity demanded is greater than the quantity supplied at the current market price. A) Scarcity B) A shortage C) A surplus D) An overstock E) An equilibrium Answer: B Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse Scarcity with Shortage 28) In cities with rent controls, the actual rents paid can be higher than the legal maximum. One explanation for this is A) rent control laws are so complicated that landlords and tenants may not be aware of what the legal price is. B) landlords are allowed to charge more than the legal maximum on some apartments so long as they charge less on others. C) because there is a shortage of apartments, tenants often are willing to pay rents higher than the law allows. D) the legal penalty landlords face for charging more than the legal maximum rent is less than the revenue earned by charging their tenants more than the maximum rent. E) that tenants are usually willing to pay 'under-the-table' money to landlords to get the apartment. Answer: C Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 29) Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia? A) Quantity demanded will decrease, quantity supplied will increase, and a surplus will result. B) Quantity demanded will increase, quantity supplied will decrease, and a surplus will result. C) Quantity demanded will decrease, quantity supplied will increase, and a shortage will result. D) Quantity demanded will increase, quantity supplied will decrease, and a shortage will result. E) Both quantity demanded and quantity supplied will decrease as result of the floor. Answer: A Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

30) Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia? A) Consumer surplus will increase. B) Producer surplus will increase. C) Deadweight loss will increase. D) Market efficiency will increase. E) Deadweight loss will be eliminated. Answer: C Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 31) Which of the following is not a result of government price controls? A) Some people win and some people lose. B) Price controls benefit poor consumers but harm producers and wealthy consumers. C) Price controls decrease economic efficiency. D) A deadweight loss will occur. E) Price controls often hurt those they are intended to help. Answer: B Diff: 2 Type: MC Topic: Price Controls Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 32) Economists are reluctant to state that price controls are desirable or undesirable because A) it is impossible to evaluate the impact on quantity demanded and quantity supplied as a result of price controls. B) it is normative analysis and varies from one economist to another. C) sometimes price controls result in increases in economic efficiency and sometimes they result in decreases in economic efficiency. D) economists are reluctant to conduct positive analysis of price controls. E) whether the gains from the winners exceed the losses from the losers is not strictly an economic question. Answer: E Diff: 2 Type: MC Topic: Price Controls Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

33) The minimum wage is an example of a price ceiling. Answer: FALSE Diff: 1 Type: TF Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 34) Shortage means the same thing as scarcity. Answer: FALSE Diff: 1 Type: TF Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Scarcity with Shortage 35) Rent control is an example of a price ceiling. Answer: TRUE Diff: 1 Type: TF Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 36) What is the difference between a price ceiling and a price floor? Compared to the competitive equilibrium price, where must price ceilings and price floors be set to have an effect on the market. Answer: A price ceiling is a legally determined maximum price that sellers may charge for a good or service. A price floor is a legally determined minimum price that sellers may receive for a product or service. To have an effect on a market, price ceilings must be set below the competitive equilibrium price, and price floors must be set above the competitive equilibrium price. Diff: 1 Type: SA Topic: Price Controls Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

Figure 4.11

37) Refer to Figure 4.11. which shows the market for vitamins. Suppose the government imposes a price ceiling of Pv. How will the price ceiling affect the quantity supplied, quantity demanded and quantity exchanged? Answer: The price ceiling will have no effect on the market outcome because the ceiling is not binding. An effective price ceiling must lie below the free market equilibrium. Thus, in this case the market outcome will be determined by forces of demand and supply. Diff: 3 Type: ES Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

Table 4.9 Price per Bushel (dollars) $2 4 6 8 10 12 14 16

Quantity Demanded (bushels) 40,000 34,000 28,000 24,000 20,000 18,000 12,000 6,000

Quantity Supplied (bushels) 0 4,000 8,000 16,000 20,000 28,000 36,000 40,000

Table 4.9 above contains information about the corn market. Answer the following questions based on this table. 38) Refer to Table 4.9. An agricultural price floor is a price that the government guarantees farmers will receive for a particular crop. Suppose the federal government sets a price floor for corn at $12 per bushel. a. What is the amount of shortage or surplus in the corn market as result of the price floor? b. If the government agrees to purchase any surplus output at $12, how much will it cost the government? c. If the government buys all of the farmers' output at the floor price, how many bushels of corn will it have to purchase and how much will it cost the government? d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to consumers at whatever price it can get. Under this scheme, what is the price at which the government will be able to sell off all of the output it had purchased from farmers? What is the revenue received from the government's sale? e. In this problem we have considered two government schemes: (1) a price floor is established and the government purchases any excess output and (2) the government buys all the farmers' output at the floor price and resells at whatever price it can get. Which scheme will taxpayers prefer? f. Consider again the two schemes. Which scheme will the farmers prefer? g. Consider again the two schemes. Which scheme will corn buyers prefer? Answer: a. 10,000 surplus. b. $12 × 10,000 = $120,000. c. 28,000 bushels × $12 = $336,000. d. $6 per bushel and government receives $6 × 28,000 = $168,000. e. Taxpayers prefer scheme (1). f. In terms of revenue, farmers are indifferent between the two schemes. g. Corn buyers prefer scheme (2). Diff: 3 Type: ES Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills

39) When ________ in a market, the total net benefit to society is maximized. A) deadweight loss is maximized B) a competitive equilibrium is achieved C) consumer surplus is minimized D) producer surplus is minimized E) producer surplus is maximized Answer: B Diff: 1 Type: MC Topic: Economic Efficiency Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Table 4.10 Hourly Wage (dollars) $12.00 12.50 11.00 11.50 12.00 12.50

Quantity of Labour Supplied 350,000 360,000 370,000 380,000 390,000 400,000

Quantity of Labour Demanded 390,000 380,000 370,000 360,000 350,000 340,000

Table 4.10 shows the demand and supply schedules for the low-skilled labour market in the city of Eastunder. 40) Refer to Table 4.10. What is the equilibrium hourly wage (W*) and the equilibrium quantity of labour (Q*)? A) W* = $11.00; Q* = 370,000 B) W* = $12.50; Q* = 380,000 C) W* = $12.50; Q* = 360,000 D) W* = $11.00; Q* = 740,000 E) W* = $11.50; Q* = 360,000 Answer: A Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills

41) Refer to Table 4.10. If a minimum wage of $11.50 an hour is mandated, what is the quantity of labour demanded? A) 380,000 B) 370,000 C) 360,000 D) 350,000 E) 10,000 Answer: C Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 42) Refer to Table 4.10. If a minimum wage of $11.50 an hour is mandated, what is the quantity of labour supplied? A) 390,000 B) 380,000 C) 370,000 D) 340,000 E) 400,000 Answer: B Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 43) Refer to Table 4.10. If a minimum wage of $11.50 is mandated, there will be a A) shortage of 10,000 units of labour. B) surplus of 10,000 units of labour. C) shortage of 20,000 units of labour. D) surplus of 20,000 units of labour. E) Market will be in equilibrium, no shortage or surplus. Answer: D Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills

44) Refer to Table 4.10. Suppose that the quantity of labour demanded increases by 40,000 at each wage level. What are the new free market equilibrium hourly wage and the new equilibrium quantity of labour? A) W = $11.50; Q = 370,000 B) W = $11.50; Q = 380,000 C) W = $12.50; Q = 380,000 D) W = $12.50; Q = 390,000 E) W = $12.00; Q = 390,000 Answer: E Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 45) Refer to Table 4.10. Suppose that the quantity of labour supplied decrease by 10,000 at each wage level. What are the new free market equilibrium hourly wage and the new equilibrium quantity of labour? A) W = $11.00; Q = 360,000 B) W = $11.50; Q = 360,000 C) W = $12.00; Q = 370,000 D) W = $12.00; Q = 380,000 E) W = $12.50; Q = 390,000 Answer: B Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 46) Which of the following is a consequence of minimum wage laws? A) Low-skill workers benefit because minimum wage increases the number of jobs providing low-skill workers with training. B) Employers will be reluctant to offer low-skill workers jobs with training. C) Producers have an incentive to offer workers non-wage benefits such as health care benefits and convenient working hours rather than a higher wage. D) All workers benefit when the minimum wage is increased. E) Everyone in the society is happy with the increase in wages. Answer: B Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy

47) The minimum wage is an example of A) a subsidy for low-skill workers. B) a price floor. C) a price ceiling. D) a black market. E) an equilibrium wage. Answer: B Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 48) To affect the market outcome, a price floor must be set A) above the black market price. B) above the legal price. C) above the price ceiling. D) above the equilibrium price. E) below the equilibrium price. Answer: D Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 49) Government intervention in the dairy market began A) during World War II to ensure that enough food was available for domestic consumption. B) after World War I in order to help farmers to adjust from a war-time economy to a peace-time economy. C) during the 1960s. D) during the First Gulf War. E) at the beginning of 21st century. Answer: C Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

50) A black market is a market where buying and selling take place A) at prices that violate government price regulations. B) in non-licensed shops and warehouses. C) after regular office hours. D) on foreign soil. E) only on weekends. Answer: A Diff: 1 Type: MC Topic: Black Markets Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Figure 4.12

Figure 4.12 shows the market for apartments in Bay City. Recently, the government imposed a rent ceiling at R0. 51) Refer to Figure 4.12. With rent control, the quantity supplied is Q1. Suppose apartment owners ignore the law and rent this quantity for the highest rent they can get. What is the highest rent they can get? A) R* B) R1 C) R0 D) more than R1 E) greater than R0 and less than R1 Answer: B Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 87 Copyright © 2024 Pearson Canada Inc.

52) Refer to Figure 4.12. What is the area that represents consumer surplus after the imposition of the ceiling? A) A + B+ D B) A + B + C C) A + B + D + F D) A + B + D + G E) A + B + D + F + G Answer: A Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 53) Refer to Figure 4.12. What is the area that represents the producer surplus after the imposition of the ceiling? A) F + G B) F C) D + F + G D) A + B + D + F E) A + B + D + F + G Answer: B Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 54) Refer to Figure 4.12. What is the area that represents the portion of producer surplus transferred to consumers as a result of the rent ceiling? A) D + E B) D + F C) E D) F E) D Answer: E Diff: 3 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills

55) Refer to Figure 4.12. What area represents the deadweight loss after the imposition of the ceiling? A) G + H B) J + H C) C + E + J + H D) C + E E) C + E + J Answer: D Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 56) Which term refers to a legally established maximum price that firms may charge? A) a price ceiling B) a subsidy C) a price floor D) a tariff E) a discount Answer: A Diff: 1 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 57) In order to be binding, a price floor A) must lie above the free market equilibrium price. B) must lie below the free market equilibrium price. C) must coincide with the free market equilibrium price. D) must be high enough for firms to earn a profit. E) must be low enough for firms to be able to produce. Answer: A Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

58) ________ dictates the lowest wage that firms may pay for labour. A) A maximum wage requirement B) A minimum wage law C) The black market wage D) A price ceiling wage E) The market equilibrium wage Answer: B Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy Figure 4.13

Figure 4.13 shows the demand and supply curves for the coffee market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at $7.00. 59) Refer to Figure 4.13. What is the value of the consumer surplus after the imposition of the price floor? A) $1,500 B) $2,700 C) $3,000 D) $4,500 E) $5,700 Answer: A Diff: 3 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 90 Copyright © 2024 Pearson Canada Inc.

60) Refer to Figure 4.13. What is the value of producer surplus after the imposition of the price floor? A) $3,000 B) $3,600 C) $4,200 D) $4,500 E) $5,700 Answer: A Diff: 3 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 61) Refer to Figure 4.13. What is the value of the portion of consumer surplus that has been transferred to producer surplus as a result of the price floor? A) $1,200 B) $1,500 C) $1,800 D) $3,000 E) $4,500 Answer: A Diff: 3 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills 62) Refer to Figure 4.13. What is the value of the deadweight loss after the imposition of the price floor? A) $600 B) $1,800 C) $2,700 D) $3,300 E) $3,500 Answer: A Diff: 3 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills

63) The sale of milk in Canada is governed by provincial marketing boards. The goal of these boards is A) to encourage more people to become farmers. B) to grant free land to farmers in order to produce agricultural products that were particularly scarce. C) to phase out the use of price ceilings in agricultural markets. D) to stop people from drinking too much milk. E) to ensure that farmers receive a fair price for their products. Answer: E Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 64) Because minimum wage is a price floor, A) it will be set below the market equilibrium price. B) it will create a deadweight loss. C) it will increase the number of jobs available in the labour market. D) it will maximize consumer surplus. E) it will create a shortage of labour in the market. Answer: B Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy 65) ________ gain the most from an increase in the minimum wage; while ________ lose the most from an increase in the minimum wage. A) Employment agencies; employers B) All low skilled workers; employers C) Labour unions; governments D) Employers; low skilled workers E) Low skilled workers who keep/find jobs; low skilled workers who cannot find jobs and employers Answer: E Diff: 1 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy

66) Increases in the minimum wage are intended to raise the incomes of low-income workers. Many economists favour a different policy to achieve this goal; a policy that avoids the deadweight losses that result from the minimum wage. What is this policy? A) distribution of food stamps to low-income consumers B) distribution of vouchers that can be used for rent or mortgage payments C) the Alternative Minimum Tax D) the earned income tax credit E) exception from income tax Answer: D Diff: 2 Type: MC Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Floors in Labour Markets: The Debate Over Minimum Wage Policy 67) Which of the following is a result of imposing a rent ceiling? A) Some consumer surplus is converted to producer surplus. B) There is an increase in the quantity of apartments supplied. C) There is an increase in the quantity of apartments demanded. D) The marginal benefit of the last apartment rented is less than the marginal cost of supplying it. E) There is a decrease in the quantity of apartments demanded. Answer: C Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 68) Which of the following describes the difference between "scarcity" and "shortage"? A) There is no difference; either word can be used to describe the situation that exists when there is less of a good or service available than people want. B) In the economic sense, everything is scarce. A shortage of a good or service occurs when the quantity demanded is greater than the quantity supplied at the current market price. C) There is a shortage of almost everything. Scarcity occurs only if the quantity demanded of a good or service is greater than the quantity supplied at the current market price. D) In the economic sense, almost everything is scarce. A shortage of a good or service occurs when the quantity demanded is greater than the quantity supplied at the equilibrium price. E) Scarcity can be eliminated, however, a shortage is not easy to eliminate. Answer: B Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse Scarcity with Shortage

69) In provinces with rent controls, the actual rents paid can be ________ than the legal maximum. One explanation for this is because there is a ________ of apartments, tenants are ________. A) higher; shortage; often willing to pay rents higher than the law allows B) higher; surplus; often forced to pay rents higher than the law allows C) lower; surplus; never willing to pay rents below the legal maximum D) lower; shortage; rarely willing to pay rents lower than the law allows E) higher; surplus; always willing to pay any rent for the place they like to rent. Answer: A Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills Special Feature: Solved Problem: What's the Economic Effect of an Illicit Market for Apartments? 70) Which of the following is a result of government price controls? A) Some people win and some people lose. B) Price controls benefit poor consumers but harm producers and wealthy consumers. C) Price controls increase economic efficiency. D) The deadweight loss from price ceilings is greater than the deadweight loss from price floors. E) Price controls cannot affect the market outcomes. Answer: A Diff: 2 Type: MC Topic: Price Controls Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 71) Economists ________ that price controls are desirable. A) are in agreement B) are reluctant to state C) never believe D) only recently agree E) strongly believe Answer: B Diff: 2 Type: MC Topic: Price Controls Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

72) If the government implements a price ceiling on insulin, this will A) increase the price consumers will pay for insulin. B) decrease the quantity of insulin that manufacturers will be willing to supply. C) have to be set above the market equilibrium price to be effective. D) encourage manufacturers to produce and sell more insulin to increase their profits. E) decrease the quantity of insulin that consumers will be willing to purchase. Answer: B Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 73) If the government implements a price ceiling on insulin, which of the following is not likely to occur? A) an increase in consumer surplus B) an decrease in producer surplus C) an increase in deadweight loss D) a more efficient equilibrium E) inefficient quantity of insulin Answer: D Diff: 2 Type: MC Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 74) Provincial marketing boards allow anyone to sell milk at any price they choose. Answer: FALSE Diff: 1 Type: TF Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking 75) There is a shortage of every good that is scarce. Answer: FALSE Diff: 1 Type: TF Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Scarcity with Shortage

76) All renters benefit from rent control and all landlords lose. Answer: FALSE Diff: 1 Type: TF Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking Figure 4.14

77) Refer to Figure 4.14. The figure above shows the market for watermelons. Suppose the government imposes a price floor of Pw. How will the price floor affect the quantity supplied, quantity demanded, and quantity exchanged? Answer: The price floor will have no effect on the market outcome because it is not binding. An effective price floor must lie above the free market equilibrium. Thus, in this case the market outcome will be determined by forces of demand and supply. Diff: 3 Type: ES Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Reflective Thinking

Table 4.11 Price Per Bushel (dollars) $3 6 9 12 15 18 21 24

Quantity Demanded (bushels) 36,000 30,000 25,000 20,000 16,000 13,000 8,000 3,000

Quantity Supplied (bushels) 0 2,000 5,000 10,000 16,000 23,000 30,000 36,000

Table 4.11 above contains information about the wheat market. Answer the following questions based on this table. 78) Refer to Table 4.11. An agricultural price floor is a price that the government guarantees farmers will receive for a particular crop. Suppose the federal government sets a price floor for wheat at $21 per bushel. a. What is the amount of shortage or surplus in the wheat market as result of the price floor? b. If the government agrees to purchase any surplus output at $21, how much will it cost the government? c. If the government buys all of the farmers' output at the floor price, how many bushels of wheat will it have to purchase and how much will it cost the government? d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to consumers at whatever price it can get. Under this scheme, what is the price at which the government will be able to sell off all of the output it purchased from farmers? What is the revenue received from the government's sale? e. In this problem we have considered two government schemes: (1) a price floor is established and the government purchases any excess output and (2) the government buys all the farmers' output at the floor price and resells it at whatever price it can get. Which scheme will taxpayers prefer? f. Which scheme will the farmers prefer? g. Which scheme will wheat buyers prefer? Answer: a. 22,000 surplus b. $21 × 22,000 = $462,000 c. 30,000 bushels × $21 = $630,000 d. $6 per bushel and government receives $6 × 30,000 = $180,000 e. Taxpayers prefer scheme (1). f. In terms of revenue, farmers are indifferent between the two schemes. g. Wheat buyers prefer scheme (2). Diff: 3 Type: ES Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills

Figure 4.15

Figure 4.15 shows the market for taxi rides. The following question(s) are based on this figure. 79) Refer to Figure 4.15. To legally drive a taxicab in Toronto, you must have a licence issued by the city government. Assume that only 13,200 licences have been issued. Let's also assume this puts an absolute limit on the number of taxi rides that can be supplied in Toronto on any day, because no one breaks the law by driving a taxi without a licence. Assume as well that each taxi provides 6 trips per day. In this case, the quantity supplied of taxi rides is 79,200 (or 6 rides per taxi × 13,200 taxis). This is shown in the diagram with a vertical line at this quantity. Assume that there are no government controls on the prices that drivers can charge for rides. a. What would the equilibrium price and quantity be in this market if there were no licence requirement? b. If there were no licence requirement, indicate the area that represents consumer surplus. c. If there were no licence requirement, indicate the area that represents producer surplus. d. If there were no licence requirement, indicate the area that represents economic surplus. e. What are the price and quantity with the licence requirement? f. With a licence requirement in place, what area represents consumer surplus? g. With a licence requirement in place, what area represents producer surplus? h. With a licence requirement in place, what area represents the deadweight loss? i. Based on your answers to parts (c) and (g), are taxicab drivers better off with the licence requirement for taxicabs than without? j. Are consumers better off with or without the licence requirement for taxicabs?

Answer: a. P = $20, Q = 100,000 rides. b. Consumer Surplus = A + B+ H. c. Producer Surplus = C + D + J. d. Economic Surplus = A + B + C + D + H + J. e. P = $30, Q = 79,200. f. Consumer surplus with licence = A. g. Producer surplus with licence = B + C + D. h. Deadweight loss = H + J. i. Taxi drivers are better off with the requirement because producer surplus is greater by the area of B J. j. Consumers are better off without the licence requirement. Diff: 3 Type: ES Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills

80) Using a supply and demand graph, illustrate the market for rent-controlled apartments with the following data: Equilibrium rent without rent control: $1,500 Rent with rent control: $700 Quantity of apartments demanded with rent control: 50,000 Quantity of apartments supplied with rent control: 20,000 What is the value of the initial shortage of apartments with rent control? Now assume rent control leads to a reduction in the supply of apartments, and the new quantity supplied is 15,000. Illustrate this on your graph. What is the value of the shortage of apartments following the decrease in supply? Answer:

The initial shortage of apartments is (50,000 - 20,000) = 30,000. The reduction in supply is shown by the shift from S1 to S2. The shortage following the decrease in supply is (50,000 - 15,000) = 35,000. Diff: 3 Type: ES Topic: Price Ceilings Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytic Skills Special Feature: Apply the Concept: Price Controls and the Venezuelan Economy.

Table 4.12 Price per Bushel (dollars) $2 4 6 8 10 12 14 16

Quantity Demanded (bushels) 40,000 34,000 28,000 24,000 20,000 18,000 12,000 6,000

Quantity Supplied (bushels) 0 4,000 8,000 16,000 20,000 28,000 36,000 40,000

Table 4.12 above contains information about the corn market. Answer the following questions based on this table. 81) Refer to Table 4.12. An agricultural price floor is a price that the government guarantees farmers will receive for a particular crop. Suppose the federal government sets a price floor for corn at $12 per bushel. a. What is the amount of shortage or surplus in the corn market as result of the price floor? b. If the government agrees to purchase any surplus output at $12, how much will it cost the government? c. If the government buys all of the farmers' output at the floor price, how many bushels of corn will it have to purchase and how much will it cost the government? d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to consumers at whatever price it can get. Under this scheme, what is the price at which the government will be able to sell off all of the output it had purchased from farmers? What is the revenue received from the government's sale? e. In this problem we have considered two government schemes: (1) a price floor is established and the government purchases any excess output and (2) the government buys all the farmers' output at the floor price and resells at whatever price it can get. Which scheme will taxpayers prefer? f. Consider again the two schemes. Which scheme will the farmers prefer? g. Consider again the two schemes. Which scheme will corn buyers prefer? Answer: a. 10,000 surplus. b. $12 × 10,000 = $120,000. c. 28,000 bushels × $12 = $336,000. d. $6 per bushel and government receives $6 × 28,000 = $168,000. e. Taxpayers prefer scheme (1). f. In terms of revenue, farmers are indifferent between the two schemes. g. Corn buyers prefer scheme (2). Diff: 3 Type: ES Topic: Price Floors Learning Outcome: 4.3 Explain the economic effect of government-imposed price floors and price ceilings AACSB: Analytical Thinking

4.4

Analyze the economic impact of taxes

1) The actual division of the burden of a tax between buyers and sellers in a market is called A) tax incidence. B) tax liability. C) tax bearer. D) tax parity. E) tax bill. Answer: A Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Figure 4.16

Figure 4.16 shows the market for beer. The government plans to impose a unit tax in this market. 2) Refer to Figure 4.16. What is the size of the unit tax? A) $2 B) $5 C) $7 D) $12 E) $27 Answer: C Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 102 Copyright © 2024 Pearson Canada Inc.

3) Refer to Figure 4.16. How much of the tax is paid by buyers? A) $2 B) $5 C) $7 D) $12 E) $15 Answer: B Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 4) Refer to Figure 4.16. The price buyers pay after the tax is A) $7. B) $9. C) $20. D) $22. E) $27. Answer: E Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 5) Refer to Figure 4.16. For each unit sold, the price sellers receive after the tax (net of tax) is A) $20. B) $22. C) $27. D) $32. E) $42. Answer: A Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 6) Refer to Figure 4.16. How much of the tax is paid by producers? A) $2 B) $5 C) $7 D) $12 E) $15 Answer: A Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills

7) Refer to Figure 4.16. As a result of the tax, is there a loss in consumer surplus? A) Yes, because consumers paying a price above the economically efficient price. B) No, because the producer pays the tax. C) No, because the market reaches a new equilibrium. D) No, because consumers are charged a lower price to cover their tax burden. E) No, consumers are still buying the good as before. Answer: A Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 8) Refer to Figure 4.16. What is the consumer incidence of the tax? A) 28.6% B) 50% C) 65% D) 70% E) 71.4% Answer: E Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 9) The government proposes a tax on e-cigarettes. Buyers will bear the entire burden of the tax if the A) supply curve for e-cigarettes is vertical. B) demand curve for e-cigarettes is vertical. C) demand curve for e-cigarettes is horizontal. D) demand curve is downward sloping and the supply curve is upward sloping. E) demand curve is more elastic than supply curve. Answer: B Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 10) Suppose the demand curve for a product is vertical and the supply curve is upward sloping. If a unit tax is imposed in the market for this product, A) sellers bear the entire burden of the tax. B) buyers bear the entire burden of the tax. C) the tax burden will be shared equally between buyers and sellers. D) buyers share the burden of the tax with government. E) sellers will bear the most burden of the tax. Answer: B Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 104 Copyright © 2024 Pearson Canada Inc.

11) Suppose the demand curve for a product is horizontal and the supply curve is upward sloping. If a unit tax is imposed in the market for this product, A) sellers bear the entire burden of the tax. B) the tax burden will be shared among the government, buyers and sellers. C) buyers bear the entire burden of the tax. D) the tax burden will be shared by buyers and sellers. E) more burden of tax will be on buyers. Answer: A Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Figure 4.17

12) Refer to Figure 4.17. Suppose the market is initially in equilibrium at price P0 and now the government imposes a tax on every unit sold. Which of the following statements best describes the impact of the tax? For demand curve D0, A) the producer bears a greater share of the tax burden if the supply curve is S1. B) the producer bears a greater share of the tax burden if the supply curve is S0. C) the producer's share of the tax burden is the same whether the supply curve is S0 or S1. D) the producer bears the entire burden of the tax if the supply curve is S0 and the consumer bears the entire burden of the tax if the supply curve is S1. E) the consumer bears the entire tax burden if the supply curve is S0. Answer: A Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills

Figure 4.18

13) Refer to Figure 4.18. Suppose the market is initially in equilibrium at price P0 and then the government imposes a tax on every unit sold. Which of the following statements best describes the impact of the tax? A) The consumer will bear a smaller share of the tax burden if the demand curve is D0. B) The consumer's share of the tax burden is the same whether the demand curve is D0 or D1. C) The consumer will bear a smaller share of the tax burden if the demand curve is D1. D) The consumer will bear the entire burden of the tax if the demand curve is D1, and the producer will bear the entire burden of the tax if the demand curve is D0. E) The producer will bear the entire tax burden if demand curve is D1. Answer: A Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 14) Suppose an excise tax of $1 is imposed on every case of beer sold and sellers are responsible for paying this tax. How would the imposition of the tax be illustrated in a graph? A) The supply curve for cases of beer would shift to the right by $1. B) The supply curve for cases of beer would shift to the left by more than $1. C) The supply curve for cases of beer would shift to the left by less than $1. D) The supply curve for cases of beer would shift to the left by $1. E) Sellers will increase the price of beer by $1 and supply curve will stay the same. Answer: D Diff: 1 Type: MC Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 106 Copyright © 2024 Pearson Canada Inc.

15) Suppose that the federal government places a $1,500 tax on the buyers of new snowmobiles. After the purchase of a new snowmobile, a buyer must pay the government $1,500. How would the imposition of the tax on buyers be illustrated in a graph? A) The tax will shift the supply curve to the left by $1,500. B) The tax will shift the demand curve to the right by $1,500. C) The tax will shift both the demand and supply curve to the right by $1,500. D) The tax will shift the demand curve to the left by more than $1,500. E) The tax will shift the demand curve to the left by $1,500. Answer: E Diff: 2 Type: MC Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 16) Employees are officially responsible for paying 40 percent of the premiums for employment insurance. When studying the actual distribution of the cost of the program, economists find A) the tax is not high enough to cover the true costs of employment insurance. B) the share of the cost paid by employers is too high and reduces the demand for lower skilled workers. C) the burden of the program falls almost entirely on workers. D) the contributions should be greater for high income workers than for low income workers. E) the burden of the program is entirely on the government. Answer: C Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Special Feature: Apply the Concept: How Is the Burden of Employment Insurance Premiums Shared between Workers and Firms? 17) Payroll deductions imposed on ________ is used to fund Employment Insurance. A) employers only B) workers only C) employers and workers D) the unemployed E) tax payers Answer: C Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Special Feature: Apply the Concept: How Is the Burden of Employment Insurance Premiums Shared between Workers and Firms?

18) When economists find that workers pay almost all of the cost of employment insurance premiums, they are suggesting that A) the labour supply curve is nearly vertical. B) the labour supply curve is nearly horizontal. C) the labour demand curve is nearly vertical. D) the labour demand curve is nearly horizontal. E) the labour demand curve is more elastic than labour supply curve. Answer: A Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Special Feature: Apply the Concept: How Is the Burden of Employment Insurance Premiums Shared between Workers and Firms? 19) When the government taxes a good or service, it A) affects the market equilibrium for that good or service. B) eliminates the deadweight loss associated with the good or service. C) increases consumer surplus for the good or service. D) increases producer surplus for the good or service. E) reduces the price of the good or service. Answer: A Diff: 1 Type: MC Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 20) Economists have shown that the burden of a tax is the same whether the tax is collected from the buyer or the seller. Why, then, are gasoline and cigarette taxes imposed on sellers? Because A) sellers are more honest than buyers. B) the demand for both gasoline and cigarettes is very elastic. C) the Supreme Court has ruled that the government cannot impose taxes like these on buyers. D) it is more difficult for buyers to keep track of their purchases, and for the government to verify that the right amount of tax revenue is collected. E) buyers can avoid paying the taxes by purchasing in black market using cash. Answer: D Diff: 1 Type: MC Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking

21) A tax that imposes a small excess burden relative to the tax revenue that it generates is A) a payroll tax. B) a sin tax. C) an efficient tax. D) a FICA tax. E) a buyer's tax. Answer: C Diff: 1 Type: MC Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 22) The division of the burden of a tax between buyers and sellers in a market is called tax allocation. Answer: FALSE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 23) If the demand curve for a product is vertical, any tax increase on the product is paid for entirely by the consumer. Answer: TRUE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Special Feature: Solved Problem: When Do Consumers Pay All of a Sales Tax Increase? 24) One result of a tax is an increase in economic efficiency. Answer: FALSE Diff: 1 Type: TF Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 25) What is "tax incidence"? What determines tax incidence in a competitive market? Answer: Tax incidence refers to the actual division of the burden of a tax between buyers and sellers in a market. In a competitive market, tax incidence is determined by the forces of supply and demand in that market. Diff: 1 Type: SA Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking

26) Using a supply and demand graph, illustrate the effect of the addition of a $10.00 unit tax on digital cameras, where the entire tax burden falls on the seller. Assume the equilibrium price before the tax is $125 and the equilibrium quantity is 50,000. What happens to the price and quantity after the tax is implemented? Answer:

Price does not change and quantity decreases. Diff: 2 Type: SA Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills Special Feature: Solved Problem: When Do Consumers Pay All of a Sales Tax Increase?

Figure 4.19

27) Refer to Figure 4.19. The figure above illustrates the markets for two goods, Good X and Good Y. Suppose an identical dollar tax is imposed in each market. a. Compare the consumer burden and producer burden in each market. Illustrate your answer graphically. b. If the goal of the government is to raise revenue with minimum impact to quantity consumed, in which market should the tax be imposed? c. If the goal of the government is to discourage consumption, in which market should the tax be imposed? Answer: a. See the figure below

b. The market for Good Y c. The market for Good X Diff: 3 Type: ES Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills

Figure 4.20

28) Refer to Figure 4.20. The figure above represents demand and supply in the market for gasoline. Use the diagram to answer the following questions. a. How much is the government tax on each litre of gasoline? b. What portion of the unit tax is paid by consumers? c. What portion of the unit tax is paid by producers? d. What is the quantity sold after the imposition of the tax? e. What is the after-tax revenue per litre received by producers? f. What is the total tax revenue collected by the government? g. What is the value of the excess burden of the tax? h. Is this gasoline tax efficient? Answer: a. Tax = $0.50 per litre b. Consumer burden = $0.20 c. Producer burden = $0.30 d. Quantity sold = 30 billion e. Net Price to seller = $1.10 f. Tax Revenue = $1.25 billion (1/2 × $0.50 × 30 billion) g. Excess burden (deadweight loss) = $1.5 billion (1/2 × $0.60 × 5 billion) h. Yes, a tax is efficient if it imposes a small excess burden relative to the tax revenue it raises. Diff: 2 Type: ES Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills

29) Tax incidence is the actual division of the A) burden of the tax between buyers and sellers in a market. B) tax revenues between government agencies. C) tax revenues between the federal government and state governments. D) population into different tax brackets. E) tax revenues between government and taxpayers. Answer: A Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Figure 4.21

Figure 4.21 shows the market for cigarettes. The government plans to impose a unit tax in this market, which will be collected by sellers. 30) Refer to Figure 4.21. What is the size of the unit tax? A) $8 B) $5 C) $3 D) $2 E) 0 Answer: B Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills

31) Refer to Figure 4.21. How much of the tax is paid by buyers? A) $8 B) $5 C) $4 D) $3 E) $2 Answer: D Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 32) Refer to Figure 4.21. The price buyers pay after the tax is A) $12. B) $8. C) $5. D) $3. E) $2. Answer: B Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 33) Refer to Figure 4.21. For each unit sold, the price sellers receive after the tax (net of tax) is A) $12. B) $8. C) $4.40. D) $3. E) $5. Answer: D Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 34) Refer to Figure 4.21. How much of the tax is paid by producers? A) $45 B) $8 C) $5 D) $3 E) $2 Answer: E Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills

35) Refer to Figure 4.21. As a result of the tax, is there a loss in producer surplus? A) Yes, because producers are not selling as many units now. B) No, because the consumer pays the tax. C) No, because the market reaches a new equilibrium. D) No, because producers are able to raise the price to cover their tax burden. E) No, because producers are charging higher price from consumers. Answer: A Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 36) The government proposes a tax on halogen light bulbs. Sellers will bear the entire burden of the tax if the A) supply curve for halogen bulbs is horizontal. B) demand curve for halogen bulbs is vertical. C) demand curve for halogen bulbs is horizontal. D) demand curve is downward sloping and the supply curve is upward sloping. E) supply curve for halogen bulbs is vertical. Answer: C Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 37) Buyers will bear the entire burden of a unit tax if the demand curve for a product is A) horizontal. B) vertical. C) downward sloping. D) upward sloping. E) more elastic than supply curve. Answer: B Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills

38) Suppose the demand curve has a slope of -1 and the supply curve has a slope of +1. If a per unit tax is imposed in the market for this product, A) sellers bear the entire burden of the tax. B) the tax burden will be shared among the government, buyers, and sellers. C) buyers bear the entire burden of the tax. D) the tax burden will be shared by buyers and sellers. E) buyers will bear the most burden of the tax. Answer: D Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills Figure 4.22

39) Refer to Figure 4.22. Suppose the market is initially in equilibrium at price P1 and now the government imposes a tax on every unit sold. Which of the following statements best describes the impact of the tax? For demand curve D1, A) the producer bears a smaller share of the tax burden if the supply curve is S2. B) the producer bears a smaller share of the tax burden if the supply curve is S1. C) the producer's share of the tax burden is the same whether the supply curve is S1 or S2. D) the producer bears the entire burden of the tax if the supply curve is S2. E) the consumer bears the entire burden of the tax if the supply curve is S1. Answer: B Diff: 3 Type: MC Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills

Figure 4.23

40) Refer to Figure 4.23. Suppose the market is initially in equilibrium at price P1 and then the government imposes a tax on every unit sold. Which of the following statements best describes the impact of the tax? A) The consumer will bear a greater share of the tax burden if the demand curve is D1. B) The consumer's share of the tax burden is the same whether the demand curve is D1 or D2. C) The consumer will bear a greater share of the tax burden if the demand curve is D2. D) The consumer will bear the entire burden of the tax if the demand curve is D1. E) The producer will bear the entire burden of the tax if the demand curve is D2. Answer: C Diff: 2 Type: MC Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 41) Suppose an excise tax of $0.75 is imposed on every pack of cigarettes sold and sellers are responsible for paying this tax. How would the imposition of the tax be illustrated in a graph? A) The supply curve for cigarettes would shift to the left by $0.75. B) The supply curve for cigarettes would shift to the left by less than $0.75. C) The supply curve for cigarettes would shift to the left by more than $0.75. D) The supply curve for cigarettes would shift to the right by $0.75. E) The supply curve will shift to the left by $0.50 and demand curve will shift left by $0.25 because they both share the tax burden. Answer: A Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 117 Copyright © 2024 Pearson Canada Inc.

42) In Singapore the government places a $5,000 tax on the buyers of new automobiles. After the purchase of a new car, a buyer must pay the government $5,000. How would the imposition of the tax on buyers be illustrated in a graph? A) The tax will shift the demand curve to the right by $5,000. B) The tax will shift the demand curve to the left by $5,000. C) The tax will shift both the demand and supply curve to the right by $5,000. D) The tax will shift the supply curve to the left by $5,000. E) The tax will shift the demand curve to the left by less than $5000 because sellers and buyers share the tax burden. Answer: B Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills 43) The Employment Insurance (EI) program requires that workers pay 40% of the cost while employers are to pay the remaining 60%. If we consider EI premiums as a tax, the actual burden of EI premiums to workers is A) much less than 40%. B) exactly 0%. C) exactly 40%. D) much more than 40%. E) between 30% and 40%. Answer: D Diff: 2 Type: MC Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Special Feature: Apply the Concept: How Is the Burden of Employment Insurance Premiums Shared between Workers and Firms? 44) Employment Insurance premiums are withheld from workers' pay. An additional premium is paid by employers. Which of the following statements regarding Employment Insurance premiums is true? A) Employers are required to pay a greater share of the total premium than workers, but most economists believe the burden of the tax is shared equally. B) Parliament wanted the burden of the tax to be greater for employers than for workers. C) Most economists believe the burden of the tax falls almost entirely on workers. D) Most economists believe the burden of the tax falls mostly on employers. E) Workers pay only 20% of the total employment insurance premium. Answer: C Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Special Feature: Apply the Concept: How Is the Burden of Employment Insurance Premiums Shared between Workers and Firms?

45) Economists have shown that the burden of a sales tax is A) greater on the buyer when the tax is collected from the buyer. B) greater on the seller when the tax is collected from the seller. C) greater on the buyer when the tax is collected from the seller and greater on the seller when the tax is collected from the buyer. D) always greater on buyers than sellers because they are more vulnerable than sellers. E) the same whether the tax is collected from the buyer or the seller. Answer: E Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 46) An efficient tax is A) a tax that imposes an equal tax burden on buyers and sellers. B) a tax that raises a maximum amount of revenue. C) a tax that imposes a small excess burden relative to the tax revenue that it raises. D) a tax that is used to fund research and development of new technology. E) a tax that is imposed only on sellers. Answer: C Diff: 1 Type: MC Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 47) The division of the burden of a tax between buyers and sellers in a market is called tax incidence. Answer: TRUE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 48) A tax is efficient if it imposes a small excess burden relative to the tax revenue it raises. Answer: TRUE Diff: 1 Type: TF Topic: The Economic Impact of Taxes Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 49) For most goods and services, the burden of a tax is on the sellers. Answer: FALSE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking

50) If the demand curve for a product is vertical, any tax increase on the product is paid for entirely by the consumer. Answer: TRUE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 51) The incidence of a tax depends on whether the government collects the tax from buyers or sellers. Answer: FALSE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking 52) The excess burden of a tax is also known as a deadweight loss. Answer: TRUE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytical Thinking 53) In the market for gasoline, an increase in the federal excise tax on gasoline would shift the supply curve up. Answer: TRUE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytical Thinking 54) If buyers were required to pay the federal excise tax on gasoline directly to the government, the demand curve for gasoline would shift up. Answer: FALSE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytical Thinking

55) Employers withhold several taxes and fees from employees' paycheques, one of which is the Employment Insurance premium. The federal government requires employers to pay 60% of Employment Insurance premiums and workers to pay the other 40%. Does this mean that the burden of Employment Insurance premiums falls mostly on employers? Briefly explain. Answer: Most economists believe that even though employers are to pay 60% of total EI premiums, the burden of the program's fee falls almost entirely on employees. The forces of demand and supply working in the labour market determine the incidence of the tax, not Parliament, so even though the tax is paid mostly by employers, this does not mean that they end carrying most of the burden. Diff: 1 Type: SA Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking Special Feature: Apply the Concept: How Is the Burden of Employment Insurance Premiums Shared between Workers and Firms? 56) Is there a difference between the "true burden" of a tax and who is legally required to pay a tax? Briefly explain. Answer: There is a difference. The true burden of a tax refers to the tax incidence, or how much of a tax is ultimately paid by the sellers and how much is paid by the buyers. The incidence of a tax does not depend on whether the government collects a tax from the buyers of a good or from the sellers. Diff: 1 Type: SA Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Reflective Thinking

57) Using a supply and demand graph, illustrate the effect of an increase in the federal cigarette tax of $1.00 per pack, where the entire tax burden falls on the consumer. Assume the equilibrium price before the tax is $12.00 per pack and the equilibrium quantity is 30 million packs. After the implementation of the tax, what are the equilibrium price and equilibrium quantity? Answer:

After the implementation of the tax, the equilibrium price will be $13.00 and the equilibrium quantity will still be 30 million packs. Diff: 3 Type: ES Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills Special Feature: Solved Problem: When Do Consumers Pay All of a Sales Tax Increase?

Figure 4.24

58) Refer to Figure 4.24. The figure above represents demand and supply in the market for gum. Use the diagram to answer the following questions. a. How much is the government tax on each pack of gum? b. What portion of the unit tax is paid by consumers? c. What portion of the unit tax is paid by producers? d. What is the quantity sold after the imposition of the tax? e. What is the after-tax revenue per pack received by producers? f. What is the total tax revenue collected by the government? g. What is the value of the excess burden of the tax? h. Is this gum tax efficient? Answer: a. $1.25 b. Consumer burden = $1.00 c. Producer burden = $0.25 d. Quantity traded = 18 billion e. Net Price to seller = $1.25 f. Tax Revenue = $22.5 billion ($1.25 × 18 billion) g. Excess burden (deadweight loss) = $1.25 billion (1/2 × $1.25 × 2 billion) h. Yes, a tax is efficient if it imposes a small excess burden relative to the tax revenue it raises. Diff: 2 Type: ES Topic: Tax Incidence Learning Outcome: 4.4 Analyze the economic impact of taxes AACSB: Analytic Skills

Microeconomics, 4Ce (Hubbard) Chapter 5 Externalities, Environmental Policy, and Public Goods 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency 1) A carbon tax is an example of A) a tax on producers of cars to reduce the production of cars so that there is less pollution. B) a tax on all car buyers to reduce the purchase of cars to reduce the use of fuels that cause pollution. C) a tax on both buyers and sellers of cars to reduce the use of fuels that cause pollution. D) a government policy that enforce taxes on all home owners for the use of heating to reduce the use of fuels that cause pollution. E) a market-based policy that provides an economic incentive to reduce the use of fuels that cause CO2 emission. Answer: E Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking Special Feature: Chapter Opener: Ready or Not, Electric, Here We Come! 2) When the federal government orders firms to use direct regulations to reduce pollution, it is said to be using A) command-and-control policies. B) strong-arm tactics. C) global initiatives. D) market-based policies. E) rewards-based policies. Answer: A Diff: 1 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking Special Feature: Chapter Opener: Ready or Not, Electric, Here We Come!

3) Conceptually, the efficient level of carbon emissions is the level for which A) the marginal benefit of reducing carbon emissions is maximized. B) the marginal cost of reducing carbon emissions is minimized. C) the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissions. D) the marginal benefit of reducing carbon emissions is minimized and the marginal cost of reducing carbon emissions is maximized. E) total benefit of reducing carbon emissions is equal to the total cost of reducing carbon emissions. Answer: C Diff: 1 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking Special Feature: Economics in Your Life: What's the "Best" Level of Pollution? 4) An externality is A) a benefit realized by the purchaser of a good or service. B) a cost paid for by the producer of a good or service. C) a benefit or cost experienced by someone who is not a producer or consumer of a good or service. D) anything that is external or not relevant to the production of a good or service. E) related to the cost of production incurred for the purpose of exports. Answer: C Diff: 1 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 5) Which of the following is a source of market failure? A) unforeseen circumstances which lead to the bankruptcy of many firms B) a lack of government intervention in a market C) incomplete property rights or inability to enforce property rights D) an inequitable income distribution E) a lack of agreement between consumers and producers Answer: C Diff: 2 Type: MC Topic: Externalities and Market Failure Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

6) What is a market failure? A) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost. B) It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal private cost. C) It refers to a situation where an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event. D) It refers to a breakdown in a market economy because of widespread corruption in government. E) It refers to a situation where markets are unable to equate private cost and private benefits. Answer: A Diff: 1 Type: MC Topic: Externalities and Market Failure Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 7) What are property rights? A) the title to ownership of any physical asset B) a legal document verifying ownership of intangible assets C) the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it D) the right of the government to appropriate private assets for the good of society E) the rights of people to claim ownership of any property they want Answer: C Diff: 1 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 8) Which of the following activities creates a negative externality? A) cleaning up the sidewalk on your block B) graduating from college C) repainting the house you live in to improve its appearance D) keeping a junked car parked on your front lawn E) growing a nice garden on your front lawn Answer: D Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

9) A negative externality exists if A) there are price controls in a market. B) there are quantity controls in a market. C) the marginal social cost of producing a good or service exceeds the private cost. D) the marginal private cost of producing a good or service exceeds the social cost. E) there is unnecessary government intervention in a market. Answer: C Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 10) Which of the following represents the true economic cost of production when firms produce goods that cause negative externalities? A) the private cost of production B) the social cost of production C) the external cost of production D) the explicit cost of production E) the opportunity cost of production Answer: B Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 11) Private costs A) are borne by producers of a good, while social costs are borne by government. B) are borne by consumers of a good, while social costs are borne by government. C) are borne by producers of a good, while social costs are borne by society at large. D) are borne by producers of a good, while social costs are borne by those who cannot afford to purchase the good. E) are borne by producers of a good, while social costs are borne by consumers of the good. Answer: C Diff: 2 Type: MC Topic: Private Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

12) What is a "social cost" of production? A) the cost of the natural resources used up in production B) the total costs of producing a product, both implicit and explicit costs C) the sum of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product D) the cost of the environmental damage created by production E) the cost that governments have to pay for social programs Answer: C Diff: 2 Type: MC Topic: Social Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 13) If you burn your class notes in your dorm room at the end of the semester in spite of regulations against it, then you are A) acting economically irrationally and creating a social cost. B) avoiding the private costs associated with taking your notes to the recycling and creating a social cost. C) acting rationally and creating a positive externality. D) saving landfill space and creating a social benefit. E) incurring a private cost by creating a mess with burnt papers that you will have to clean. Answer: B Diff: 2 Type: MC Topic: Private Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 14) Which of the following is an example of a positive externality? A) banning the sale of candy in elementary schools B) planting trees along a sidewalk which add beauty and create shade C) forbidding the use of cell phones in public D) prohibiting street parking in all residential neighbourhoods E) organizing parties with your friends to enjoy loud music and drinks Answer: B Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

15) A positive externality causes A) the marginal social benefit to be equal to the marginal private cost of the last unit produced. B) the marginal social benefit to be less than the marginal private cost of the last unit produced. C) the marginal social benefit to exceed the marginal private cost of the last unit produced. D) the marginal private benefit to exceed the marginal social cost of the last unit produced. E) nothing in terms of marginal cost and marginal benefits because it is always good. Answer: C Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 16) When a negative externality exists, the private market produces A) more than the economically efficient output level. B) less than the economically efficient output level. C) products at a low opportunity cost. D) products at a high opportunity cost. E) products at a very high explicit cost. Answer: A Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 17) Mandatory motorcycle helmet laws are designed to reduce the severity of injuries resulting from motorcycle accidents which cost the health care system millions of dollars a year. In this sense, these mandatory helmet laws are reducing ________ of risky behaviour. A) positive externalities B) negative externalities C) the private benefit D) the social benefit E) private cost Answer: B Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

Figure 5.1

Figure 5.1 shows a market with an externality. The current market equilibrium output of Q1 is not the economically efficient output. The economically efficient output is Q2. 18) Refer to Figure 5.1. Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, the diagram shows A) the effect of a positive externality in the production of a good. B) the effect of a negative externality in the production of a good. C) the effect of an external cost imposed on a producer. D) the effect of an external benefit such as a subsidy granted to consumers of a good. E) the effect of a decrease in private cost on the production of good. Answer: B Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 19) Refer to Figure 5.1. If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does S1 represent? A) the market supply curve reflecting external cost B) the market supply curve reflecting implicit cost C) the market supply curve reflecting social cost D) the market supply curve reflecting private cost E) the market supply curve reflecting the explicit cost Answer: D Diff: 2 Type: MC Topic: Private Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 7 Copyright © 2024 Pearson Canada Inc.

20) Refer to Figure 5.1. If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does S2 represent? A) the market supply curve reflecting private cost B) the market supply curve reflecting social cost C) the market supply curve reflecting external cost D) the market supply curve reflecting implicit cost E) the market supply curve reflecting the explicit cost Answer: B Diff: 2 Type: MC Topic: Social Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills Figure 5.2

Figure 5.2 shows a market with a negative externality. 21) Refer to Figure 5.2. The efficient output level is A) Qa. B) Qb. C) Qb - Qd. D) Qd. E) Qa - Qd. Answer: A Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 8 Copyright © 2024 Pearson Canada Inc.

22) Refer to Figure 5.2. The private profit maximizing quantity for the firm is A) Qa. B) Qb. C) Qb - Qd. D) Qd. E) Qa - Qd. Answer: B Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 23) Refer to Figure 5.2. The deadweight loss due to the externality is represented by the area A) abc. B) abf. C) abd. D) ade. E) aeb. Answer: B Diff: 3 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 24) Refer to Figure 5.2. The size of marginal external costs can be determined by A) S2 + S1 at each output level. B) S2 - S1 at each output level. C) the supply curve S2. D) the supply curve S1. E) either the supply curve S1 or S2. Answer: B Diff: 3 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills

25) Refer to Figure 5.2. The marginal benefit of the last unit produced is represented by the price A) Pa. B) Pb. C) Pc. D) Pf. E) Pc and Pf. Answer: B Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 26) Refer to Figure 5.2. The true marginal cost of the last unit produced is represented by the price A) Pa. B) Pb. C) Pc. D) Pf. E) Pc and Pf. Answer: D Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 27) A market supply curve reflects the A) external costs of producing a good or service. B) external benefits of producing a good or service. C) social costs of producing a good or service. D) private costs of producing a good or service. E) private benefits of producing good or service. Answer: D Diff: 2 Type: MC Topic: Private Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

28) Which of the following conditions holds in an economically efficient competitive market equilibrium? A) The deadweight loss is positive but at a minimum. B) Producer and consumer surplus are exactly equal in size. C) There are no positive and no negative external effects from consumption and production. D) The marginal benefit of the last unit produced and consumed is maximized. E) Producer surplus is minimized and consumer surplus is maximized. Answer: C Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 29) A market demand curve reflects the A) private benefits of consuming a product. B) external benefits of consuming a product. C) social benefits of consuming a product. D) sum of private and social benefits of consuming a product. E) difference between private and social benefits of consuming a product. Answer: A Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

Figure 5.3

30) Refer to Figure 5.3. The efficient output level is A) Qm. B) Qn. C) Qo. D) Qo - Qm. E) Qn - Qm. Answer: B Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 31) Refer to Figure 5.3. The privately optimal output level is A) Qm. B) Qn. C) Qo. D) Qo - Qm. E) Qn - Qm. Answer: A Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills

32) Refer to Figure 5.3. The size of marginal external benefits can be determined by A) the demand curve D2. B) D2 + D1 at each output level. C) D2 - D1 at each output level. D) the demand curve D1. E) either by D1 or by D2. Answer: C Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 33) Refer to Figure 5.3. In the absence of any government intervention, the private market A) underproduces by Qo - Qm units. B) overproduces by Qo - Qm units. C) overproduces by Qn - Qm units. D) underproduces by Qn - Qm units. E) can easily reach the optimum equilibrium. Answer: D Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 34) Refer to Figure 5.3. The deadweight loss due to the externality is represented by the area A) mso. B) msn. C) nso. D) mtn. E) tns. Answer: B Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills

35) Refer to Figure 5.3. At the competitive market equilibrium, for the last unit produced, A) the size of the external cost is Pm - Po. B) the size of the external benefit is Pm - Po. C) the size of the external cost is Pn - Po. D) the size of the external benefit is Pn - Po. E) the size of the external benefit is Pn - Pm. Answer: B Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 36) An externality refers to economic events outside a market. Answer: FALSE Diff: 1 Type: TF Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 37) The private cost of a good or service is the cost borne by the producer. Answer: TRUE Diff: 2 Type: TF Topic: Private Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 38) A market failure arises when an entire sector of the economy (for example, the airline industry) collapses because of some unforeseen event. Answer: FALSE Diff: 1 Type: TF Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 39) When there is a positive externality in a free market, too much of the good is produced and consumed. Answer: FALSE Diff: 2 Type: TF Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

40) When there is a negative externality, the competitive output is more than the economically efficient output level. Answer: TRUE Diff: 2 Type: TF Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 41) What is an externality? Answer: An externality is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. Diff: 2 Type: SA Topic: Externalities Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 42) Explain briefly the costs and benefits associated with command-and-control policies. Answer: The benefit of command-and-control policies is that these policies lead towards an adoption of a known technology and are relatively easy to enforce (counting electric cars is straightforward). The cost is that these regulations are often expensive, rigid, and slow to adapt. Diff: 2 Type: SA Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking Special Feature: Chapter Opener: Ready or Not, Electric, Here We Come! 43) What is a private cost of production? What is a social cost of production? When is the private cost of production equal to the social cost of production? Answer: Private cost of production is the cost borne by the producer of a good or service. Social cost of production is the total cost of producing a good or service, including both the private cost and any external cost. The private cost and the social cost are equal when no externalities exist. Diff: 2 Type: SA Topic: Private Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

44) How does a negative externality in production reduce economic efficiency? Answer: If there is a negative externality in production, consumers not directly involved in the consumption of the product pay some of the external cost of producing the product. Since the producer does not bear the entire cost of production, the producer's marginal cost of production (the supply) is reduced. This encourages the producer to produce more of the product, leading to a market equilibrium which is greater than the efficient equilibrium and resulting in a deadweight loss. Diff: 2 Type: SA Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 45) Explain how mandatory bicycle helmet laws may reduce the negative externalities of risky behaviour. Answer: Mandatory bicycle helmet laws are designed to reduce the severity of injuries resulting from traffic and other accidents. By requiring all cyclists to wear helmets, the chances of serious injury are smaller, even when other motorist and/or cyclists engage in risky behaviour like speeding or reckless driving. Diff: 2 Type: SA Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 46) An externality A) is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. B) enhances market efficiency. C) is a private cost or benefit that results from the production or consumption of a good or service that is external to a market. D) refers to production or consumption that occurs outdoors. E) refers to cost of production that occurs while producing goods to be exported. Answer: A Diff: 1 Type: MC Topic: Externalities Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

47) Pollution is an example of a A) public good. B) positive externality. C) private cost. D) negative externality. E) common resource. Answer: D Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 48) Which of the following would result in a positive externality? A) A local government establishes a price ceiling on rental apartments. B) An electric utility burns coal that causes acid rain. C) Medical research results in a cure for malaria. D) McDonald's adds new fat-free items to its menu. E) Grocery stores start selling alcohol for consumers' convenience. Answer: C Diff: 1 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 49) A positive externality results when A) economists are sure that a good or service provides benefits to consumers. B) someone pays for a good or service even though she is not directly affected by the production or consumption of it. C) people who live in one country benefit from the production of a good or service that occurs in another country. D) people who are not directly involved in producing or paying for a good or service benefit from it. E) people gain more benefit by engaging in free trade. Answer: D Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

50) Which of the following describes how a negative externality affects a competitive market? A) The externality causes a difference between the private cost of production and the social cost. B) The externality causes a difference between the private cost of production and the private benefit from consumption. C) The externality causes consumer surplus to exceed producer surplus. D) The externality causes a difference between the private cost of production and the equilibrium price. E) The externality causes consumers to gain at the expense of producers. Answer: A Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 51) A free market fails when A) there is government intervention. B) there is an external effect in either production, consumption, or both. C) firms that produce goods that create positive externalities go bankrupt. D) firms that produce goods that create negative externalities earn high profits. E) there are too many buyers that sellers fail to satisfy their needs. Answer: B Diff: 1 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 52) Which of the following could be evidence of a market failure? A) Resources in an economy are not fully utilized. B) The market price of a product is above the average cost of production. C) There are only a handful of firms competing against each other in an industry. D) Market prices do not reflect true production costs. E) There are no externalities in the market. Answer: D Diff: 2 Type: MC Topic: Externalities and Market Failure Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

53) The level of pollution that maximizes the benefits for society is A) zero. B) the level associated with the market equilibrium. C) the level at which marginal benefits are equal to the marginal cost. D) the current level. E) the level that the government chooses for the society. Answer: C Diff: 2 Type: MC Topic: Cap-and-Trade Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking Special Feature: Economics in Your Life: What's the "Best" Level of Pollution? 54) Which of the following describes how a positive externality affects a competitive market? A) The externality causes a difference between the private benefit from consumption and the social benefit. B) The externality causes a difference between the private benefit from production and the social cost of production. C) The externality causes quantity demanded to exceed quantity supplied. D) The externality causes a difference between the social cost of production and the social cost of consumption. E) The externality causes a difference between private cost and private benefits. Answer: A Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 55) "A competitive market achieves economic efficiency by maximizing the sum of consumer surplus and producer surplus." This statement A) is true only if there are positive externalities in production in the market. B) is true only if there are no negative externalities in the market. C) is true only if there are no positive or negative externalities in the market. D) is true in theory, but economic efficiency cannot be achieved in a real market. E) is true only if there are no positive externalities in production in the market. Answer: C Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

56) If there are no externalities, a competitive market achieves economic efficiency. If there is a negative externality, economic efficiency will not be achieved because A) too little of the good will be produced. B) too much of the good will be produced. C) a deadweight loss will occur that is equal to the area under the demand curve for the good. D) economic surplus is maximized. E) consumers surplus is maximized. Answer: B Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 57) When there is a negative externality, the private cost of production ________ the social cost of production. A) is greater than B) is equal to C) eliminates D) is less than E) becomes Answer: D Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 58) When there is a positive externality, A) the private benefit received by consumers is greater than the external benefit. B) the social benefit received by consumers is greater than the private benefit. C) the private benefit received by consumers is greater than the private cost. D) the private benefit received by consumers is greater than the social benefit. E) the social cost is greater than private benefits received by consumers. Answer: B Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

59) When production generates a negative externality, the true cost of production is the A) private cost of production. B) public cost of production. C) social cost of production. D) average cost of production. E) opportunity cost of production. Answer: C Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 60) If the social cost of producing a good or service exceeds the private cost, A) a positive externality exists. B) the sum of consumer surplus and producer surplus is maximized. C) the market achieves economic efficiency. D) a negative externality exists. E) a government intervention exists. Answer: D Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 61) The cost borne by a producer in the production of a good or service is called A) private cost. B) public cost. C) social cost. D) internal cost. E) external cost. Answer: A Diff: 1 Type: MC Topic: Private Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

62) If the marginal social benefit of consuming a good or a service exceeds the marginal private benefit, A) a negative externality exists. B) the market achieves economic efficiency. C) a positive externality exists. D) the sum of consumer surplus and producer surplus is maximized. E) market is in equilibrium. Answer: C Diff: 1 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 63) An external cost is created when you A) graduate from college. B) buy flowers for your mother on Mother's Day. C) litter on the side of the road. D) buy a sandwich for lunch. E) buy lunch for a friend. Answer: C Diff: 1 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 64) When there is an externality in a market, A) the externality will move the market to an economically efficient equilibrium. B) the externality will cause the market price to be less than or greater than the equilibrium price. C) the government should use price controls to enable the market to reach equilibrium. D) government intervention may increase economic efficiency. E) supply and demand forces will bring the market to the equilibrium. Answer: D Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

65) The social cost of cutting trees for firewood in a government forest is A) the increased likelihood of flooding as more trees are cut. B) the increased likelihood of flooding as more trees are cut and the private cost of cutting the trees. C) the opportunity cost to the individual of cutting the wood. D) the marginal costs of cutting the last tree. E) a private cost to individuals who need it for fuel. Answer: B Diff: 2 Type: MC Topic: Social Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 66) Assume that emissions from electric utilities contribute to pollution in the form of acid rain. Which of the following describes how this affects the market for electricity? A) The equilibrium in the market is not efficient; the marginal benefit from electricity is greater than the marginal social cost. B) A deadweight loss occurs; at equilibrium the additional social cost of production is greater than the additional benefit to consumers. C) The equilibrium in the market is not efficient; because of the cost of the acid rain, economic efficiency would be greater if more electricity were produced. D) The equilibrium in the market is not efficient; consumer surplus is equal to producer surplus. E) The equilibrium in the market is not efficient; consumer surplus is less than producer surplus. Answer: B Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 67) Medical research that ends in a cure for a serious disease produces positive externalities. What is the impact of this positive externality on economic efficiency? A) At equilibrium, less than the economically efficient quantity of medical research is produced. B) A deadweight loss occurs because at equilibrium the marginal social cost of medical research is greater than the marginal social benefit. C) At equilibrium, more than the economically efficient quantity of medical research is produced. D) A deadweight loss occurs because at equilibrium the marginal social cost equals the marginal social benefit. E) Economic efficiency is still achieved because the research found a cure for a serious disease. Answer: A Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

Figure 5.4

Suppose there are several paper mills producing paper for a market. These mills, located upstream from a fishing village, discharge a large amount of wastewater into the river. The waste material affects the number of fish in the river, and the use of the river for recreation and as a public water supply source. Figure 5.4 shows the paper market. Use the figure to answer the following question(s). 68) Refer to Figure 5.4. What does S1 represent? A) the market supply curve that reflects social cost B) the market supply curve that reflects only external cost C) the market supply curve that reflects only private benefit D) the market supply curve that reflects private cost E) the market supply curve that reflects explicit cost Answer: D Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 69) Refer to Figure 5.4. What does S2 represent? A) the market supply curve that reflects social cost B) the market supply curve that reflect private cost C) the market supply curve that reflects external cost D) the market supply curve that reflects social benefit E) the market supply curve that reflects private benefit Answer: A Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 24 Copyright © 2024 Pearson Canada Inc.

70) Refer to Figure 5.4. What is the economically efficient output level? A) Q1 B) Q2 minus Q1 C) Q2 D) Q1 plus Q2 E) None of these. Answer: C Diff: 1 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 71) Refer to Figure 5.4. What is the deadweight loss from producing at the market equilibrium? A) area C B) area E C) area D D) area F E) area D and F Answer: B Diff: 2 Type: MC Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 72) Refer to Figure 5.4. Why is there a deadweight loss? A) because the marginal social cost of producing each additional unit in excess of Q2 exceeds the marginal benefit B) because the marginal private cost of producing each additional unit in excess of Q2 exceeds the marginal benefit C) because the marginal social benefit of producing each additional unit in excess of Q2 exceeds the private cost D) because the marginal private benefit of producing each additional unit in excess of Q2 exceeds the social cost E) because the marginal private benefit of producing each additional unit in excess of Q2 is less than social cost Answer: A Diff: 3 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

73) Refer to Figure 5.4. The socially optimal value of tax in this situation would be A) - . B)

C) area C + area D. D) . E)

Answer: A Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills Figure 5.5

Figure 5.5 shows a market with an externality. The current market equilibrium output of Q1 is not the economically efficient output. The economically efficient output is Q2. 74) Refer to Figure 5.5. Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, diagram shows A) the effect of a subsidy granted to producers of a good. B) the effect of excess demand in a market. C) the effect of a positive externality in the consumption of a good. D) the effect of a negative externality in the consumption of a good. E) the effect of a negative externality due to production of a good. Answer: C Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 26 Copyright © 2024 Pearson Canada Inc.

75) Refer to Figure 5.5. If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does D1 represent? A) the demand curve reflecting external benefits B) the demand curve reflecting social benefits C) the demand curve reflecting private benefits D) the demand curve reflecting the sum of private and social benefits E) the demand curve reflecting private benefit equals private cost Answer: C Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 76) Refer to Figure 5.5. If, because of an externality, the economically efficient output is Q2 and not the current equilibrium output of Q1, what does D2 represent? A) the demand curve reflecting external benefits B) the demand curve reflecting social benefits C) the demand curve reflecting private benefits D) the demand curve reflecting the sum of social and external benefits E) the demand curve reflecting implicit benefits Answer: B Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills

Figure 5.6

Figure 5.6 shows the market for measles vaccinations, a product that generates positive externalities. 77) Refer to Figure 5.6. What does D1 represent? A) the demand curve reflecting social benefit B) the positive externalities curve C) the demand curve reflecting private benefit D) the social welfare curve E) the social cost curve Answer: C Diff: 1 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 78) Refer to Figure 5.6. What is the economically efficient output level? A) Q1 B) Q1 + Q2 C) Q2 - Q1 D) Q2 E) None of these is efficient. Answer: D Diff: 1 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 28 Copyright © 2024 Pearson Canada Inc.

79) Refer to Figure 5.6. What does D2 represent? A) the social welfare curve B) the demand curve reflecting social benefit C) the demand curve reflecting private benefit D) the positive externalities curve E) the curve reflecting the willingness to pay Answer: B Diff: 1 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 80) Refer to Figure 5.6. What is the market equilibrium output level? A) Q1 B) Q2 C) Q1 + Q2 D) Q2 - Q1 E) Both Q1 and Q2 Answer: A Diff: 1 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 81) Refer to Figure 5.6. What is the deadweight loss resulting from producing at the market equilibrium? A) B + C B) E + C C) F D) C E) F + C Answer: B Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills

82) Refer to Figure 5.6. Why is there a deadweight loss? A) because the marginal private benefit for each additional unit between Q1 and Q2 exceeds the marginal cost B) because the marginal private cost for each additional unit between Q1 and Q2 exceeds the marginal private benefit C) because the marginal social cost for each additional unit between Q1 and Q2 exceeds the marginal social benefit D) because the marginal social benefit for each additional unit between Q1 and Q2 is less than the marginal cost E) because the marginal social benefit for each additional unit between Q1 and Q2 exceeds the marginal cost Answer: E Diff: 3 Type: MC Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Analytic Skills 83) The social cost of a good or service is the cost borne by the producer. Answer: FALSE Diff: 2 Type: TF Topic: Social Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 84) An externality is an example of a market failure. Answer: TRUE Diff: 1 Type: TF Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 85) When products that create positive externalities are produced, at the market equilibrium output, the social benefit generated by consuming the product exceeds the private benefit. Answer: TRUE Diff: 2 Type: TF Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

86) An external benefit is created when you pursue a college education. Answer: TRUE Diff: 1 Type: TF Topic: Externalities and Economic Efficiency Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 87) When negative externalities exist, the competitive market supply curve does not include all of the costs borne by members of society. Answer: TRUE Diff: 1 Type: TF Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 88) What is a private benefit from consumption? What is a social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption? Answer: Private benefit from consumption is the benefit received from the consumer of a good or service. Social benefit from consumption is the total benefit from consuming a good or service, including both the private benefit and any external benefit. The private benefit and the social benefit are equal when no externalities exist. Diff: 2 Type: SA Topic: Private Cost Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking 89) A negative externality is an example of market failure. The root of the problem lies in the definition and enforcement of property rights. Explain. Answer: If harmed parties do not have rights or have rights that are not enforced or weakly enforced, producers can make choices that impose costs on others and do not have to bear the full cost of their actions. This creates a discrepancy between the private cost of production and the social cost of production, the true cost of production being the social cost. Since the private cost is less than the social cost, firms will produce more than the economically efficient output level, resulting in a market failure. (Students can also explain using positive externalities.) Diff: 3 Type: ES Topic: Negative Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

90) How does a positive externality in consumption reduce economic efficiency? Answer: If there is a positive externality in consumption, people not directly involved in the consumption of the product capture some of the external benefits of the product being consumed. Since the consumer does not reap the entire benefit of consumption, the consumer's marginal benefit of consumption (the demand) is reduced. This results in the consumer consuming less of the product, leading to a market equilibrium that is less than the efficient equilibrium and resulting in a deadweight loss. Diff: 2 Type: ES Topic: Positive Externality Learning Outcome: 5.1 Identify examples of positive and negative externalities and use graphs to show how externalities affect economic efficiency AACSB: Reflective Thinking

5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality 1) In economics, the optimal level of pollution is A) zero. B) the level for which the total benefit from reducing the pollution is the greatest. C) the level for which the marginal benefit from reducing the pollution is the greatest. D) the level for which the net total benefit from reducing the pollution is the greatest. E) the level for which the total benefit is less than total cost of reducing. Answer: D Diff: 2 Type: MC Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That It's the Net Benefit That Counts 2) Economists argue that the level of pollution should be A) reduced completely to zero because by definition, it is a negative external effect. B) ignored because it has always been present since the beginning of history. C) reduced to the point where the marginal benefit of pollution reduction is equal to the marginal cost of pollution reduction to society. D) best determined by elected officials who can speak on behalf of the public. E) globally set to be reduced to zero so that everyone can enjoy a healthier life. Answer: C Diff: 2 Type: MC Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking

3) Because producers do not bear the external cost of pollution, A) the economically efficient level of production is achieved. B) private production is below the economically efficient level. C) private production exceeds the economically efficient level. D) the market price is too high. E) they are more generous to keep the prices at efficient level. Answer: C Diff: 2 Type: MC Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 4) If pollution is created when producing a product, then the market equilibrium price A) is too high and equilibrium quantity is too low. B) and equilibrium quantity are too low. C) and equilibrium quantity are too high. D) is too low and equilibrium quantity is too high. E) is exactly where it should be to reach the efficient equilibrium. Answer: D Diff: 2 Type: MC Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 5) Why was the Montreal Protocol necessary to reduce the use of chlorofluorocarbons (CFC) which damage the ozone layer and increase cases of skin cancer? A) The people getting skin cancer weren't necessarily the same people who decided to use CFCs. B) No one understood the ozone layer prior to the Montreal Protocol. C) The benefits of using CFCs outweighed the cost of increased cases of skin cancer. D) CFCs are an example of a positive externality. E) Montreal Protocol has nothing to do with the ozone layer. Answer: A Diff: 2 Type: MC Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Apply the Concept: The Montreal Protocol: Reducing Your Chances of Getting Skin Cancer

Figure 5.7

6) Refer to Figure 5.7. The marginal cost of reducing pollution curve is the same curve as A) the supply of pollution reduction curve. B) the demand for pollution reduction curve. C) the negative externality curve. D) the value of pollution reduction curve. E) the welfare cost curve. Answer: A Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills 7) Refer to Figure 5.7. The marginal benefit of reducing pollution curve is the same curve as A) the supply of pollution reduction curve. B) the demand for pollution reduction curve. C) the positive externality curve. D) the external benefit curve. E) the social welfare curve. Answer: B Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills

8) Refer to Figure 5.7. What is the incremental cost of increasing the quantity of pollution reduction from QB to QE units? A) PE B) the value of the area QBBEQE C) PE × QE D) the value of the area BEF E) the value of the area QB × QE Answer: B Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills 9) Refer to Figure 5.7. What is the incremental benefit of increasing the quantity of pollution reduction from QB to QE units? A) PF B) PF × QE C) the value of the area BEF D) the value of the area QBBFQE E) the value of the area QB × QE Answer: D Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills 10) Refer to Figure 5.7. Which of the following statements is true? A) At QE the benefits of reducing pollution outweighs the cost of pollution reduction. B) At QB society is under allocating resources to pollution reduction. C) The optimal quantity of pollution reduction is QB. D) The optimal quantity of pollution reduction is QE. E) The optimal quantity of pollution reduction is QE - QB. Answer: C Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills

11) The Coase theorem states that A) government intervention is always needed if externalities are present. B) assigning property rights is the only thing the government should do in a market economy. C) if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities. D) a free market equilibrium is the best solution to address externalities. E) there is no solution except charging heavy penalties to reduce negative externalities. Answer: C Diff: 2 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 12) Why is it unlikely that private solutions to the externalities associated with carbon dioxide emissions will be found? A) Property rights over air are poorly defined and transactions costs are high. B) Transactions costs in negotiating agreements between consumers and producers are low. C) All parties have full and accurate information about the causes and costs of climate change. D) Private solutions cannot be applied to government utilities. E) Private solutions cannot be applied to public goods. Answer: A Diff: 2 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 13) According to ________, in a market with an externality, private parties would voluntarily negotiate an efficient outcome without government intervention. A) A. C. Pigou B) Adam Smith C) Ronald Coase D) John Maynard Keynes E) Robert Lucas Answer: C Diff: 1 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking

14) Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain, then, according to the Coase theorem, A) an equitable solution can be reached only if property rights are assigned to the victims of pollution and not the polluters. B) an equitable solution can be reached only if property rights are assigned to polluters and not to the victims of pollution. C) an efficient solution can be reached regardless of the initial assignment of property rights. D) government intervention is necessary to reach an efficient and equitable solution. E) an efficient solution can never be reached because of the initial assignment of property rights. Answer: C Diff: 3 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 15) If the paint on your house was eaten away by the fumes from a factory nearby and you hired a lawyer to sue the polluting firm, your legal fees would be considered A) external costs. B) transaction costs. C) marginal benefits. D) social costs of the pollution. E) private costs. Answer: B Diff: 1 Type: MC Topic: Transactions Costs Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 16) Consider a situation in which a utility company emits high levels of sulfur dioxide and the company is not liable for the damages its pollution causes. According to the Coase theorem, government action is ________ to achieve an ________ amount of pollution. A) necessary; equitable B) necessary; efficient C) not necessary; equitable D) not necessary; efficient E) not necessary; equilibrium Answer: D Diff: 2 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking

17) Consider the following characteristics: a. low transaction costs b. small levels of pollution c. high levels of pollution d. clear assignment of property rights. Which of the above are assumptions behind the Coase Theorem? A) a, b, and d B) a, c, and d C) d only D) a only E) a and d Answer: E Diff: 2 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 18) Which of the following must be present to reach a private solution to an externality problem? A) A majority of the parties affected by the externality must agree to a solution. B) The transaction costs to negotiate a solution must be relatively low. C) The total number of people, creators of the problem and those affected, must be relatively large to justify negotiating a solution. D) The government must approve the solution for it to be a legal solution. E) The matter should be put before a court of law to reach a mutually agreeable solution. Answer: B Diff: 2 Type: MC Topic: Transactions Costs Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking

19) In the city of Alvarez, with the exception of guide dogs for blind people, all dogs are banned from its three public parks, regardless of whether the animals are leashed. Many residents are pushing for a change in policy. Canine lover Sara Northridge observed, "There are 800 or more homes here. There are three parks within 10 minutes, and almost everyone has a dog, but we can't take our dogs there." Others fear that allowing dogs would detract from their enjoyment of the parks. Tim Cortis retorted, "We're not preventing dog lovers from enjoying the park, just come without your dog." Which of the following is a way of dealing with the problem by assigning property rights to a particular group? A) Impose a two-tier entry fee system — a lower fee for non-dog owners and a higher fee for dog owners. B) Impose a fee only for dog owners to use the public parks; non-dog owners do not pay a fee. C) Dog owners should let their dogs play at their backyards and take turns with it. D) Allow dog owners to bring their dogs to the park but insist that they keep watch over their dogs. E) Dedicate some parks, or at least one park, exclusively for the use of visitors bringing dogs to the park. Answer: E Diff: 2 Type: MC Topic: Command and Control Approach Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 20) The Montreal Protocol and later agreements are expected to result in 60 million fewer cases of skin cancer in 2020 due to lower chlorofluorocarbon (CFC) levels in the atmosphere, than would have been the case without these agreements. Why was agreement on the Montreal Protocol possible in 1987 while agreement on reducing the level of carbon dioxide has been all but impossible? A) The cost of pollution abatement today is much higher than it was in the 1980s. Thus, it would be far more costly to achieve the same level of pollution reduction now than it was in 1987. B) The costs of reducing CFC emissions to efficient levels was higher than the cost of reducing carbon dioxide emissions to efficient levels. C) Carbon dioxide levels are not very high in most Canadian cities. D) It is better to tackle one problem rather than two. E) The costs of reducing CFC emissions to efficient levels was lower than the cost of reducing carbon dioxide emissions to efficient levels. Answer: E Diff: 2 Type: MC Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Apply the Concept: The Montreal Protocol: Reducing Your Chances of Getting Skin Cancer

21) James Meade, who won the Nobel Prize in Economics in 1977, argued that positive externalities resulted from A) reducing emissions of sulfur dioxide. B) producing automobiles and automobile tires. C) home owners in the Northeast moving to the South and Southwest United States. D) apple growing and beekeeping. E) raising cattle to use for meat. Answer: D Diff: 1 Type: MC Topic: Positive Externality Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Apply the Concept: The Fable of the Bees 22) In Canada, beekeepers can travel within and sometimes between provinces renting out their bee colonies to farmers for pollination services. This is an example of A) a Coasian solution to a positive externality problem. B) a Pigovian solution to a positive externality problem. C) a tradable exchange contract. D) command and control policy. E) tradeable permits to solve the problem of externality. Answer: A Diff: 2 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Apply the Concept: The Fable of the Bees 23) In economics, the optimal level of pollution is the level for which the net benefit from reducing the pollution is the greatest. Answer: TRUE Diff: 2 Type: TF Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 24) If pollution is created when producing a product, then the market equilibrium price is too high and equilibrium quantity is too low. Answer: FALSE Diff: 2 Type: TF Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking

25) For the Coase theorem to work, there must be clear assignment of property rights. Answer: TRUE Diff: 2 Type: TF Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 26) State the Coase theorem. Answer: The Coase theorem states that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities, regardless of initial assignment of property rights. Diff: 2 Type: SA Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 27) Should the level of pollution be reduced to zero and if not, then to what level? Answer: No, the level of pollution should not be reduced to zero because the benefits reaped from greater and greater amounts of pollution reduction may not justify the cost of those incremental cleanups. Pollution should be reduced up to the point where the marginal benefit of pollution reduction equals to the marginal cost of pollution reduction. Diff: 3 Type: SA Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills 28) The Fairmount Banff Springs Hotel has a spectacular view of the Rocky Mountains. Suppose a commercial logger has purchased the logging rights to the area and is planning to clear-cut the forest in a way that will have a negative impact on the resort. Can the two parties arrive at a Coasian solution and if so what is it? Answer: In this case, since there are only two parties involved, private bargaining and well defined property rights can bring about an efficient outcome. For example, the resort-owner could pay the logger not to clear-cut the forest or could buy the forest from its owner. Diff: 2 Type: SA Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills

29) Ronald Coase was awarded the 1991 Nobel Prize in Economics primarily for addressing problems related to externalities. Which of the following describes Coase's work? A) Coase argued that government intervention is necessary to achieve economic efficiency in markets that are affected by externalities. B) Coase proved that economic efficiency cannot be achieved in a market that is affected by positive or negative externalities. C) Coase argued that private solutions to the problems of externalities can never work. D) Coase proved that a competitive market achieved a greater degree of economic efficiency than a noncompetitive market when externalities occur. E) Coase argued that under some circumstances, private solutions to the problems of externalities can be found. Answer: E Diff: 2 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 30) Which of the following statements describes the Coase Theorem? A) It is not possible to completely eliminate an externality. B) Under some circumstances, private solutions to the problems that result from externalities can be found. C) Completely eliminating an externality is not economically efficient. D) A negative externality occurs when the marginal social cost of production exceeds the social benefit. E) Negative externalities will always be present even at the equilibrium. Answer: B Diff: 1 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 31) The Montreal protocol is an agreement between countries designed to A) reduce the use of chemicals that deplete the ozone layer. B) reduce emissions of greenhouse gases. C) reduce emissions of mercury from coal fired power plants. D) reduce the use the insecticide DDT. E) reduce the use of pesticides. Answer: A Diff: 1 Type: MC Topic: Externalities Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Apply the Concept: The Montreal Protocol: Reducing Your Chances of Getting Skin Cancer

32) After the Montreal protocol (and its follow-ups), the emissions of CFCs A) have continued to grow. B) fell immediately. C) grew, but more slowly than before. D) initially grew and then began to fall. E) eliminated completely. Answer: D Diff: 2 Type: MC Topic: Externalities and Economic Efficiency Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Apply the Concept: The Montreal Protocol: Reducing Your Chances of Getting Skin Cancer 33) If electric utilities continually reduce their emissions of sulfur dioxide, A) the utilities will eventually be forced to go out of business. B) the marginal benefit of additional emissions will rise. C) the marginal cost of further emissions will rise. D) the total benefit of sulfur dioxide emissions will fall. E) the total benefit of reducing sulfur dioxide emission will rise more than its cost. Answer: C Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 34) If the marginal benefit of reducing emissions of some air pollutant is greater than the marginal cost, A) further reductions will make society worse off. B) the marginal benefit will rise and the marginal cost will fall as further reductions are made. C) economic efficiency will be achieved when emissions are reduced to zero. D) private businesses, rather the consumers, should be made to pay for the cost of further reductions. E) further reductions will make society better off. Answer: E Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking

35) If the marginal benefit of reducing emissions of some air pollutant is less than the marginal cost, A) further reductions will make society better off. B) further reduction will make society worse off. C) pollution taxes should be imposed on producers to pay for further reductions. D) economic efficiency will be increased if further reductions are made. E) the overall surplus will increase with further reduction of pollutants. Answer: B Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 36) According to Steven Cheung: "Pollination contracts usually include stipulations regarding the number and strength of ...[bee] colonies, the rental fee per hive, the time of delivery...the protection of bees from pesticides, and the strategic placing of hives." Cheung cites this as evidence that A) the high costs of writing and enforcing complicated written agreements between owners of beehives and apple orchards prevents economic efficiency from being achieved in these markets. B) without government's financial and material support, efficient number of apple trees and beehives can never be reached. C) government regulation of contracts between owners of beehives and apple orchards is necessary to bring about an economically efficient number of apple trees and beehives. D) the beekeeping and apple growing businesses have become more complicated and costly over time due to the legal costs involved. E) government intervention is not always necessary to bring about an economically efficient number of apple trees and beehives. Answer: E Diff: 2 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Apply the Concept: The Fable of the Bees

37) Steven Cheung examined the relationship between beekeepers and apple growers. Cheung noted that: "Pollination contracts usually include stipulations regarding the number and strength of ... [bee] colonies, the rental fee per hive, the time of delivery...the protection of bees from pesticides, and the strategic placing of hives." Cheung's suggests that the relationship between beekeepers and apple growers is an example of A) the Coase Theorem. B) how excessive legal costs can prevent economic efficiency from being achieved. C) negative externalities. D) government intervention improving economic efficiency. E) a coordination of work. Answer: A Diff: 3 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Apply the Concept: The Fable of the Bees 38) Which of the following statements about the economically efficient level of air pollution is correct? A) The economically efficient level of pollution is zero. B) The economically efficient level of pollution occurs where all social costs equal all social benefits. C) The economically efficient level of pollution occurs where the marginal cost of pollution reduction equals the marginal social benefit of reduction. D) The economically efficient level of pollution occurs where total benefits of pollution reduction are maximized. E) The economically efficient level of pollution occurs where total cost of pollution reduction are zero. Answer: C Diff: 2 Type: MC Topic: The Optimal Level of Pollution Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 39) The costs in time and other resources that parties incur in the process of facilitating an exchange of goods and services are called A) enforcement costs. B) implicit costs. C) explicit costs. D) transaction costs. E) transportation costs. Answer: D Diff: 1 Type: MC Topic: Transactions Costs Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking

40) Private solutions to the problem of externalities are most likely when A) government actively encourages these solutions. B) transaction costs are low and the number of bargaining parties is small. C) transaction costs are low and the number of bargaining parties is large. D) transaction costs are low and the monetary damages to third parties is high. E) transactions costs are high and the number of bargaining parties is large to share the huge costs. Answer: B Diff: 2 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 41) Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter. If those harmed by the pollution were found not have the right to avoid damages (say the smelter was there first) the amount of pollution reduction A) would be significantly less than if the owners of the smelter were legally liable for damages. B) would be less than the amount at which the marginal benefit of pollution reduction equaled the marginal cost. C) would be the same as if it would be if the owners of the smelter were legally liable. D) would be too small; the government would have to intervene to bring about an efficient outcome. E) would be significantly lower than required to reach efficient level of outcome. Answer: C Diff: 3 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking

42) Compare two situations. (A) A firm is not legally responsible for damages that result from air pollution caused by its production of steel. (B) A firm is legally responsible for damages that result from its production of steel. Ronald Coase argued that A) bargaining between the firm and the victims of the air pollution caused by the firm will result in little reduction of pollution in either situation (A) or (B) because the firm has greater economic and political power than the victims. B) bargaining between the firm and the victims of the air pollution caused by the firm would lead to a greater reduction in pollution in situation (A) than situation (B). C) bargaining between the firm and the victims of the air pollution caused by the firm would lead to a smaller reduction in pollution in situation (A) than situation (B). D) bargaining between the firm and the victims of the air pollution caused by the firm would lead to an equal reduction in pollution in situation (A) and situation (B). E) bargaining between the firm and the victims of the air pollution caused by the firm would lead to no reduction in pollution in situation (A) and situation (B). Answer: D Diff: 3 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking

Figure 5.8

Consider a chemical plant that discharges toxic fumes over a nearby community. To reduce the emissions of toxic fumes, the firm can install pollution abatement devices. Figure 5.8 shows the marginal benefit and the marginal cost from reducing the toxic emissions. 43) Refer to Figure 5.8. What is the economically efficient level of pollution reduction? A) 12.5 million tons B) 11 million tons C) 9 million tons D) 8 million tons E) 0 tons Answer: C Diff: 1 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 44) Refer to Figure 5.8. Suppose the emissions reduction target is currently established at 8 million tons. What is the area that represents the cost of eliminating an additional 1 million tons? A) A B) B C) A + B D) A + C E) A + B + C Answer: A Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills 48 Copyright © 2024 Pearson Canada Inc.

45) Refer to Figure 5.8. Suppose the emissions reduction target is currently established at 8 million tons. Should society undertake to reduce an additional 1 million tons so that the total reduction is 9 million tons? A) No, because there is a net cost represented by the area B + C. B) Yes, because the marginal benefit exceeds the marginal cost. C) Yes, because toxic fumes are dangerous and must be eliminated at any cost. D) No, because the firms will pass the additional cost on to consumers. E) No, because the marginal cost exceeds the marginal benefit. Answer: B Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills 46) Suppose a negative externality exists in a market. If transactions costs are low and parties are willing to bargain then, according to the Coase theorem, A) an efficient solution can be reached only if property rights are assigned to the victims of the pollution. B) an efficient solution can be reached only if property rights are assigned to the polluters. C) an efficient solution can never be reached unless there are penalties for not following the rules. D) government intervention is critical to reach an efficient solution. E) an efficient solution can be reached regardless of the initial assignment of property rights. Answer: E Diff: 2 Type: MC Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 47) Consider the following statement made by a politician: "We should establish policies that completely eliminate air pollution. This is the only way to ensure that none of our citizens suffer the negative effects of air pollution." If this proposal was adopted and all forms of air pollution were eliminated, which of the following would be true? A) The total cost of pollution reductions would equal the total benefit to society. B) Economic efficiency would be maximized. C) The total benefit to society from reductions in air pollution would be maximized. D) The marginal cost from pollution reductions would exceed the marginal benefit. E) The marginal benefit from pollution reductions would exceed the marginal cost. Answer: D Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That It's the Net Benefit That Counts

48) The Coase Theorem asserts that government intervention is a prerequisite for addressing externality problems. Answer: FALSE Diff: 1 Type: TF Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 49) If transactions costs are low, private bargaining will always result in an efficient solution to the problem of externalities. Answer: FALSE Diff: 2 Type: TF Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 50) What are transactions costs? Why do transactions costs create difficulties in finding a private solution to the problem of pollution? Answer: Transactions costs refer to the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services. In the case of pollution, there are often both many polluters and many people suffering from the negative effects of pollution. The transactions costs in dealing with the reduction of pollution would include the time and other costs of negotiating and monitoring an agreement, drawing up a binding contract, and purchasing insurance. When many people are involved, the transactions costs can be higher than the net benefit from reducing the pollution and a private solution may not be feasible. Diff: 2 Type: SA Topic: Transactions Costs Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Reflective Thinking 51) State the Coase theorem. What are some of the limitations of the Coase theorem in practice? Answer: The Coase theorem states the following: If transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities. Some limitations of the theorem are as follows. First, the Coase theorem works only if the transaction costs are low, which is unlikely if there are many bargaining parties. Second, private solutions to the problem of externalities will occur only if all parties to the agreement have full information about the costs and benefits associated with the externality. In reality, this may not be likely or may be difficult to ensure. Third, all parties must be willing to accept a reasonable agreement. For example, if those suffering from the effects of pollution do not have information on the costs of reducing pollution it is unlikely that parties can reach an agreement. Unreasonable demands can hinder an agreement. Diff: 2 Type: ES Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills 50 Copyright © 2024 Pearson Canada Inc.

52) Ronald Coase is famous for the Coase Theorem, which is based on the premise that there is an economically efficient level of pollution reduction. Many economists believe that the tradable emissions allowance program that has been used to deal with the problem of acid rain has been successful in reducing emissions of sulfur dioxide in an economically efficient manner. Why isn't this program an example of the Coase Theorem? Answer: The Coase Theorem states that if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities. Tradable emissions allowance programs are one type of market-based solution to the problem of negative externalities, but these programs are initiated by government, not private parties. Diff: 3 Type: ES Topic: The Coase Theorem Learning Outcome: 5.2 Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. AACSB: Analytic Skills

5.3 Analyze government policies to achieve economic efficiency in a market with an externality 1) Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities? A) Ronald Coase B) A. C. Pigou C) Adam Smith D) David Hume E) Robert Lucas Answer: B Diff: 1 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 2) What does the phrase "internalizing an external cost" mean? A) limiting the extent to which domestic firms can outsource production B) prohibiting economic activities that create externalities C) forcing producers to factor in the cost of externalities created in production of their output D) finding a way to address cross-border pollution E) prohibiting firms from hiring foreign nationals Answer: C Diff: 1 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

3) Which of the following criteria should be used to evaluate if government intervention in a market for the purpose of environmental protection is justified? A) Does the intervention program reduce pollution to zero using the least costly method? B) Is the intervention necessary to bring pollution to a bearable level? C) Does the intervention program make the amount of economic surplus as large as possible? D) Is the damage to the environment from government intervention as small as possible? E) Is the intervention program economically efficient? Answer: E Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 4) If policymakers use a pollution tax to control pollution, the tax per unit of pollution should be set A) equal to the marginal external cost at the economically efficient level of pollution. B) equal to the marginal private cost of production at the economically efficient level of pollution. C) equal to the amount of the deadweight loss created in the absence of a pollution tax. D) at a level low enough so that producers can pass along a portion of the additional cost onto consumers without significantly reducing demand for the product. E) at a level high enough so that producers are forced to stop production of the good in favour of the environment. Answer: A Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 5) An advantage of imposing a tax on the producer that generates pollution is that A) it forces the polluting producer to internalize the external cost of the pollution. B) the government can keep tabs on exactly what is produced in an industry. C) it will eliminate pollution. D) a producer can pass the cost of the pollution to consumers. E) it will send polluting producers out of business. Answer: A Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

Figure 5.9

Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5.9 illustrates the situation in the toilet paper market. 6) Refer to Figure 5.9. The efficient output is A) Q1. B) Q2. C) Q3. D) Q4. E) Q3 and Q4. Answer: B Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills Special Feature: Solved Problem: Using a Tax to Deal with a Negative Externality 7) Refer to Figure 5.9. The private profit-maximizing output level is A) Q1. B) Q2. C) Q3. D) Q4. E) Q3 and Q4. Answer: C Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills Special Feature: Solved Problem: Using a Tax to Deal with a Negative Externality 53 Copyright © 2024 Pearson Canada Inc.

8) Refer to Figure 5.9. An efficient way to get the firm to produce the socially optimal output level is A) for government to set a quota on the quantity of toilet paper that the toilet paper industry can produce. B) to impose a tax to make the industry bear the external costs it creates. C) to grant a subsidy to enable the industry to internalize the external costs of production. D) to assign property rights to the firms in the industry. E) to ask them to voluntarily reduce the production to save the environment. Answer: B Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills Special Feature: Solved Problem: Using a Tax to Deal with a Negative Externality 9) Refer to Figure 5.9. Suppose the government wants to use a Pigovian tax to bring about the efficient level of production. What should the value of the tax be? A) (P2 - P1) per ton of output B) (P2 - P0) per ton of output C) (P1 - P0) per ton of output D) P1 per ton of output E) P2 per ton of output Answer: B Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills Special Feature: Solved Problem: Using a Tax to Deal with a Negative Externality 10) Refer to Figure 5.9. Let's suppose the government imposes a tax of $50 per ton of toilet paper to bring about the efficient level of production. What happens to the market price of toilet paper? A) It rises by $50. B) It rises by more than $50. C) It rises by less than $50. D) It remains the same because the tax is imposed on producers who create the externality. E) It rises by exactly $25 because consumers and producers share the burden of tax. Answer: C Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills Special Feature: Solved Problem: Using a Tax to Deal with a Negative Externality

11) Suppose a tax equal to the value of the marginal external cost at the optimal output is imposed on a pollution generating good. All of the following will result from the tax except A) an increase in the equilibrium market price. B) a decrease in the equilibrium quantity produced and consumed. C) a decrease in market supply of the good. D) a decrease in the demand for the good. E) an increase in the demand for the good. Answer: E Diff: 2 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 12) Governments can increase the consumption of a product that creates positive externalities by A) subsidizing the production of the product so that the supply is increased and market price is reduced. B) taxing the production and consumption of the product. C) convincing everyone to consume the good. D) assigning property rights to the producers of the product. E) providing discount coupons to consumers to purchase the good. Answer: A Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

Figure 5.10

Shingles vaccinations for adults benefit society by protecting adults and by preventing an epidemic of the disease. Thus, the social benefits of shingles vaccinations exceed the private benefit for any quantity of vaccinations, as illustrated in Figure 5.10. 13) Refer to Figure 5.10. One way to obtain the economically efficient amount of shingles vaccinations is for governments to subsidize the consumers of these vaccinations. What is the size of the per-vaccination Pigovian subsidy that the government must provide to internalize the external benefits? A) PE B) (PE - PG) C) (PE - PF) D) (PF - PG) E) PG Answer: B Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills 14) Refer to Figure 5.10. What is the value of the net gain to society as a result of subsidizing shingles vaccinations? A) (PE × QE) B) (PF × QF) C) value equal to the area of FEG D) value equal to the area of QFFGQE E) value equal to the area of QFQE Answer: C Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills 56 Copyright © 2024 Pearson Canada Inc.

15) Consider the following methods of pollution reduction: a. The government sets a target for maximum emissions. b. The government mandates the installation of specific pollution abatement equipment. c. The government imposes a per unit tax on the good that creates pollution. d. The government gives firms a tax rebate for every unit of pollution abated. Which of the above is an example of a command and control approach to reducing pollution? A) a only B) b only C) a and b only D) a, b, and d only E) a, b, c, and d Answer: C Diff: 2 Type: MC Topic: Command and Control Approach Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 16) Government-imposed quantitative limits on the amount of pollution firms are allowed to produce are an example of A) the Pigovian method of pollution control. B) command and control approach to pollution reduction. C) Coasian solution to pollution reduction. D) a tradable emission allowance system of pollution control. E) a tradable pollution permit for pollution control. Answer: B Diff: 2 Type: MC Topic: Command and Control Approach Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

17) What is the rationale behind a marketable emission allowance scheme? A) to create of a market for externalities: the scheme brings together buyers and sellers of marketable permits B) to discipline polluting firms by specifying the maximum amount of emissions allowed and giving them permits to pollute up to their allowance C) to raise revenue for the government through the sale of emission permits and at the same time set an emissions target D) to provide firms with the incentive to consider less costly alternatives to pollution reduction by making firms pay for the right to pollute beyond their specified allowance E) to provide firms with the incentive to consider more costly methods to pollution reduction by making them pay for the right to pollute beyond their specified allowance Answer: D Diff: 2 Type: MC Topic: Tradable Emissions Allowances Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 18) A major problem with using tradable emissions allowance system to control pollution is A) that it grants firms a licence to pollute. B) the difficulty in determining the emissions target. C) that it discourages firms from implementing cost-effective pollution control technology. D) that it does not eliminate pollution completely. E) that it sends big polluters out of business. Answer: B Diff: 1 Type: MC Topic: Tradable Emissions Allowances Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

19) Anyone can purchase sulfur dioxide emissions allowances on the Chicago Mercantile Exchange. Several environmental groups have raised money to buy allowances (which they subsequently destroy). As part of their fund-raising, these groups have urged contributors to buy the allowances as gifts. As one newspaper story put it, "For the environmentalist in your life, here's a gift that is sold by the ton, fits in an envelope and will last forever." Source for quote: Randall Edwards, "Dear Santa: Please Bring Me Sulfur Dioxide for Christmas," Columbus Dispatch, December 19, 1999. What would be the impact on the price of the emission allowances in the market? A) The price rises. B) The price falls to zero. C) The price falls but not to zero. D) The price remains unchanged because the allowances purchased by the environmental groups are destroyed. E) The price and quantity both fall in the market. Answer: A Diff: 2 Type: MC Topic: Tradable Emissions Allowances Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 20) Some policymakers have argued that products like cigarettes, alcohol, and sweetened soft drinks generate negative externalities in consumption. If the government decided to impose a tax on pop, the government will cause A) consumers to internalize the externality. B) producers to internalize the externality. C) the external cost to drinking pop to become a private cost paid by the government. D) the external cost to drinking pop to become a private cost paid by producers. E) an increase in the price of pop and producers will produce more pops. Answer: A Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking Special Feature: Apply the Concept: Drafting Subsidies for the Battle of the Bulge

21) Some policymakers have argued that products like cigarettes, alcohol, and sweetened soft drinks generate negative externalities in consumption. All else equal, if the government decided to impose a tax on pop, the equilibrium quantity of pop would ________ and the equilibrium price of soda would ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) stay the same; stay the same Answer: C Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking Special Feature: Apply the Concept: Drafting Subsidies for the Battle of the Bulge 22) The effectiveness of a tax on specific products with negative externalities depends on A) consumers being unable to switch to an untaxed product that also generates negative externalities. B) consumers having close substitutes for the specific good being taxed. C) consumers being easily able to stock up on products when visiting another jurisdiction. D) the externality being large enough for consumers to be aware of the costs to others. E) consumers being able to switch to other products. Answer: A Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking Special Feature: Apply the Concept: Drafting Subsidies for the Battle of the Bulge 23) The tradeable emission permits system implemented in Quebec is intended to A) eliminate air pollution and greenhouse gases by the year 2020. B) reduce carbon dioxide emissions. C) provide fast growing developing countries such as India and China with the technology to reduce their carbon emissions. D) impose a carbon tax by the year 2020 on all industries that emit carbon dioxide. E) reduce greenhouse gas emissions. Answer: B Diff: 1 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

24) The emissions trading system run by the European Union and joined by Quebec is an example of a A) positive externality. B) command and control system. C) Coasian solution to pollution control. D) tradeable emission permits system. E) market based policy. Answer: D Diff: 1 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 25) When a tax on output is imposed to internalize the external costs of pollution, the supply curve shifts down by the amount of the tax. Answer: FALSE Diff: 1 Type: TF Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 26) One problem with using a command and control approach to pollution reduction is that the monitoring costs may be too high. Answer: TRUE Diff: 1 Type: TF Topic: Command and Control Approach Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 27) Suppose the government mandates the installation of certain type of pollution abatement equipment for the leather tannery industry. For some firms in the industry, installing this equipment may not be the most cost effective method of reducing pollution. Answer: TRUE Diff: 2 Type: TF Topic: The Optimal Level of Pollution Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

28) What is a Pigovian tax? What happens to deadweight loss when a Pigovian tax is implemented? Answer: A Pigovian tax is a government tax intended to bring about an efficient level of output in the presence of externalities. A Pigovian tax eliminates deadweight loss. Diff: 1 Type: SA Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 29) Briefly explain the command-and-control approach in dealing with an externality such as pollution. Give an example of the U.S. government using the command-and-control approach to deal with the pollution problem. Answer: Command-and-control is an approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices. One example listed in the text occurred in 1983, when the federal government required auto manufacturers to install catalytic converters to reduce auto emissions on all new automobiles. Diff: 2 Type: SA Topic: Command and Control Approach Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 30) Economist A. C. Pigou argued that to deal with a negative externality in production, the government should impose a tax equal to the cost of the externality. What did Pigou believe should be done in the case of a positive externality in consumption? How would his recommendation impact the demand and market equilibrium for the product which is generating the positive externality? Answer: Pigou believed that, in the case of a positive externality in consumption, the government should give consumers a subsidy equal to the value of the externality. By giving a subsidy equal to the value of the externality, the external benefit will become a private benefit and demand for the product will increase to the point where the market equilibrium is also the efficient equilibrium. Diff: 2 Type: SA Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 31) The first economist to systematically analyze market failure was A) Adam Smith. B) Ronald Coase. C) A. C. Pigou. D) J. E. Meade. E) J. M. Keynes. Answer: C Diff: 1 Type: MC Topic: Market Failure Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 62 Copyright © 2024 Pearson Canada Inc.

32) Assume that production from an electric utility caused acid rain. If the government imposed a tax on the utility equal to the cost of the acid rain, the government's action would A) externalize the externality. B) result in a marginal social benefit greater than the marginal cost of the electricity. C) be an example of supply-side economic policy. D) internalize the externality. E) result in power outages. Answer: D Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 33) Assume that production from an electric utility caused acid rain and that the government imposed a tax on the utility equal to the cost of the acid rain. This is an example of A) a transaction cost. B) market based policy. C) a Pigovian subsidy. D) the Coase Theorem. E) a Pigovian tax. Answer: E Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

Figure 5.11

Coal burning utilities release sulfur dioxide and nitric acid, which react with water to produce acid rain. Acid rain damages trees and crops and kills fish. Because the utilities do not bear the cost of the acid rain, they overproduce the quantity of electricity. This is illustrated in Figure 5.11. 34) Refer to Figure 5.11. S1 represents the supply curve that reflects the private cost of production and S2 represents the supply curve that reflects the social cost of production. One way to internalize the external cost generated by utilities is to impose a Pigovian tax on the production of electricity. What is the size of the Pigovian tax that will internalize the cost of the externality? A) P0 B) P2 C) P1 - P0 D) P2 - P1 E) P2 - P0 Answer: B Diff: 3 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills 35) Policies that mandate the installation of specific pollution control devices are called A) command and control policies. B) benefit policies. C) welfare policies. D) incentive policies. E) market based policies. Answer: A Diff: 1 Type: MC Topic: Command and Control Approach Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 64 Copyright © 2024 Pearson Canada Inc.

36) Economic incentives are designed to make individual self-interest coincide with social interest. According to economists, which of the following methods of pollution control best uses economic incentives to reduce pollution? A) Rewarding environmental groups for monitoring the activities of private firms that produce products that generate pollution. B) Imposing quantitative limits on the amount of pollution and imposing a penalty for non-compliance with these limits. C) Requiring the installation of specific pollution control devices. D) Command and control policies to reduce pollution. E) Instituting a system of tradable emissions allowances. Answer: E Diff: 3 Type: MC Topic: Tradable Emissions Allowances Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

Figure 5.12

College education benefits society by producing a more employable workforce, reducing crime, and creating a better informed citizenry. Thus, the social benefits of college education exceed the private benefits for any level of college education. This is illustrated in Figure 5.12. 37) Refer to Figure 5.12. One way to obtain the economically efficient amount of post-secondary education is for governments to subsidize post-secondary education. What is the size of the per-student Pigovian subsidy that the government must provide to internalize the external benefits? (Note that the subsidy can be granted to the education institutions or to the students directly or indirectly; for example, through low-interest student loans.) A) P2 - P0 B) P2 - P1 C) P0 - P1 D) P1 E) P2 Answer: B Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills

38) The federal and provincial governments subsidize post-secondary students with grants and lowinterest loans. The loans and subsidies are examples of A) positive externalities. B) Coase subsidies. C) Pigovian subsidies. D) emission allowances. E) government grants. Answer: C Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 39) Which of the following is an example of a Pigovian tax? A) payments by utilities to obtain tradable emissions allowances B) a payroll tax C) payments for licenses to pollute D) a tax imposed on a utility that internalizes the cost of externalities caused by the utility E) a tax that is involved in private solution to externalities in the form of transactions costs Answer: D Diff: 2 Type: MC Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 40) The efficient level of paper production will occur where the A) marginal private benefit from consuming paper is equal to the marginal social cost of production. B) marginal social benefit from consuming paper is equal to the marginal social cost of production. C) economically efficient level of the output of paper is equal to the economically efficient level of inputs. D) production of paper no longer produces negative externalities. E) consumers stop using too much of paper products. Answer: A Diff: 1 Type: MC Topic: Marginal Benefit and Marginal Cost of Pollution Reduction Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking Special Feature: Solved Problem: Using a Tax to Deal with a Negative Externality

41) Which of the following describes a positive externality? A) John Henry paints the outside of his house in order to increase its market value just before he puts the house up for sale. B) The government imposes a tax on alcohol to reduce the accidents caused by drunk drivers. C) The government imposes a tax on cigarettes in order to discourage smoking among teenagers. D) Mary volunteers to drive her neighbour's children to soccer practice. E) People who do not attend university or college still benefit from others who receive a post-secondary education. Answer: E Diff: 2 Type: MC Topic: Positive Externality Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 42) The Canadian government has frequently used a "command and control" approach in dealing with pollution. Which of the following describes this approach? A) The government uses taxes to internalize the externalities caused by pollution. B) The government uses subsidies to encourage firms to use new technology that reduces pollution. C) The government imposes quantitative limits on the amount of pollution firms are allowed to generate. D) The government distributes information to consumers and producers on how to reduce pollution. E) The government continuously monitor and close businesses of big polluters. Answer: C Diff: 2 Type: MC Topic: Command and Control Approach Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 43) Which of the following is an example of the Canadian government's use of a "command and control" approach to reducing pollution? A) British Columbia's 10-cent-per-liter tax on fossil fuels B) the federal government's excise tax on gasoline C) government-issued tradable emissions allowances used to reduce emissions of nitrogen oxide D) provisions under the Canada Environmental Protection Act of 1999 that limit the legal emissions from new automobiles E) the federal government's tax on alcohol Answer: D Diff: 2 Type: MC Topic: Command and Control Approach Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

44) Economists generally favour the use of tradable emissions allowances to reduce pollution. However, the use of these allowances has been criticized by some environmentalists. Which of the following describes this criticism? Some environmentalists A) believe the allowances give firms a licence to pollute. B) believe that the price of allowances is often too high for consumers to afford. C) believe that Pigovian taxes are a more efficient way to reduce pollution. D) oppose allowances on legal grounds; they believe the use of allowances is unconstitutional. E) oppose allowances because of economic reasons. Answer: A Diff: 2 Type: MC Topic: Tradable Emissions Allowances Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 45) If the government decides to impose a tax on soft drinks, the government will cause A) consumers to stop purchasing soft drinks completely. B) producers to internalize the externality. C) the external cost of drinking pop to become a private cost paid by the government. D) the external cost of drinking pop to become a private cost paid by producers. E) consumers to internalize the externality. Answer: E Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking Special Feature: Apply the Concept: Drafting Subsidies for the Battle of the Bulge 46) All else equal, if the government decides to impose a tax on soft drinks, the equilibrium quantity of soft drinks would ________ and the equilibrium price of soft drinks would ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) stay the same; stay the same Answer: D Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking Special Feature: Apply the Concept: Drafting Subsidies for the Battle of the Bulge

47) Which of the provinces below is planning to use a tradeable emission permits system to reduce carbon dioxide emissions? A) Saskatchewan B) Quebec C) British Columbia D) New Brunswick E) Alberta Answer: B Diff: 1 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

Figure 5.13

Figure 5.13 illustrates the market for movie tickets during a pandemic, where the government has decided it needs to restrict the sale of tickets for social distancing purposes. The figure illustrates an externality in consumption from going to a movie theater because the cost of spreading the virus is borne by other people. The demand curve showing marginal private benefit includes the chance of spreading the virus by contracting it while inside a movie theater. 48) Refer to Figure 5.13. The efficient equilibrium quantity of movie tickets is ________ hundred per day. A) 14 B) 16 C) 18 D) 19 Answer: B Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytical Thinking Special Feature: Solved Problem: During a Pandemic, Should Governments Restrict Indoor Dining or Impose a Tax on Restaurant Meals?

49) Refer to Figure 5.13. The market equilibrium quantity of movie tickets is ________ hundred per day. A) 14 B) 16 C) 18 D) 19 Answer: C Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytical Thinking Special Feature: Solved Problem: During a Pandemic, Should Governments Restrict Indoor Dining or Impose a Tax on Restaurant Meals? 50) Refer to Figure 5.13. The efficient equilibrium price of movie tickets is ________ per ticket. A) $6 B) $8 C) $9 D) $11 Answer: A Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytical Thinking Special Feature: Solved Problem: During a Pandemic, Should Governments Restrict Indoor Dining or Impose a Tax on Restaurant Meals? 51) Refer to Figure 5.13. The market equilibrium price of movie tickets is ________ per ticket. A) $6 B) $8 C) $9 D) $11 Answer: B Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytical Thinking Special Feature: Solved Problem: During a Pandemic, Should Governments Restrict Indoor Dining or Impose a Tax on Restaurant Meals?

52) Refer to Figure 5.13. If the government wanted to achieve the efficient level of movie tickets by imposing a "pandemic tax," the actual price for movie tickets paid by consumers after the tax is implemented is ________ per ticket. A) $6 B) $8 C) $11 D) $14 Answer: C Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytical Thinking Special Feature: Solved Problem: During a Pandemic, Should Governments Restrict Indoor Dining or Impose a Tax on Restaurant Meals? 53) Refer to Figure 5.13. If the government wanted to achieve the efficient level of movie tickets by imposing a "pandemic tax," the amount of the pandemic tax should be ________ per ticket. A) $3 B) $4 C) $5 D) $6 Answer: C Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytical Thinking Special Feature: Solved Problem: During a Pandemic, Should Governments Restrict Indoor Dining or Impose a Tax on Restaurant Meals? 54) Refer to Figure 5.13. If the government wanted to achieve the efficient level of movie tickets by imposing a "pandemic tax," the tax would raise the price paid by consumers by ________ per ticket. A) $3 B) $4 C) $5 D) $6 Answer: A Diff: 2 Type: MC Topic: Government Policies to Deal with Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytical Thinking Special Feature: Solved Problem: During a Pandemic, Should Governments Restrict Indoor Dining or Impose a Tax on Restaurant Meals?

55) When the government imposes a tax equal to the external cost of producing a product that causes pollution, the government is said to externalize the externality. Answer: FALSE Diff: 1 Type: TF Topic: Negative Externality Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 56) A.C. Pigou argued that the government can deal with a positive externality in consumption by giving consumers a subsidy equal to the value of the externality. Answer: TRUE Diff: 1 Type: TF Topic: Pigovian Taxes and Subsidies Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 57) Issuing marketable emission allowance permits to polluting firms will result in those firms polluting more than is socially desirable. Answer: FALSE Diff: 2 Type: TF Topic: Tradable Emissions Allowances Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking 58) What is meant by the term "internalizing an externality"? How does a Pigovian tax or subsidy internalize an externality? Answer: Internalizing an externality refers to transferring the external benefit or cost to the producer or consumer that generates the externality. A Pigovian tax transfers a negative externality in production back to the producer, which reduces the supply of the product and results in an efficient level of output. A Pigovian subsidy transfers a positive externality in consumption back to the consumer, which increases the demand for the product and results in an efficient level of output. Diff: 2 Type: SA Topic: Externalities and Economic Efficiency Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

59) Some environmentalists have criticized tradable emissions allowances on the grounds that they give permit holders a license to pollute. Furthermore, environmentalists argue that those who sell their permits receive a monetary benefit from their contribution to polluting the environment. Use economic reasoning to evaluate this criticism. Answer: The criticism ignores one of the central lessons of economics: resources are scarce and tradeoffs exist. Resources spent reducing one type of pollution are not available for other uses. Furthermore, the opportunity cost of polluting (using the permit) is the price of the permit. In other words, firms are forced to face the cost of polluting. So although firms receive a monetary benefit from the sale of permits, the scheme gives them the incentive to find the cheapest way to reduce pollution. Diff: 3 Type: ES Topic: Tradable Emissions Allowances Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills

Figure 5.14

Figure 5.14 shows the market for aviation security. Aviation security generates a positive externality because people who are not airline passengers benefit from aviation security. 60) Refer to Figure 5.14 to answer the following questions. a. In the absence of any government intervention, what is the equilibrium level of security that airlines will supply? Denote this level, Q*. Briefly explain why this quantity is not the economically efficient level of aviation security. b. In the diagram, illustrate the presence of positive externalities in the aviation security market. Label any new curve that you draw. c. On your diagram identify the economically efficient level of aviation security. Denote this level Qe. d. Explain how a government subsidy for the airlines can bring about the economically efficient aviation security level. Be sure to identify the size of the subsidy.

Answer:

a. See the figure above. Q* is not the optimal level because aviation security creates positive externalities. As a result, the social benefit exceeds the private benefit for any quantity. Since airlines do not factor in the external benefits, they will offer less than the economically efficient level of aviation security. b. See the figure above. c. See the figure above. d. The government can subsidize the airlines to induce airlines to offer a higher level of security. The size of the subsidy required to internalize the positive externality is equal to the external benefit at the economically efficient output level. Diff: 3 Type: ES Topic: Externalities Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Analytic Skills 61) Since positive externalities are good for the society, there should not be any government intervention. What is the economists point of view on this? Answer: Positive externalities lead markets to produce a smaller quantity than is socially optimal and charge lower price than is socially desirable; therefore, in economists' point of view, government intervention will be needed to internalize this externality to reach the social optimum. Diff: 3 Type: ES Topic: Positive Externality Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking, Communication

62) Outline some of the policy approaches British Columbia and Quebec have tried to reduce Global Warming. Is the debate over which approach is better to reduce CO2 emission over? Answer: Several approaches to reducing CO2 emissions have been used in the recent past. British Columbia has introduced a Pigovian tax on CO2 emissions. Traeable emission permits similar to the one used successfully in the U.S to reduce sulphur dioxide emissions have also been tried. Quebec announced to use tradeable emission permits for carbon dioxide emissions. Under this program, firm that emit carbon dioxide (or cause it to be emitted) have to purchase an allowance to do so. The total number of allowances is set by the government, but firms are allowed to trade allowances with each other. It is not clear whether BC's carbon tax or Quebec tradeable emission permits will be more effective at reducing emissions and even less clear which will achieve reductions at the lowest cost to consumers. The debate over which policies to use in reducing carbon dioxide emissions is far from over and will likely continue for many years. Diff: 3 Type: ES Topic: Negative Externality Learning Outcome: 5.3 Analyze government policies to achieve economic efficiency in a market with an externality AACSB: Reflective Thinking

5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources 1) A product is considered to be rival if A) you can keep those who did not pay for the item from enjoying its benefits. B) you cannot keep those who did not pay for the item from enjoying its benefits. C) your consumption of the product reduces the quantity available for others to consume. D) it is jointly owned by all members of a community. E) your consumption of the good has positive externalities. Answer: C Diff: 1 Type: MC Topic: Rivalry Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 2) A product is considered to be nonexcludable if A) you can keep those who did not pay for the item from enjoying its benefits. B) you cannot keep those who did not pay for the item from enjoying its benefits. C) your consumption of the product reduces the quantity available for others to consume. D) it is jointly owned by all members of a community. E) your consumption of the good has positive externalities. Answer: B Diff: 1 Type: MC Topic: Excludability Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

3) Which of the following displays these two characteristics: rivalry and nonexcludability? A) a public good B) a private good C) a quasi-public good D) a common resource E) a club good Answer: D Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 4) Which of the following displays these two characteristics: nonrivalry and nonexcludability in consumption? A) public goods B) private goods C) quasi-public goods D) common resources E) club goods Answer: A Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 5) Which of the following displays these two characteristics: nonrivalry and excludability? A) public goods B) private goods C) quasi-public goods D) common resources E) imported goods Answer: C Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

6) Which of the following displays rivalry and excludability in consumption? A) public goods B) private goods C) quasi-public goods D) common resources E) club goods Answer: B Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 7) Which of the following is an example of a product that is nonexcludable and rivalrous? A) free concert (with limited seating) in a park B) national defense C) automobiles D) flu vaccinations E) a congested toll road Answer: A Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 8) Which of the following is an example of a quasi-public good? A) cable television B) organic apples C) stock of knowledge in the public domain D) crime prevention E) fire protection Answer: A Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

9) Which of the following is an example of a common resource? A) the Sumatran tiger population in the world B) rabbit fur C) the stock of knowledge in the public domain D) taxicab services E) a toll road Answer: A Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 10) Common resources differ from public goods in that A) common resources are non-excludable while public goods are excludable to those who do not pay for the good. B) unlike public goods, common resources are non rival in consumption. C) common resources are collectively owned by a group of people while public goods are government owned. D) common resources are resources that cannot be renewed but the production of public goods can be increased any time. E) unlike public goods, common resources are rivalrous in consumption. Answer: E Diff: 2 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 11) In economics, the term "free rider" refers to A) a person who evades taxes. B) a supervisor who delegates menial time-consuming activities to others. C) one who volunteers her services. D) one who waits for others to produce a good and then enjoys its benefits without paying for it. E) one who rides public transport without paying the fare. Answer: D Diff: 1 Type: MC Topic: Free Riding Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

12) The demand curve for a public good is also called the A) total welfare curve. B) marginal social benefit curve. C) total social benefit curve. D) total willingness-to-pay curve. E) social welfare curve. Answer: B Diff: 1 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 13) How does the construction of a market demand curve for a private good differ from that for a public good? A) There is no difference; in both cases the demand curve is determined by adding up the price each consumer is willing to pay for each quantity of the good. B) There is no difference; in both cases the demand curve is determined by adding up the quantities demanded by each consumer at each price. C) The market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price, but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each quantity of the good. D) The market demand curve for a private good is determined by adding up the price each consumer is willing to pay for each quantity of the good, but the market demand curve for a public good is determined by adding up the quantities demanded by each consumer at each price. E) There is no difference; in both cases it shows the prices consumers are willing to pay and quantities consumers are willing to purchase. Answer: C Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 14) The market demand for a public good can be determined by A) adding up the total private benefits and external benefits that each quantity provides the citizens of a country. B) adding up how much each citizen expects to consume at each possible price. C) adding up how much each consumer is willing to pay for each unit of the public good. D) estimating the value of the benefit that each unit provides and multiplying that by the number of consumers. E) how much all consumers together are willing to pay for a good that they could enjoy without paying. Answer: C Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 82 Copyright © 2024 Pearson Canada Inc.

15) One difference between the demand for a private good and that for a public good is that A) with a private good, each consumer chooses the quantity she wants to consume but with a public good, each consumer chooses the price she is willing to pay for a fixed quantity. B) with a public good, each consumer chooses the quantity she wants to consume but with a private good, everyone wants to get more than others. C) with a private good, each consumer receives different amounts of benefit from consuming the product but with a public good, every consumer realizes the same amount of benefit from consuming the product. D) the marginal benefit from consuming the last unit of a public good always exceeds the marginal benefit from consuming the last unit of a private good because there are externalities in the consumption of the former. E) with a private good, each consumer chooses the quantity she wants to consume but with a public good, everyone consumes the same quantity. Answer: E Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 16) For certain public projects such as building a dam on a river or a bridge to an island, what procedure a government is likely to use to determine what quantity of a public good should be supplied? A) It conducts public surveys to determine if consumers want the product. B) It hires economists to estimate the market demand for the product. C) It takes a vote in Congress. D) It evaluates the costs and benefits of producing the good. E) It will just do it to show people that it cares for them. Answer: D Diff: 1 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 17) For-profit producers will produce only private goods because A) markets exist for private goods but not for public goods. B) the cost of production can be easily determined. C) buyers will be willing to pay for the goods since the benefits are excludable. D) all external benefits can be internalized using market prices. E) the price elasticity of private goods is a lot higher. Answer: C Diff: 1 Type: MC Topic: Private Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

18) Private producers have no incentive to provide public goods because A) the government subsidy granted is usually insufficient to enable private producers to make a profit. B) production of huge quantities of public goods entails huge fixed costs. C) they cannot avoid the tragedy of the commons. D) once produced, it will not be possible to exclude those who do not pay for the good. E) the price elasticity of public goods is very low. Answer: D Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 19) Sefronia and Bella share an apartment and they are deciding whether or not to purchase a weekly housecleaning service. The value of the service to each of them is $50 and it costs $80 to hire a housecleaner. Should they hire a housecleaner? A) Yes, if each contributes $40, then each stands to gain a consumer surplus. B) No, because each will wait for the other to hire the housecleaner. C) Yes, but only if a housecleaner will accept $50 so that each can take turns to pay the housecleaner. D) No, because it will be difficult for them to agree on which housecleaning service to use. E) Only if they can negotiate the price with the cleaner to bring it down to $50. Answer: A Diff: 2 Type: MC Topic: Private Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills 20) Sefronia and Bella share an apartment and they are deciding whether or not to purchase a weekly housecleaning service. The value of the service to each of them is $50 and it costs $80 to hire a housecleaner. Suppose Bella is lazy and a spendthrift and Sefronia suspects that Bella will be willing to pay $80. What is Sefronia likely to do, given that she is as rational as any other person? A) She will correctly rationalize that Bella's laziness and spendthrift ways are irrelevant to the decision at hand. B) She might claim that she is willing to pay only $25, hoping that Bella would pay the rest of the amount. C) She might offer to do Bella's housecleaning chores if Bella would pay her $50. D) She will come clean and tell Bella that since Bella is lazy and a spendthrift she should pay a bigger share of the $80. E) She might claim that she is not willing to pay for a housecleaner, hoping that Bella would pay the entire $80. Answer: E Diff: 2 Type: MC Topic: Private Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills

21) The "tragedy of the commons" refers to the phenomenon where A) individuals are free riders. B) people overuse a common resource. C) people do not internalize an externality. D) there is rivalry in consumption. E) people are excluded from accessing a resource. Answer: B Diff: 1 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 22) A tragedy of the commons occurs when a resource is A) rival and excludable. B) rival and non-excludable. C) non-rival and non-excludable. D) non-rival and excludable. E) people are excluded from accessing a resource. Answer: B Diff: 1 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 23) Which of the following is an example of a common resource? A) a salmon farm pool in northern New Brunswick B) impounded dogs in a dog pound C) public health care services D) sea otters in the coastal waters off the Queen Charlotte Islands E) a toll road Answer: D Diff: 1 Type: MC Topic: Common Resources Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

24) Which of the following exemplifies the tragedy of the commons? A) Residents of the high Arctic receive only one radio signal which may be eliminated altogether if government funding is cut. B) The Pleasant Hill community is growing so fast that the city's only post office is not able to keep pace with the population growth in the community. C) Canadian citizens receive free universal health care administered by provincial governments. D) The Malaysian tapir, distinguished for its unusual colouration, is a target for poachers who hunt it for its tough and leathery hide. E) Canadian kids are getting free education at public schools. Answer: D Diff: 2 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 25) Consider the stock of ocean tuna which is massively overfished. It is rational for an individual to exploit the resource rather than to conserve the stock because A) the private benefit of harvesting tuna is higher than the social benefit of harvesting it. B) the private benefit of harvesting tuna is lower than the social benefit of harvesting it. C) the social cost of harvesting the fish is lower than the private cost. D) the private cost of harvesting the fish is lower than the social cost. E) there is no private cost of harvesting the fish. Answer: C Diff: 2 Type: MC Topic: Social Cost Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

Figure 5.15

Figure 5.15 shows the market for Atlantic salmon, a common resource. The current market equilibrium output of Q1 is not the economically efficient output. The economically efficient output is Q2. 26) Refer to Figure 5.15. The current market equilibrium output is partly the result of overfishing. In that case, what does S1 represent? A) the private marginal benefit of harvesting salmon B) the social marginal benefit of harvesting salmon C) the private marginal cost of harvesting salmon D) the social marginal cost of harvesting salmon E) the supply curve with higher cost of harvesting salmon Answer: C Diff: 2 Type: MC Topic: Private Cost Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills 27) Refer to Figure 5.15. The current market equilibrium output is partly the result of overfishing. In that case, what does S2 represent? A) the private marginal benefit of harvesting salmon B) the social marginal benefit of harvesting salmon C) the private marginal cost of harvesting salmon D) the social marginal cost of harvesting salmon E) the supply curve with lower cost of harvesting salmon Answer: D Diff: 2 Type: MC Topic: Social Cost Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills 87 Copyright © 2024 Pearson Canada Inc.

28) Refer to Figure 5.15. Identify the area that shows the deadweight loss from overfishing. A) egh B) ekh C) efh D) eghk E) fkh Answer: B Diff: 2 Type: MC Topic: Deadweight Loss Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills 29) Overuse of a common resource may be avoided by all of the following methods except A) charging for the use of a common resource. B) issuing tradable permits for the use of a common resource. C) government taking over ownership of all private common resources. D) setting quotas or legal limits on the quantity consumed of the common resource. E) give part ownership to people so that they use it responsibly. Answer: C Diff: 2 Type: MC Topic: Common Resources Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 30) The tragedy of the commons was avoided in the Middle Ages by A) selling common grounds to individuals. B) the local police who monitored entry into the commons. C) command and control policies. D) the government which imposed a tax for the use of the commons. E) social pressure to uphold traditionally accepted limits on family use of the commons. Answer: E Diff: 2 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

31) The basic cause of deadweight losses from the existence of common resources and externalities is A) a lack of clearly defined and enforceable property rights. B) the self-interested rationality of human beings. C) the use of a market system to deal with scarcity. D) the absence of government intervention. E) the overuse of resources. Answer: A Diff: 2 Type: MC Topic: Deadweight Loss Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 32) Most gyms don't allow non-members to workout (day passes are available though). In most cases (unless the gym gets really crowded) your work out doesn't prevent other from working out at the same time. This makes a gym A) a quasi-public good. B) private good. C) public good. D) common resource. E) both a public good and a common resource. Answer: A Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

33) Global warming refers to the effect of global pollutants such as carbon dioxide on climates on the earth. Climate-induced changes in temperatures affect, among other things, agriculture. Which of the following is a reason why policymakers are still debating if this problem should be addressed and how it should be addressed? A) Scientists agree about the damage caused by carbon emissions but disagree about the methods of reducing emissions. B) The marginal cost of reducing carbon emissions is known with certainly but the marginal benefit from reduction is not known with certainty. C) The marginal cost of reducing carbon emissions is not known with certainly but the marginal benefit from reduction is known with certainty. D) There is much disagreement about all aspects of the problem: how much carbon emissions contribute to damage from climate change which in turn affects the benefits from reduction, and what methods to use which in turn determines the cost of reduction. E) The issue is global and hence some countries agree on how to reduce it and some do not. Answer: D Diff: 2 Type: MC Topic: The Optimal Level of Pollution Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking Special Feature: Economics in Your Life: What's the "Best" Level of Pollution? 34) A product is considered to be excludable if it is jointly owned by all members of a community. Answer: FALSE Diff: 1 Type: TF Topic: Excludability Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 35) A quasi-public good is similar to a public good in that one person's consumption of the quasi-public good does not reduce the amount available for everyone else. Answer: TRUE Diff: 2 Type: TF Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 36) A quasi-public good differs from a public good in that unlike a public good, it is possible to keep out those who do not pay for the quasi-public good from enjoying the benefits of the good. Answer: TRUE Diff: 2 Type: TF Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

37) Goods differ on the basis of whether their consumption is rival and excludable. Explain the terms "rivalry" and "excludability" as they are used to define goods. List the four categories of goods, and define these categories in terms of rivalry and excludability. Answer: Rivalry occurs when one person's consuming a unit of a good means no one else can consume it. Excludability means that anyone who does not pay for a good cannot consume it. 1. Private good: rival and excludable 2. Public good: nonrivalrous and nonexcludable 3. Quasi-public good: nonrivalrous and excludable 4. Common resource: rival and nonexcludable Diff: 2 Type: ES Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 38) Determine if each of the products below displays any of the following characteristics: (i) rivalry (ii) nonrivalry (ii) excludability (iv) nonexcludability. a. a highway during peak commute hours b. an online course c. infectious disease prevention d. open source software such as Linux e. a movie showing at Cineplex Theatres Answer: a. rivalry due to traffic congestion although entry into the highway is nonexcludable b. nonrival but excludable because those who did not pay for the course may not take the course c. nonrival and nonexcludable d. nonrival and nonexcludable e. limited by seating capacity and room size but excludable since admission requires purchase of a ticket Diff: 2 Type: SA Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills

39) "When it comes to public goods, individuals do not reveal their true preferences because it is not in their self-interest to do so." Evaluate this statement. Answer: The statement is true. For example, in the case of a private good such as a hamburger, a consumer either reveals her willingness to pay by purchasing the good at the market price or goes without it. This is not the case with a public good. Once produced, individuals cannot be excluded from consuming the good even if they have not paid for the good. Therefore, it is in a consumer's interest not to reveal her true preferences for the good. Diff: 3 Type: ES Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills

40) Table 5.1 Number of Acres 1 2 3 4 5 6 7 8

Deidre's Eugene's Farhad's Marginal Willingness to Willingness to Willingness to Social Benefit Pay (dollars) Pay (dollars) Pay (dollars) (dollars) $180 $140 $150 160 130 130 140 120 110 120 110 90 100 100 70 80 90 50 60 80 30 40 70 20

In an effort to maintain privacy and enhance property values, three homeowners, Deidre, Eugene and Farhad, are considering leasing a portion of adjoining vacant land for a private park. Table 5.1 shows each person's willingness to pay for each quantity of the land. a. Complete the column in Table 5.1. b. Graph the marginal social benefit curve. c. Suppose the landowner is willing to lease a portion of her land according to the following supply schedule given in Table 5.2. On the same diagram, graph the supply curve. Table 5.2 Number of Acres 1 2 3 4 5 6 7 8

Price per Acre (dollars) $260 280 300 320 340 360 380 400

d. What is the optimal quantity of land that homeowners should lease? Explain your answer. e. Explain why a park of 5 acres is not optimal.

Answer: a. Table 5.1 Number of Acres 1 2 3 4 5 6 7 8

Deidre's Eugene's Farhad's Marginal Willingness to Willingness to Willingness to Social Benefit Pay (dollars) Pay (dollars) Pay (dollars) (dollars) 180 140 150 470 160 130 130 420 140 120 110 370 120 110 90 320 100 100 70 270 80 90 50 220 60 80 30 170 40 70 20 130

b and c.

d. The optimal quantity of land that homeowners should lease is 4 acres, given by the intersection of the marginal social benefit curve and the marginal cost (supply) curve. e. A park of 5 acres is not optimal because the marginal benefit of the 5th acre to the homeowners is $270 while the cost of leasing the 5th acre is $340. Diff: 3 Type: SA Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills Special Feature: Solved Problem: Determining the Optimal Level of Public Goods

41) Public goods are distinguished by two primary characteristics. What are they? A) nonrivalry and nonexcludability B) government intervention and low prices C) market failure and high prices D) rivalry and exclusivity E) tragedy of commons and free riders Answer: A Diff: 1 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 42) Goods can be classified on the basis of whether their consumption is A) internal and excludable. B) rival and competitive. C) includable and cooperative. D) rival and excludable. E) personal or social. Answer: D Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 43) Classifying a good as excludable means A) that someone can be barred from consuming the good based on race, creed, or some other irrelevant characteristic. B) that anyone who does not pay for the good cannot consume it. C) that consumption of the good causes no externalities. D) that a producer with patent or copyright protection can exclude any other producer from selling his product. E) you can be refused to get the good at the seller's discretion. Answer: B Diff: 1 Type: MC Topic: Excludability Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

44) Classifying a good as rival means A) that the good is produced in a competitive market. B) that there is a shortage of the good. C) that when one person consumes a unit of the good, no one else can consume it. D) anyone who does not pay for the good cannot consume it. E) only one person can have the good and all others want to have it. Answer: C Diff: 1 Type: MC Topic: Rivalry Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 45) A private good is A) a good that is rival and nonexcludable. B) a good that is nonrival and nonexcludable. C) a good that is rival and excludable. D) a good that is nonrival and excludable. E) a good that is not supposed to be used in public. Answer: C Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 46) A public good is A) a good that is rival and excludable. B) a good that is nonrival and nonexcludable. C) a good that is nonrival and excludable. D) a good that is rival and nonexcludable. E) a good that people can only use at public places. Answer: B Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

47) Goods that are excludable but not rival are A) public goods. B) semi-private goods. C) common resources. D) quasi-public goods. E) welfare goods. Answer: D Diff: 2 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 48) A good that is rival but not excludable is a A) common resource. B) public good. C) quasi-public good. D) quasi-private good. E) club good. Answer: A Diff: 2 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 49) All of the following are examples of public goods except A) broadcast television with commercials. B) clean water systems. C) stock of knowledge in the public domain. D) crime prevention. E) firework. Answer: B Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

50) Which of the following is an example of a nonexcludable product? A) post-secondary education B) a private school C) public transportation D) Internet service for your home computer E) a public library Answer: E Diff: 1 Type: MC Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 51) The free rider problem refers to a situation in which A) people consume a pure public good without payment, even though the good may not be produced if no one chooses to pay. B) the marginal cost of allowing additional consumers to consume a public good is zero. C) high income individuals subsidize the production of goods, such as education, that make society better off. D) markets fail to allocate resources efficiently when benefits outweigh costs. E) people like to ride the public transport unlawfully without paying. Answer: A Diff: 1 Type: MC Topic: Free Riding Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 52) Which of the following best illustrates the free rider problem? A) Since no one owns elephants and elephants are valued for their hide, meat, and ivory, elephants can be hunted to extinction. B) For every purchase of a $30 fare card, you are entitled to five free bus rides. C) If your neighbors professionally landscape their front yards, it is likely that the market value of your property will increase. D) All three homeowners in a quiet cul-de-sac have expressed the desirability of security lighting in the common parking area. One of the homeowners installs the lighting and asks you to contribute toward the cost. You choose not to contribute. E) My friend always evade paying the bus fare by using an expired metropass. Answer: D Diff: 2 Type: MC Topic: Free Riding Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

53) "Free riding" is a characteristic of which type of good? A) a private good B) a common resource C) a public good D) a good that is both rival and excludable E) a good that is rival and non-excludable Answer: C Diff: 2 Type: MC Topic: Free Riding Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 54) Parents who do not have their children immunized and attempt to benefit from other parents who did have their own children immunized are exhibiting an economic behaviour known as A) excludability. B) public rivalry. C) free riding. D) internalizing an external cost. E) preferences. Answer: C Diff: 1 Type: MC Topic: Free Riding Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 55) Which of the following describes the difference between the market demand curve for a private good and the demand curve for a public good? A) The market demand curve for a private good is derived by adding vertically the quantities that consumers demand at each price. The demand curve for a public good is derived by adding horizontally the quantities that consumers demand at each price. B) The market demand curve for a private good is derived by adding horizontally the quantity of the good demanded at each price by each consumer. The demand curve for a public good is derived by adding up the price each consumer is willing to pay for each quantity of the good. C) The market demand curve for a private good will always be downward sloping. The demand curve for a public good will always be upward sloping. D) The market demand curve is drawn holding everything other than the price of the good constant; the demand curve for a public good is drawn by allowing all variables that affect demand to change. E) There is no difference, both represent the quantity of good a consumer is willing to purchase at the market price. Answer: B Diff: 3 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills

56) To derive a demand curve for a public good, we A) add the price that each consumer is willing to pay for each quantity of the public good. B) add the quantities that each consumer is willing to purchase at each price of the public good. C) multiply the quantity demanded at each price by the number of the consumers. D) multiply the price by the quantity for each consumer and add up across all consumers. E) multiply the quantity demanded and multiply all prices and then add them up. Answer: A Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking Special Feature: Solved Problem: Determining the Optimal Level of Public Goods 57) It is difficult for a private market to provide the economically efficient quantity of a public good because A) by law, governments cannot use cost-benefit analysis to determine this quantity. B) public goods produce positive and negative externalities. C) individual preferences are not revealed in the market for the good. D) it is too expensive to produce the necessary amount of the good. E) the good needs to be produced in huge quantity. Answer: C Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 58) The supply curve of a public goods shows A) the total quantities that all producers are willing and able to supply at each price. B) the maximum amount suppliers require to produce each quantity of the good. C) the total cost of producing each unit of the good. D) the marginal cost of producing each unit of the good. E) the target price at each quantity of the good. Answer: D Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

59) The efficient output level of a public good occurs where the A) greatest number of free riders occurs. B) marginal cost of producing the last unit is equal to the marginal benefit realized by consumers. C) total cost of production is affordable. D) marginal cost of production is at its lowest. E) total profit of producers is maximized. Answer: B Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking Figure 5.16

Amit and Bree are the only two homeowners on an isolated private road. Both agree that installing street lights along the road would be beneficial and want to do so. Figure 5.16 shows their willingness to pay for different quantities of street lights, the market demand for street lights, and the marginal cost of installing the street lights. 60) Refer to Figure 5.16. How much is Amit willing to pay to have 4 street lights installed? A) $3,600 B) $2,700 C) $1,800 D) $1,500 E) $900 Answer: E Diff: 1 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills 101 Copyright © 2024 Pearson Canada Inc.

61) Refer to Figure 5.16. How much is Bree willing to pay to have 4 street lights installed? A) $1,500 B) $1,800 C) $2,700 D) $7,200 E) $8,000 Answer: B Diff: 1 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills 62) Refer to Figure 5.16. What is the optimal quantity of street lights to install? A) 3 B) 4 C) 6 D) 9 E) 12 Answer: C Diff: 3 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills 63) Refer to Figure 5.16. Suppose Amit and Bree know each other's preferences so that it is not possible for one to deceive the other. Which of the following statements best describes the circumstances under which the optimal quantity of street lights could be achieved? A) The optimal quantity will be installed only if the two parties agree to pay according to their willingness to pay as indicated by their respective demand curves. B) Because there are only two consumers, it is likely that private bargaining will result in the optimal quantity being installed. C) The optimal quantity will be installed only if the two parties split the cost of installation equally. D) The optimal quantity will be installed only if Bree pays for the entire installation cost. E) The optimal quantity will never be installed unless there is an involvement of the government. Answer: B Diff: 3 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills

64) Which of the following is an example of a common resource? A) caribou in the wild B) lions in a zoo C) a post-secondary education D) public transportation E) donuts in the office Answer: A Diff: 1 Type: MC Topic: Common Resources Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 65) An important difference between the demand for a private good and the demand for a public good is that A) individuals reveal their preferences for a public good but they do not have to reveal their preferences a private good. B) the resources used to provide public goods are common resources or government owned; the resources used to produce private goods are all privately owned. C) individuals reveal their preferences for a private good but they do not have to reveal their preferences for a public good. D) the demand for a private good produces consumption externalities; the demand for a public good produces production externalities. E) individuals must pay half price for public good but for private good they have to pay full price. Answer: C Diff: 3 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 66) In order to determine what quantity of a public good should be supplied, governments sometimes use A) quantitative analysis. B) economic forecasting. C) econometrics. D) cost-benefit analysis. E) their own preferences. Answer: D Diff: 1 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

67) The "tragedy of the commons" is a term that refers to A) tragic events such as forest fires and hurricanes that cause more damage than they should because of the failure of government to develop a common approach to handling disasters. B) the tendency for a common resource to be overused. C) the failure of Britain's House of Commons to respond quickly to tragedies such as the Great Plague. D) free riding that causes too little of a public good to be produced. E) road accidents that have become common in everyday lives. Answer: B Diff: 1 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 68) In England during the Middle Ages, each village had an area of pasture on which any family in the village was allowed to graze its cows and sheep without charge. Eventually, the grass in the pasture would be depleted and no family's cows or sheep would get enough to eat. The reason the grass was depleted was A) the area of pasture was nonexcludable and the consumption of the grass was rival. B) self-interest motives led livestock owners to raise too many cows and sheep. C) due to a policy of neglect on the part of the English government. D) it did not get enough rainfall. E) there was a drought. Answer: A Diff: 2 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 69) Haiti was once a heavily forested country. Today, 80 percent of Haiti's forests have been cut down, primarily to be burned to create charcoal. The reduction in the number of trees has lead to devastating floods when it rains heavily. This is an example of A) tragic externalities. B) poverty. C) human greed. D) the consequences of not having a market economic system. E) the tragedy of the commons. Answer: E Diff: 1 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

70) Negative externalities and the tragedy of the commons are problems that have a common source. What is this common source? A) self-interest motives of producers and consumers B) a lack of concern for human rights C) a lack of competition D) a lack of clearly defined and enforced property rights E) poverty Answer: D Diff: 1 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 71) Which of the following is a possible solution when a scarce resource is subject to the tragedy of the commons? A) Access to the commons can be restricted through community norms and laws. B) Subsidies can be offered to consumers. C) People can be forced to move away from the commons. D) An advertising campaign can be used to persuade people to use less of the scarce resource. E) A by-law that restricts the use of commons completely. Answer: A Diff: 2 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills 72) If your professor offers a review session for 1 hour the day before the final exam and one student dominates all the professor's time leaving you with no time to ask your question, this an example of A) the tragedy of the commons. B) market failure due to a public good. C) market failure due to a quasi public good. D) market failure due to a private goods. E) lack of available time. Answer: A Diff: 2 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

73) When Canada and other developed nations were growing and increasing carbon emissions, developing nations such as China were harmed while not contributing to the problem. In this sense, one can think of increasing carbon emissions as being like a(n) A) public bad. B) private bad. C) quasi-private bad. D) quasi-public bad. E) exploitation. Answer: A Diff: 2 Type: MC Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 74) In 2014, the Environment Minister Leona Aglukkaq proposed a plan to enact tougher limits on pollution from automobiles. By implementing new pollution regulations, the government will cause the polluters' A) marginal private cost curve to shift up. B) marginal private cost curve to shift down. C) marginal social cost curve to shift up. D) marginal social cost curve to shift down. E) to pay a penalty every time they pollute. Answer: A Diff: 2 Type: MC Topic: Common Resources Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 75) In 2016, Catherine McKenna (Minister of Environment and Climate Change) announced the federal government would impose a price on carbon emissions of $10 a tonne beginning in 2018. She would do this because A) clear air is a common resource. B) clean air is a quasi public good. C) clean air is a public good. D) clean air is a private good. E) she promised to do so during her campaign. Answer: A Diff: 1 Type: MC Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

76) A public good that is a good that is both rival and excludable. Answer: FALSE Diff: 1 Type: TF Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 77) The social benefit of a given level of a public good is the vertical sum of all private benefits for that level. Answer: TRUE Diff: 1 Type: TF Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 78) A modern example of the tragedy of the commons is the forests in many poor countries. Answer: TRUE Diff: 1 Type: TF Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 79) State whether each of the following goods and services is nonrival, nonexcludable, or both: a. a toll road b. a public park c. a lighthouse d. an art museum e. a radio broadcast of "A Prairie Home Companion" Answer: a. nonrival, although rivalry could exist during traffic congestion b. both, although rivalry could exist under some circumstances, such as when there is a sporting event or a private party c. both d. nonrival and excludable if admission requires the purchase of a ticket. e. both Diff: 2 Type: ES Topic: Public Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking

80) How does a public good differ from a quasi-public good? In your answer, give an example of each type of good. Answer: A pubic good is: (a) nonrival — one person's consumption of the good does not prevent anyone else from consuming it; (b) nonexcludable — anyone can consume the good without paying for it. An example of a public good is national defense. A quasi-public good is excludable, but nonrival. This means that people who do not pay for the good do not consume it, but one person's consumption does not affect the consumption of anyone else. An example of a quasi-public good is a toll road. Diff: 2 Type: ES Topic: Categories of Goods Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 81) Explain how the decision by parents to not immunize their children, hoping that their children will not get sick because other parents have had their children immunized, is an example of free riding. How is this behaviour dangerous to the public? Answer: Free riding is benefiting from a good without paying for it. Parents who do not get their children immunized, and instead assume their children will not get sick because all the other children that their own kids will be in contact with have been immunized, are attempting to benefit from the vaccinations of other children without paying for their own kids' vaccinations. This behaviour is dangerous to the public because the likelihood of an unvaccinated child catching and spreading a disease is much greater than that of a child who has been vaccinated. Diff: 2 Type: SA Topic: Free Riding Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Reflective Thinking 82) Define the tragedy of the commons. Give three examples of common resources. Briefly explain why common property resources are subject to overuse. Answer: The tragedy of the commons refers to situations where common resources are subject to overuse and pollution. Examples include forest land, pasture land, fish in the ocean, lions in the wild, shrimp population in the gulf states, a public library, and space on a public beach. Common resources are subject to overuse because each individual captures the private benefit fully but only bears part of the cost of using the resource. As a result, each individual has no incentive to maintain the quality or purity of the resource. Diff: 2 Type: ES Topic: The Tragedy of the Commons Learning Outcome: 5.4 Explain how goods can be categorized on the basis of whether they are rival or excludable and use graphs to illustrate the efficient quantities of public goods and common resources AACSB: Analytic Skills

Microeconomics, 4Ce (Hubbard) Chapter 6 Elasticity: The Responsiveness of Demand and Supply 6.1

Define and calculate price elasticity of demand

1) Price elasticity of demand measures A) how responsive suppliers are to price changes. B) how responsive sales are to changes in the price of a related good. C) how responsive quantity demanded is to a change in price. D) how responsive sales are to a change in buyers' incomes. E) whether demand shifts left or right with the change in price. Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 2) Suppose the value of the price elasticity of demand is -3. What does this mean? A) A 1 percent increase in the price of the good causes quantity demanded to increase by 3 percent. B) A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent. C) A 3 percent increase in the price of the good causes quantity demanded to decrease by 1 percent. D) A $1 increase in price causes quantity demanded to fall by 3 units. E) A 3 percent decrease in price will decrease the quantity demanded by 3 percent. Answer: B Diff: 1 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills 3) If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded A) will increase by 45 percent. B) will increase by 5 percent. C) will decrease by 45 percent. D) will decrease by 5 percent. E) will decrease by 15 percent. Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills

4) According to Jim Kenny, the purpose of a 2-cents per ounce tax on sweetened beverages, by Mayor of San Francisco was A) to make people more health conscious. B) to raise money for important needs. C) to close the sweetened beverages industry. D) to make consumers happy that the government is concerned about their health. E) to make people aware of the dangers of these beverages. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking Special Feature: Chapter Opener: Do Pop Taxes Work? 5) The price elasticity of demand for Stork ice cream is -4. Suppose you're told that following a price increase, quantity demanded fell by 10 percent. What was the percentage change in price that brought about this change in quantity demanded? A) 40 percent B) 25 percent C) 2.5 percent D) 0.4 percent E) 4 percent Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills 6) If demand is inelastic, the absolute value of the price elasticity of demand is A) one. B) less than one. C) greater than one. D) greater than the absolute value of the slope of the demand curve. E) zero. Answer: B Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

7) A demand curve which is ________ represents perfectly inelastic demand, and a demand curve which is ________ can represent inelastic demand. A) downward sloping; vertical B) horizontal; downward sloping C) horizontal; upward sloping D) upward sloping; horizontal E) vertical; downward sloping Answer: E Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Inelastic with Perfectly Inelastic 8) If demand is perfectly inelastic, the absolute value of the price elasticity of demand is A) zero. B) less than one. C) more than one. D) equal to the absolute value of the slope of the demand curve. E) infinity. Answer: A Diff: 1 Type: MC Topic: Perfectly Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 9) Jenna runs a small boutique in Capitola. She tells one of her suppliers that she is willing to pay $6 for a pair of wool hand warmers and not a dime more. On the basis of this information, what can you conclude about her price elasticity of demand for wool hand warmers? A) It is elastic. B) It is perfectly elastic. C) It is perfectly inelastic. D) The price elasticity coefficient is 0. E) It is unit elastic. Answer: B Diff: 1 Type: MC Topic: Perfectly Elastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

10) Seth is a competitive body builder. He says he has to have his 12-oz package of protein powder to "feed his muscles" every day. On the basis of this information, what can you conclude about his price elasticity of demand for protein powder? A) It is elastic. B) It is perfectly elastic. C) It is perfectly inelastic. D) The price elasticity coefficient is 0. E) It is unit elastic. Answer: C Diff: 1 Type: MC Topic: Perfectly Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking Figure 6.1

11) Refer to Figure 6.1. The demand curve on which elasticity changes at every point is shown in A) Panel A. B) Panel B. C) Panel C. D) none of the above graphs. E) Panel C and D both. Answer: C Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 4 Copyright © 2024 Pearson Canada Inc.

12) Refer to Figure 6.1. A perfectly elastic demand curve is shown in A) Panel A. B) Panel B. C) Panel C. D) Panel D. E) Panel A and B. Answer: B Diff: 1 Type: MC Topic: Perfectly Elastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 13) Refer to Figure 6.1. A perfectly inelastic demand curve is shown in A) Panel A. B) Panel B. C) Panel C. D) Panel D. E) Panel A and B. Answer: A Diff: 1 Type: MC Topic: Perfectly Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 14) If 50 units of a good are sold at a price of $20 and 80 units are sold at a price of $15, what is the absolute value of the price elasticity of demand? Use the midpoint formula. A) 0.17 B) 0.62 C) 1.62 D) 3 E) 5 Answer: C Diff: 3 Type: MC Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Price Elasticity of Demand

Figure 6.2

15) Refer to Figure 6.2. The absolute value of the price elasticity of demand at points a and b is 1. What is the value of Pb? A) $50 B) $40 C) $30 D) $20 E) $15 Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills 16) Suppose a hurricane decreased the supply of oranges so that the price of oranges rose from $120 a ton to $180 a ton and quantity sold decreased from 800 tons to 240 tons. What is the absolute value of the price elasticity of demand? A) 0.11 B) 0.37 C) 1.47 D) 9.33 E) 2.69 Answer: E Diff: 2 Type: MC Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Price Elasticity of Demand

Figure 6.3

17) Refer to Figure 6.3. Using the midpoint formula, calculate the absolute value of the price elasticity of demand between e and f. A) 0.32 B) 0.4 C) 2.5 D) 3.125 E) 4.75 Answer: D Diff: 2 Type: MC Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Price Elasticity of Demand 18) Jaycee Jeans sold 40 pairs of jeans at a price of $40. When it lowered its price to $20, the quantity sold increased to 60 pairs. Calculate the absolute value of the price elasticity of demand. Use the midpoint formula. A) 1.67 B) 1.0 C) 0.6 D) 0.53 E) 0.4 Answer: C Diff: 2 Type: MC Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Price Elasticity of Demand 7 Copyright © 2024 Pearson Canada Inc.

19) Which of the following statements about price elasticity of demand is false? A) The value of the price elasticity of demand is the reciprocal of the value of the demand curve's slope. B) If quantity demanded changes by a larger percentage than the percentage change in price, demand is elastic. C) The value of the price elasticity of demand along a downward-sloping demand curve is always negative. D) A linear downward-sloping demand curve has a varying price elasticity coefficient. E) A non-linear demand curve has price elasticity of demand equals 1 at each point. Answer: A Diff: 3 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking Figure 6.4

20) Refer to Figure 6.4. Which of the following statements is true about the price elasticity of demand? A) The elasticity coefficient is constant along the demand curve. B) The elastic portion of a straight-line downward-sloping demand curve corresponds to the segment above the midpoint. C) The inelastic portion of the demand curve corresponds to the segment above the midpoint. D) At the midpoint of the demand curve, the elasticity coefficient is zero. E) The elastic portion of a straight-line downward-sloping demand curve corresponds to the segment below the midpoint. Answer: B Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 8 Copyright © 2024 Pearson Canada Inc.

21) Refer to Figure 6.4. The inelastic segment of the demand curve A) is coincident with the horizontal axis. B) is coincident with the vertical axis. C) lies below the midpoint of the curve. D) lies above the midpoint of the curve. E) exactly at the midpoint of the curve. Answer: C Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 22) Refer to Figure 6.4. At the midpoint of the demand curve, in absolute value, A) the price elasticity coefficient is at a maximum. B) the price elasticity coefficient is at a minimum. C) the price elasticity coefficient is zero. D) the price elasticity coefficient is one. E) the price elasticity coefficient is infinity. Answer: D Diff: 1 Type: MC Topic: Unit-Elastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 23) Which of the following statements is true about the price elasticity of demand along a downwardsloping linear demand curve? A) It is inelastic at high prices and elastic at low prices. B) It is unit-elastic throughout the demand curve. C) It is elastic at low prices and inelastic at high prices. D) It is perfectly elastic at very high prices and perfectly inelastic at very low prices. E) It is elastic at high prices and inelastic at low prices. Answer: E Diff: 2 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

24) If, for a given percentage increase in price, quantity demanded falls by a proportionately smaller percentage, then demand is A) unit-elastic. B) perfectly elastic. C) relatively inelastic. D) relatively elastic. E) perfectly inelastic. Answer: C Diff: 2 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 25) If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity demanded, then the demand for golf balls is A) unit-elastic. B) perfectly elastic. C) relatively inelastic. D) relatively elastic. E) perfectly inelastic. Answer: D Diff: 2 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 26) Facing stiff competition, Hendrix College, a small liberal arts institution in Conway, Ark., decided two years ago to bolster its academic offerings, promising students at least three hands-on experiences outside the classroom, including research, internships and service projects. Although it raised tuition and fees by 29 percent, enrollment in the freshman class rose by 37 percent. Source: Jonathan D. Glater and Alan Finder, "In New Twist on Tuition Game, Popularity Rises With the Price," New York Times, December 12, 2006 Based on the information above, the demand for Hendrix College education is A) unit-elastic. B) perfectly elastic. C) relatively inelastic. D) perfectly inelastic. E) More information is needed to answer the question. Answer: C Diff: 2 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

27) If the demand for a life-saving drug was perfectly inelastic and the price doubled, the quantity demanded would A) also double. B) decrease by 50%. C) be cut in half. D) remain constant. E) fall substantially. Answer: D Diff: 2 Type: MC Topic: Perfectly Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 28) At a price of $100, Beachside Canoe Rentals rented 11 canoes. When it increased its rental price to $125, only 9 canoes were rented. Calculate the absolute value of the price elasticity of demand for canoe rentals, using the midpoint formula. A) 2 B) 1.25 C) 0.9 D) 0.75 E) 0.45 Answer: C Diff: 3 Type: MC Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Price Elasticity of Demand 29) Consider the following types of demand curves: a. a vertical demand curve b. a horizontal demand curve c. a linear downward-sloping demand curve Which of the demand curves listed exhibits a price elasticity of demand coefficient that remains constant along the demand curve? A) a only B) b only C) a and b only D) a and c only E) b and c only Answer: C Diff: 2 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

30) If at a price of $24, Octavia sells 36 home-grown orchids and at $30 she sells 24 home-grown orchids, the demand for her orchids is A) elastic. B) inelastic. C) unit-elastic. D) perfectly elastic. E) perfectly inelastic. Answer: A Diff: 3 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 31) If at a price of $50, Ghani sells 20 hand-made leather cell-phone covers but at a price of $60, zero units are sold. Based on this information, the demand for his cell-phone covers is A) elastic or perfectly inelastic. B) elastic or perfectly elastic. C) unit-elastic. D) perfectly inelastic. E) perfectly elastic. Answer: B Diff: 2 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 32) At a price of $8 per dozen, Chuy sells 40 dozen homemade tamales per week. When he raised her price to $12 per dozen, he still sold 40 dozen per week. Based on this information, the demand for his tamales is A) perfectly elastic. B) inelastic. C) perfectly inelastic. D) unit-elastic. E) relatively inelastic. Answer: C Diff: 2 Type: MC Topic: Perfectly Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

33) For consumers who opt to pay a $10 monthly fee to have unlimited texting on their cell phones, but choose not to pay a $5 monthly fee to have unlimited call minutes, the unlimited texting option has a ________ than the unlimited minutes option. A) higher price elasticity of demand B) higher cross-price elasticity of demand C) lower income elasticity of demand D) lower cross-price elasticity of demand E) lower price elasticity of demand Answer: E Diff: 2 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 34) The demand for gasoline is perfectly inelastic because most people need gasoline to drive their cars. Answer: FALSE Diff: 1 Type: TF Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Inelastic with Perfectly Inelastic 35) If the demand for a product is elastic, the quantity demanded changes by a larger percentage than the percentage change in price. Answer: TRUE Diff: 2 Type: TF Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 36) If, when price changes by 35 percent, the quantity demanded changes by 7 percent, then the absolute value of the price elasticity of demand is 5. Answer: FALSE Diff: 2 Type: TF Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 37) Suppose at a price of $50, Yoshi's Jazz Bar sells 20 tickets to its nightly jazz performance and at a price of $40, it sells 25 tickets. Based on this information, the demand for Yoshi's jazz performance is elastic. Answer: FALSE Diff: 2 Type: TF Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

38) What does price elasticity of demand measure? When is demand elastic? Inelastic? Unit elastic? Answer: Price elasticity of demand measures the responsiveness of the quantity of a product demanded to a change in the price of the product. Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price. Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price. Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price. Diff: 2 Type: SA Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 39) When is demand perfectly elastic? When is demand perfectly inelastic? What are the values of the price elasticity of demand when demand is perfectly elastic or perfectly inelastic? What do perfectly elastic and perfectly inelastic demand curves look like? Answer: Demand is perfectly elastic when quantity demanded is infinitely responsive to price. If demand is perfectly elastic, price elasticity of demand equals infinity, and the demand curve is a horizontal line. Demand is perfectly inelastic when quantity demanded is completely unresponsive to price. If demand is perfectly inelastic, price elasticity of demand equals zero, and the demand curve is a vertical line. Diff: 2 Type: SA Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 40) Suppose the price of gasoline in July 2004 averaged $1.35 per litre and 15 million gallons a day were sold. In October 2005, the price averaged $2.15 per litre and 14 million gallons were sold. If the demand for gasoline did not shift between these two months, use the midpoint formula to calculate the price elasticity of demand. Indicate whether demand was elastic or inelastic. Answer: Price elasticity of demand = [(14 - 15) / (15 + 14)/2] / [(2.15 - 1.35) / (1.35 + 2.15)/2] = (-1 / 14.5) / (0.80 / 1.75) = (-0.069 / 0.457) = -0.15. Price elasticity of demand equals 0.15 (in absolute value) indicating that demand was inelastic. Diff: 2 Type: SA Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills 41) Economists use the concept of ________ to measure how one economic variable, such as quantity, responds to a change in another economic variable, such as price. A) slope B) efficiency C) relativity D) elasticity E) demand Answer: D Diff: 1 Type: MC Topic: Elasticity Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 14 Copyright © 2024 Pearson Canada Inc.

42) The price elasticity of demand is equal to A) the value of the slope of the demand curve. B) the change in quantity demanded divided by the change in price. C) the percentage change in price divided by the percentage change in quantity demanded. D) the percentage change in quantity demanded divided by the percentage change in price. E) the change in the quantity demanded due to change in income. Answer: D Diff: 1 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 43) In September 2014, the average price of gasoline in Canada was 130.61 cents per litre, and consumers purchased nearly 5 percent less gasoline than they had during September 2010, when the average price of gasoline was 103.36 cents per litre. Based on these figures, from September 2010 to September 2014, the demand for gasoline was A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: B Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills Special Feature: Chapter Opener: Do Pop Taxes Work? 44) To calculate the price elasticity of demand, we divide A) the percentage change in quantity demanded by the percentage change in price. B) the percentage change in price by the percentage change in quantity demanded. C) rise by the run. D) the average price by the average quantity demanded. E) the percentage change in quantity demanded by the percentage change in income. Answer: A Diff: 1 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

45) The slope of a demand curve is not used to measure the price elasticity of demand because A) the slope of a linear demand curve is not constant. B) the slope of a line cannot have a negative value. C) the measurement of slope is sensitive to the units chosen for price and quantity. D) the slope of the demand curve does not tell us how much quantity changes as price changes. E) the slope is the percentage change in prices only. Answer: C Diff: 1 Type: MC Topic: Price Elasticity and the Slope of a Demand Curve Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 46) If the slope of a demand curve is equal to -0.1, then A) demand is inelastic. B) we don't know whether the demand is elastic or inelastic. C) the demand is elastic at low prices and inelastic at high prices. D) as price increases by 10 percent, quantity demanded decreases by 1 percent. E) price elasticity of demand is less than 1. Answer: B Diff: 2 Type: MC Topic: Price Elasticity and the Slope of a Demand Curve Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 47) The price elasticity of demand for beef is estimated to be 0.60 (in absolute value). This means that a 20 percent increase in the price of beef, holding everything else constant, will cause the quantity of beef demanded to A) decrease by 12 percent. B) decrease by 20 percent. C) decrease by 26 percent. D) decrease by 32 percent. E) decrease by 60 percent. Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills

48) If the absolute value of the price elasticity of demand for aspirin equals 0.8 then A) aspirin is a normal good. B) the demand for aspirin is inelastic. C) aspirin has few substitutes. D) the demand for aspirin is elastic. E) aspirin is an inferior good. Answer: B Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 49) If demand is perfectly elastic, the absolute value of the price elasticity coefficient is A) infinity. B) zero. C) more than one. D) equal to the absolute value of the slope of the demand curve. E) equal one. Answer: A Diff: 1 Type: MC Topic: Perfectly Elastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 50) When the price of bacon rose by 10 percent, the quantity of bacon sold fell 4 percent. This indicates that the demand for bacon is A) inelastic. B) elastic. C) unit-elastic. D) perfectly inelastic. E) perfectly elastic. Answer: A Diff: 2 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills 51) A linear downward-sloping demand curve has price elasticities (in absolute values) that A) increase as price decreases. B) remain constant along the demand curve. C) decrease as price decreases. D) are greater than or equal to 1. E) decrease as price increases. Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 17 Copyright © 2024 Pearson Canada Inc.

52) David Suzuki believes that clean air and water are "priceless," where no cost is too high. This means his demand for clean air and water is A) perfectly elastic. B) perfectly inelastic. C) unit-elastic. D) horizontal. E) elastic. Answer: B Diff: 1 Type: MC Topic: Perfectly Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 53) If the price elasticity of demand for insulin is equal to zero, then the demand curve for insulin is A) horizontal. B) downward sloping. C) curvilinear. D) vertical. E) upward sloping. Answer: D Diff: 1 Type: MC Topic: Perfectly Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

Figure 6.5

54) Refer to Figure 6.5. The section of the demand curve labeled "A" represents A) the inelastic section of the demand curve. B) the unit-elastic section of the demand curve. C) the perfectly inelastic section of the demand curve. D) the perfectly elastic section of the demand curve. E) the elastic section of the demand curve. Answer: E Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 55) If the demand for iPods is price elastic, then A) the percentage change in quantity demanded is greater than the percentage change in price (in absolute value). B) the percentage change in quantity demanded is less than the percentage change in price (in absolute value). C) the percentage change in quantity demanded is equal to the percentage change in price. D) quantity demanded is not responsive to changes in price. E) quantity demand will not change with the price because it is a Giffen good. Answer: A Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

56) If the demand for a steak is unit-elastic, then A) the percentage change in quantity demanded is 1 percent greater than the percentage change in price. B) the percentage change in quantity demanded is equal to the percentage change in price. C) the percentage change in quantity demanded is 100 percent greater than the percentage change in price (in absolute value). D) quantity demanded does not respond to changes in price. E) the percentage change in quantity demanded is less than the percentage change in price. Answer: B Diff: 2 Type: MC Topic: Unit-Elastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 57) If the demand for cell phone service is inelastic, then A) the percentage change in quantity demanded is greater than the percentage change in price (in absolute value). B) the percentage change in quantity demanded is equal to the percentage change in price. C) the quantity demanded does not change in response to changes in price. D) the percentage change in quantity demanded is less than the percentage change in price (in absolute value). E) the change in price has no effect on quantity demanded. Answer: D Diff: 1 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

Figure 6.6

58) Refer to Figure 6.6. As price falls from PA to PB, the quantity demanded increases most along D1; therefore, A) D1 is unit elastic. B) D1 is more inelastic than D2 or D3. C) D1 is more elastic than D2 or D3. D) D1 is elastic at PA but inelastic at PB. E) D1 is perfectly elastic. Answer: C Diff: 2 Type: MC Topic: Price Elasticity and the Slope of a Demand Curve Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 59) The midpoint formula is used to measure the elasticity of demand between two points on a demand curve A) when demand is elastic. B) in special cases when the percentage change in the quantity demanded is equal to the percentage change in price. C) to ensure that the elasticity has a negative value. D) to ensure that we have only one value of the price elasticity of demand between two points on a demand curve. E) only if demand curve is vertical. Answer: D Diff: 1 Type: MC Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 21 Copyright © 2024 Pearson Canada Inc.

60) When the price of pistachio nuts is $7.50 per kg, the quantity demanded is 48 kg. When the price of peaches is $9.00 per kg, the quantity demanded is 40 kg. When the midpoint formula is used to measure the price elasticity of demand, we can say that the demand for pistachio nuts is A) relatively, but not perfectly, elastic. B) unit-elastic. C) completely inelastic. D) relatively inelastic. E) perfectly inelastic. Answer: B Diff: 3 Type: MC Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills 61) Assume that when the price of cantaloupes is $2.50, the demand for cantaloupes is unit-elastic, and the demand curve for cantaloupes is linear and downward sloping. If firms lower the price of cantaloupes to $2.00, which of the following statements can be made regarding the price elasticity of demand for cantaloupes? A) The demand for cantaloupes at $2.00 must be perfectly inelastic. B) We cannot determine whether the demand for cantaloupes is elastic or inelastic without knowing what the quantity demanded is at each price. C) The demand for cantaloupes at $2.00 must be elastic. D) The demand for cantaloupes at $2.00 must be unit-elastic. E) The demand for cantaloupes at $2.00 must be inelastic. Answer: E Diff: 2 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills 62) Assume that the demand curve for sunblock is linear and downward sloping. Which of the following statements about the slope of the demand curve for sunblock and the price elasticity of demand for sunblock are true? A) The slope and the price elasticity of demand are constant at all points along the demand curve for sunblock. B) The slope is constant, but the price elasticity of demand is not constant at all points along the demand curve for sunblock. C) The slope is not constant, but the price elasticity of demand is constant at all points along the demand curve for sunblock. D) The slope of the demand curve for sunblock is constant and equal to zero; demand is perfectly inelastic. E) The slope of the demand curve for sunblock is equal one; demand is perfectly inelastic. Answer: B Diff: 2 Type: MC Topic: Price Elasticity and the Slope of a Demand Curve Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

63) If the percentage change in the quantity of teapots demanded is greater than the percentage change in the price of teapots, then A) the price elasticity of demand for teapots is greater than 1 in absolute value. B) the demand for teapots is unit-elastic. C) the price elasticity of demand for teapots is equal to zero. D) the price elasticity of demand for teapots is less than 1 in absolute value. E) the price elasticity of demand for teapots is equal infinity. Answer: A Diff: 2 Type: MC Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Elastic and Inelastic Demand 64) We should never assume that an inelastic demand curve is a perfectly inelastic demand curve because A) there has never been evidence of a perfectly inelastic demand curve. B) an inelastic demand curve may be perfectly inelastic at some times but not others. C) perfectly inelastic demand curves are rare. D) an inelastic demand curve may be elastic at high prices. E) one is related to slope and the other is related to elasticity. Answer: C Diff: 1 Type: MC Topic: Perfectly Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Inelastic with Perfectly Inelastic Table 6.1 Price $35 25

Quantity 40 50

65) Refer to Table 6.1. Suppose you own a bookstore. You believe that you can sell 40 copies per day of the latest Margaret Atwood novel when the price is $35. You consider lowering the price to $25 and believe this will increase the quantity sold to 50 books per day. Compute the price elasticity of demand using the mid-point formula and these data. Select the correct implication from your work. A) The demand for the Margaret Atwood book is inelastic. Revenue will fall if the price is lowered. B) The demand for the Margaret Atwood book is elastic. Revenue will rise if the price is lowered. C) The demand for the Margaret Atwood book is inelastic. Revenue will rise if the price is lowered. D) The demand for the Margaret Atwood book is elastic. Revenue will fall if the price is lowered. E) The demand for the Margaret Atwood book is unit elastic. Revenue will stay the same with the change in price. Answer: A Diff: 3 Type: MC Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Price Elasticity of Demand 23 Copyright © 2024 Pearson Canada Inc.

66) Of the following, which is the best example of a product with a perfectly inelastic demand? A) the demand for tickets in Toronto when the Blue Jays are in the World Series B) the demand for gasoline C) insulin for a diabetic D) the demand for a college education by a student who has a full scholarship to a top school (according to the Maclean's University Rankings) E) demand for cigarettes Answer: C Diff: 1 Type: MC Topic: Perfectly Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 67) A perfectly elastic demand curve is A) vertical. B) horizontal. C) curvilinear. D) upward sloping. E) non-linear. Answer: B Diff: 1 Type: MC Topic: Perfectly Elastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 68) A newspaper article on the effect of higher wheat prices on the market for pasta contained the following: " 'The prices keep going up,' [Salvatore Cofone, president of Queen's Pasta in Etobicoke] said. 'In May, we paid $32 for 40 kilograms of semolina flour. Now, it's $37.50 for 40 kilograms.' " Source: Vanessa Lu, "Pasta makers feel pinch from bad wheat crop" Toronto Star, October 29, 2014. Assuming that this leads to an 8.5 percent decrease in the demand for semolina flour, based on the information given, what is the price elasticity of demand for semolina flour? A) 0.5 (in absolute value) B) 2.0 (in absolute value) C) 1.4% D) 1.5 E) We do not have enough information to calculate the elasticity. Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Price Elasticity of Demand

69) Suppose that when the price per ream of recycled printer paper rises from $4 to $4.50, the quantity demanded falls from 800 to 600 reams per day. Using the midpoint formula, what is the price elasticity of demand (in absolute value) over this range? A) 0.003 B) 0.41 C) 1.43 D) 2.00 E) 2.43 Answer: E Diff: 3 Type: MC Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Price Elasticity of Demand 70) If demand is inelastic, the absolute value of the price elasticity coefficient is greater than one. Answer: FALSE Diff: 1 Type: TF Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 71) If the demand for a product is elastic, the quantity demanded changes by a smaller percentage than the percentage change in price. Answer: FALSE Diff: 2 Type: TF Topic: Elastic and Inelastic Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 72) If the absolute value of the price elasticity of demand for gasoline is 0.5, then a 10 percent increase in the price of gasoline leads to a 0.5 percent decrease in the quantity demanded. Answer: FALSE Diff: 2 Type: TF Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 73) If a vendor is able to sell 5 units of a product at $10, and sells 6 units at a price of $8, then, using the midpoint formula, the demand for this good is inelastic. Answer: TRUE Diff: 2 Type: TF Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking

74) Briefly explain the economic concept of elasticity. Answer: Elasticity is a measure of how one economic variable responds to changes in another economic variable. Diff: 1 Type: SA Topic: Elasticity Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Reflective Thinking 75) The current price of canvas messenger bags is $36 each and sales of the bags equal 400 per week. If the price elasticity of demand is -2.5 and the price changes to $44, how many messenger bags will be sold per week? Use the midpoint formula. Answer: Using the midpoint formula: -2.5 = (400 - X) / [(X + 400) / 2] / (36 - 44) / [(36 + 44)/2] -2.5 × -0.2 = (400 - X) / [(X + 400) / 2] 0.5 = (400 - X) / [(X + 400) / 2] 0.5(200 + 0.5X) = 400 - X 1.25X = 300 X = 240 bags Diff: 3 Type: ES Topic: The Midpoint Formula Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills

76) The CBC covered a London School of Economics report as saying the "war on drugs [is] a global failure." They state the report offers "compelling evidence that achieving a 'drug-free world' based solely on a prohibitionist model is an expensive and wasted effort" and governments' focus on supply reduction efforts in its "war on drugs" have been relatively unsuccessful at addressing illegal drug use. Source: Janelle Jordan "War on drugs a global failure, London School of Economics says" CBC News, May 9, 2014 (http://www.cbc.ca/news/business/war-on-drugs-a-global-failure-london-school-of-economics-says-1.2636263) Some economists believe that a successful anti-drug program must concentrate on reducing demand; for example, through drug education and voluntary treatment programs for addicts. a. Suppose the price elasticity of supply for cocaine is -0.5. What will happen to the equilibrium price, quantity, and total revenue from cocaine sales if the government succeeds in its efforts to reduce demand? What is likely to happen to the incentive to sell cocaine? b. Suppose the government continues to concentrate its efforts on supply reduction and is able to reduce the supply of cocaine. As a result of the reduction in supply the price of cocaine increases by 25 percent. If the price elasticity of demand is -0.5, what is likely to happen to the incentive to sell cocaine? c. Based on your answers, explain why one approach might be preferred over the other. Answer: a. Since the supply is inelastic, a decrease in demand will lead to a decrease in price, quantity, and total revenue. Reduced revenue is likely to deter drug trafficking. b. The increase in price increases revenue when demand is inelastic; this will increase the incentive to sell cocaine. c. If people respond to incentives, the government will have more success is reducing cocaine consumption if it uses anti-drug programs that concentrate on reducing demand rather than programs that concentrate on reducing supply. Diff: 3 Type: ES Topic: Price Elasticity of Demand Learning Outcome: 6.1 Define and calculate price elasticity of demand AACSB: Analytic Skills

6.2

List and explain the determinants of the price elasticity of demand

1) Which of the following products comes closest to having a perfectly inelastic demand? A) gasoline B) cholesterol medication in general C) iPhones D) bus rides E) cigarettes Answer: B Diff: 1 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 2) Which of the following statements about the price elasticity of demand is correct? A) The elasticity of demand for a good in general is equal to the elasticity of demand for a specific brand of the good. B) The absolute value of the elasticity of demand ranges from zero to one. C) Demand is more elastic in the long run than it is in the short run. D) Demand is more elastic the smaller the percentage of the consumer's budget the item takes up. E) Price elasticity is same as the slope of a demand curve. Answer: C Diff: 2 Type: MC Topic: Passage of Time Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 3) When there are few close substitutes available for a good, demand tends to be A) perfectly inelastic. B) perfectly elastic. C) relatively inelastic. D) relatively elastic. E) unitary elastic. Answer: C Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking

4) When Lululemon Athletica first entered the market for yoga pants and clothes in 1998, the demand was ________, as many other brands are now selling yoga wear demand for lululemon clothes has become ________. A) inelastic; more elastic B) elastic; less elastic C) perfectly inelastic; elastic D) perfectly elastic; inelastic E) elastic; inelastic Answer: A Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 5) Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant? A) Demand is likely to be perfectly inelastic. B) Demand is likely to be perfectly elastic. C) Demand is likely to be relatively elastic. D) Demand is likely to be relatively inelastic. E) Demand is likely to be unit elastic. Answer: D Diff: 1 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 6) A demand curve that is horizontal indicates that the commodity A) has few substitutes. B) must be very cheap. C) is a necessity. D) has a large number of substitutes. E) has no substitutes. Answer: D Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking

7) Which of the following goods would have the most inelastic demand? A) ski vacations B) bread C) luxury cars D) big screen TVs E) diamonds Answer: B Diff: 2 Type: MC Topic: Luxuries versus Necessities Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 8) The demand for gasoline in the short run is A) elastic because people can easily switch to public transportation. B) perfectly inelastic because people have no choice but to buy gasoline. C) unit-elastic because people tend to consume a stable amount of gasoline per period. D) inelastic because there are no good substitutes for gasoline. E) infinitely elastic because people can use public transport instead. Answer: D Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 9) According to an article in the Wall Street Journal, unlike airlines, even elite hotels don't have sophisticated systems that can react quickly to changes in demand. Even if they could, many hoteliers say people don't respond that much to lower rates. "We've tested this, cutting our rates by $50 [per night], and we didn't see an appreciable response in occupancy," says Jim Schultenover, a vice president for RitzCarlton. Source: Jesse Drucker, "In Times of Belt-Tightening, We Seek Reasonable Rates," Wall Street Journal, April 6, 2001. Based on the information above, the demand for hotel rooms is A) elastic. B) unit-elastic. C) inelastic. D) perfectly elastic. E) perfectly inelastic. Answer: C Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Demand Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking

10) According to a study of the price elasticities of products sold in supermarkets, the price elasticity of demand for toothpaste is estimated at -0.45. Which of the following could explain why the price elasticity of demand for toothpaste is so low? A) The toothpaste industry is highly competitive. B) Toothpaste is relatively inexpensive. C) Toothpaste is heavily endorsed by dentists. D) There are few close substitutes for toothpaste. E) Toothpaste is a necessity with no substitute at all. Answer: D Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 11) If the price of steel increases drastically, the quantity of steel demanded by the building industry will fall significantly over the long run because A) buyers of steel are not sensitive to a price change at all. B) buyers of steel are less sensitive to a price change if they have more time to adjust to the price change. C) sales revenue in the building industry will fall sharply. D) profits will fall by a greater amount in the long run than in the short run. E) buyers of steel are more sensitive to a price change if they have more time to adjust to the price change. Answer: E Diff: 2 Type: MC Topic: Passage of Time Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 12) With the increased usage of cell phone services, what has happened to the price elasticity of demand for land-line telephone services? A) It has become more price inelastic. B) It has become more price elastic. C) It has become more income elastic. D) The absolute value of the price elasticity coefficient has probably gone down. E) It has price elasticity equal to one. Answer: B Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking

13) Which of the following would result in a higher absolute value of the price elasticity of demand for a product? A) A wide variety of substitutes are available for the good. B) The time period under consideration is short. C) The good is a necessity. D) The expenditure on the good is small relative to one's budget. E) It is an inferior good. Answer: A Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 14) Due to persistent high price of gasoline, consumers will drive less and use public transportation more. Over time, this will cause the demand curve for gasoline to become ________ and the quantity of gasoline demanded to ________. A) more elastic; rise B) more elastic; fall C) less elastic; rise D) less elastic; fall E) unit elastic; stay the same Answer: B Diff: 2 Type: MC Topic: Passage of Time Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 15) If the market for a product is broadly defined, then A) the good has many complements. B) there are few substitutes for the product, and the demand for the product is relatively inelastic. C) there are many substitutes for the product, and the demand for the product is relatively elastic. D) the expenditure on the good is likely to make up a large share of one's budget. E) there are no substitutes, and the demand for good is perfectly elastic. Answer: B Diff: 2 Type: MC Topic: Definition of the Market Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking

16) Rank these three items in terms of the elasticity of the demand for them at any given price, from most elastic to least elastic: alcoholic beverages, beer and Molson Canadian. A) alcoholic beverages, beer, Molson Canadian B) Molson Canadian, beer, alcoholic beverages C) beer, Molson Canadian, alcoholic beverages D) beer, alcoholic beverages, Molson Canadian E) alcoholic beverages, Molson Canadian, beer Answer: B Diff: 2 Type: MC Topic: Definition of the Market Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 17) Necessities tend to have more inelastic demands than luxuries. Answer: TRUE Diff: 1 Type: TF Topic: Luxuries versus Necessities Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 18) When there are few substitutes available for a good, demand tends to be relatively inelastic. Answer: TRUE Diff: 1 Type: TF Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 19) If the market for a product is narrowly defined, then there are likely to be many substitutes for the product and the demand for the product is relatively elastic. Answer: TRUE Diff: 2 Type: TF Topic: Definition of the Market Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking

20) List the five key determinants of price elasticity of demand and explain how each determinant indicates if demand tends to be elastic or inelastic. Answer: 1. Availability of close substitutes: If a product has more substitutes available, it will have more elastic demand. If a product has fewer substitutes available, it will have less elastic demand. 2. Passage of time: The more time that passes, the more elastic the demand for a product becomes. 3. Luxuries versus necessities: The demand curve for a luxury is more elastic than the demand curve for a necessity. 4. Definition of the market: The more narrowly a market is defined, the more elastic demand will be. 5. Share of a good in a consumer's budget: The demand for a good will tend to be more elastic the larger the share of the good in the average consumer's budget. Diff: 2 Type: SA Topic: Determinants of the Price Elasticity of Demand Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 21) For each pair of items below determine which product would have the higher price elasticity of demand (in absolute value). a. Insulin for a diabetic or aspirin for someone suffering a headache. b. A new Whirlpool 27 cu. ft. side-by-side refrigerator or electricity to power your all-electric home. c. A can of Schweppes Ginger Ale or soft drinks in general. Answer: a. The demand for aspirin is more price elastic (its elasticity has a higher absolute value) than the demand for insulin. Insulin is more necessity than luxury and has virtually no substitutes. There are substitutes for aspirin and it is not necessarily a necessity. b. The demand for a new refrigerator is more price elastic than the demand for electricity to power your home. The Whirlpool refrigerator has many substitutes. Electricity to power your all-electric home is more necessity than luxury, and if your home is powered only by electricity, few, if any, substitutes are available. c. The demand for Schweppes Ginger Ale is more price elastic than demand for soft drinks in general. Narrowly defined markets (such as the Schweppes Ginger Ale drink market) have many substitutes. Diff: 2 Type: ES Topic: Determinants of the Price Elasticity of Demand Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 22) The larger the share of a good in a consumer's budget, holding everything else constant, the A) more price elastic is a consumer's demand. B) more vertical is a consumer's demand curve. C) more price inelastic is a consumer's demand. D) more unit-elastic is a consumer's demand. E) more horizontal is a consumer's demand. Answer: A Diff: 2 Type: MC Topic: Share of the Good in the Consumer's Budget Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking

23) The most important determinant of the price elasticity of demand for a good is A) the definition of the market for a good. B) the availability of substitutes for the good. C) the share of the good in the consumer's budget. D) whether the good is a necessity or a luxury. E) taste of consumers. Answer: B Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 24) Which of the following statements is true? A) In general, if a product has few substitutes, it will have an elastic demand. B) The more time that passes, the more inelastic the demand for a product becomes. C) The demand curve for a necessity is more elastic than the demand curve for a luxury. D) The more narrowly we define a market, the more elastic the demand for a product will be. E) The more broadly we define a market, the more elastic the demand for a product will be. Answer: D Diff: 2 Type: MC Topic: Definition of the Market Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 25) Which of the following is not a determinant of a good's price elasticity of demand? A) the slope of the demand curve B) the share of the good in the consumer's total budget C) whether the good is a luxury or a necessity D) the passage of time E) availability of close substitutes Answer: A Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Demand Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 26) If the absolute value of the price elasticity of demand for DVD movies is 0.8, then the elasticity of demand for the DVD for the 2012 movie Cosmopolis should be A) less than 0.8 in absolute value. B) greater than 0.8 in absolute value. C) equal to 1 in absolute value. D) equal to zero because the DVD of this movie has been out for several years. E) equal to 0.8. Answer: B Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 35 Copyright © 2024 Pearson Canada Inc.

27) Holding everything else constant, the demand for a good tends to be more elastic A) the less substitutes there are for the good. B) the shorter the time period involved. C) the more consumers perceive the good to be a necessity. D) the less important the product is in consumers' budgets. E) the more substitutes there are for the good. Answer: E Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 28) Holding everything else constant, the absolute value of the price elasticity of demand for Maple Leaf bacon is ________ the price elasticity of demand for bacon. A) less than B) equal to C) twice as great as D) greater than E) half Answer: D Diff: 2 Type: MC Topic: Definition of the Market Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 29) Which of the following could explain why the demand for table salt is inelastic? A) Salt is a luxury good. B) Salt is a rare commodity. C) Households devote a very small portion of their income to salt purchases. D) Salt is a luxury for high income consumers but a necessity for low income consumers. E) Salt is necessary for living. Answer: C Diff: 1 Type: MC Topic: Share of the Good in the Consumer's Budget Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking

30) Most people buy salt infrequently and in small quantities. Even a doubling of the price of salt is likely to result in a small decline in the quantity of salt demanded. Therefore, A) the demand for salt will be perfectly inelastic. B) salt is a normal good. C) the demand for salt is relatively inelastic. D) the price elasticity of demand for salt is greater than 1 (in absolute value). E) salt is an inferior good. Answer: C Diff: 1 Type: MC Topic: Share of the Good in the Consumer's Budget Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking Table 6.2 Canada Dry Ginger Ale All carbonated soft drinks All soft drinks

Estimated Price Elasticity of Demand -3.0 -1.5 -0.8

31) Refer to Table 6.2. Assume that an economist has estimated the price elasticity of demand values in the table above. Use the data in the table to select the correct statement. A) The demand for Canada Dry Ginger Ale is inelastic. B) The elasticity for "All soft drinks" is less than the elasticity for Canada Dry Ginger Ale because Canada Dry is more of a luxury than a necessity; "All soft drinks" represent goods that are more necessity than luxury. C) The difference in elasticity values is explained by the fact that the more narrowly we define a market the more elastic the demand will be. D) There are fewer substitutes for "All carbonated soft drinks" than there are for "All soft drinks." E) Canada Dry GingerAle has the highest elasticity because people don't like it. Answer: C Diff: 2 Type: MC Topic: Definition of the Market Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 32) In general, a "big ticket item" such as a house or new car will A) tend to have a more elastic demand than a lower priced good. B) tend to have an inelastic demand because spending on the item takes up a large share of the average consumer's budget. C) tend to have an inelastic demand because it has many substitutes. D) tend to have a more inelastic demand the more time that passes. E) tend to have unit elasticity of demand because these items are necessary. Answer: A Diff: 2 Type: MC Topic: Share of the Good in the Consumer's Budget Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 37 Copyright © 2024 Pearson Canada Inc.

33) Renny Pete believes that the price elasticity of demand for her economics textbook is relatively inelastic. She argues "I was told I had to purchase a book written by Hubbard, O'Brien, Serletis, and Childs that is required by my instructor. If I wanted to buy a mystery novel I would have many authors to choose from. Therefore, the demand for mystery novels is more elastic than the demand for my textbook." Is Renny correct? A) The demand for the textbook is more inelastic, but Renny's reasoning is incorrect. The reason the textbook has an inelastic demand is that it is more expensive than any novel. B) She is correct. C) She is confused. She should have concluded that the textbook has a more elastic demand than a novel. D) She is correct that the textbook has a more inelastic demand, but that is because most students pay for their textbooks with credit or debit cards. Most people pay for novels and other books with cash or by cheque. E) She is not correct because you can easily buy used textbooks whereas it is hard to buy a used novel at a cheaper price. Answer: B Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 34) As gasoline prices increased throughout 2022 and into 2023, consumers began to explore alternatives to driving their cars and more people eventually ended up using public transportation. This exemplifies that for a specific product, the longer the time period involved, A) the larger (in absolute value) the price elasticity of demand. B) the smaller (in absolute value) the price elasticity of demand. C) the closer the price elasticity of demand is to reaching a value of zero. D) the more people come to rely on that product. E) the closer the price elasticity of demand is to reaching a value of one. Answer: A Diff: 1 Type: MC Topic: Passage of Time Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 35) The demand for required textbooks is likely to be more elastic than the demand for a best-selling mystery novel. Answer: FALSE Diff: 2 Type: TF Topic: Availability of Close Substitutes Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 36) The demand for heating oil in the short run is more elastic than the long run demand for heating oil. Answer: FALSE Diff: 1 Type: TF Topic: Passage of Time Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 38 Copyright © 2024 Pearson Canada Inc.

37) The price elasticity of demand for Kellogg's Raisin Bran is larger in absolute value than the price elasticity for all breakfast cereals. Answer: TRUE Diff: 1 Type: TF Topic: Definition of the Market Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking 38) For each pair of items below, determine which product would have the higher price elasticity of demand (in absolute value). a. blood pressure medicine for someone who has high blood pressure and the purchase of Clairol hair colouring product. b. a new Ford Fusion or a tank of gas for your current car. c. a Seiko watch or watches in general. Answer: a. The demand for the hair product is more price elastic (its elasticity has a higher absolute value) than the demand for blood pressure medicine. The latter is more necessity than luxury and has virtually no substitutes. There are substitutes for the Clairol hair colouring product and it is not a necessity. b. The demand for a new car is more price elastic than the demand for a tank of gas for your current car. The Ford Fusion: (a) has many substitutes, including your current car, and (b) will consume a relatively large portion of your budget. Gasoline for the car you own is more necessity than luxury. c. The demand for Seiko watches is more price elastic than demand for watches in general. Narrowly defined markets (such as the Seiko watch market) have many substitutes. Diff: 2 Type: ES Topic: Determinants of the Price Elasticity of Demand Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Reflective Thinking

39) The estimated price elasticities of demand for the products listed in the table as "Product A" are from Figure 6.2 in the text. Indicate whether the products listed as "Product B" will have a more elastic or less elastic demand than the corresponding Product A.

Product A

Estimated Elasticity for Product A

Beer

-0.29

Chicken Coca-Cola Cigarettes Grapes

-0.37 -1.22 -0.25 -1.18

Product B Samuel Adams Boston Lager Organically raised chicken Soda Marlboro Lights Fresh Fruit

Is Estimated Elasticity for Product B More Elastic or Less Elastic than for Product A?

Answer:

Product A

Estimated Elasticity for Product A

Beer

-0.29

Chicken Coca-Cola Cigarettes Grapes

-0.37 -1.22 -0.25 -1.18

Product B Samuel Adams Boston Lager Organically raised chicken Soda Marlboro Lights Fresh Fruit

Is Estimated Elasticity for Product B More Elastic or Less Elastic than for Product A? more elastic more elastic less elastic more elastic less elastic

Diff: 2 Type: ES Topic: Determinants of the Price Elasticity of Demand Learning Outcome: 6.2 List and explain the determinants of the price elasticity of demand AACSB: Analytic Skills

6.3

Explain the relationship between the price elasticity of demand and total revenue

1) Total revenue equals A) price per unit times quantity sold. B) price per unit times quantity supplied. C) price per unit times change in quantity sold. D) change in price per unit times quantity sold. E) price per unit plus quantity sold. Answer: A Diff: 1 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 2) When demand is elastic, a fall in price causes total revenue to rise because A) when price falls, quantity sold increases so total revenue automatically rises. B) the increase in quantity sold is large enough to offset the lower price. C) the percentage increase in quantity demanded is less than the percentage fall in price. D) the demand curve shifts. E) total revenue always rises whether price falls or rise. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 3) When demand is unit-elastic, a change in price causes total revenue to stay the same because A) the percentage change in quantity demanded exactly offsets the percentage change in price. B) buyers are buying the same quantity. C) total revenue never changes with price changes. D) the change in profit is offset by the change in production cost. E) with the fall in price, quantity also falls. Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

4) If a firm lowered the price of the product it sells and found that total revenue did not change, then the demand for its product is A) perfectly inelastic. B) perfectly elastic. C) unit-elastic. D) relatively elastic. E) relatively inelastic. Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 5) If a firm wanted to know whether the demand for its product was elastic, unit-elastic, or inelastic, then the firm could A) survey competitors and ask them what they think demand elasticity is for the product. B) talk to its customers. C) change price a little bit and observe what happens to total revenue. D) not do anything as there is no way to find an elasticity value. E) decide how much to produce. Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

Table 6.3 Price per Pound (dollars) $16 14 12 10 8 6 4 2

Quantity of Cheese Demanded (pounds) 3 4 5 6 7 8 9 10

6) Refer to Table 6.3. Over what range of prices is the demand elastic? A) over the entire range of prices B) between 6 $ and $10 C) between $8 and $16 D) between $2 and $8 E) between $14 and $16 Answer: E Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills Special Feature: Solved Problem: Price and Revenue Don't Always Move in the Same Direction 7) Refer to Table 6.3. Over what range of prices is the demand inelastic? A) over the entire range of prices B) between $12 and $16 C) between $8 and $16 D) between $2 and $8 E) between $6 and $10 Answer: D Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills Special Feature: Solved Problem: Price and Revenue Don't Always Move in the Same Direction

8) Consider a demand curve that has a constant elasticity value of 0. What happens to quantity demanded and total revenue when price increases? A) The quantity demanded and total revenue remain the same. B) The quantity demanded does not change but total revenue increases. C) The quantity demanded and total revenue fall to zero. D) The quantity demanded does not change but total revenue decreases. E) The quantity demanded changes but total revenue stays the same. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 9) Amazon estimates the price elasticity of demand for e-books to be -1.74. Yet, some publishers have resisted Amazon's calls to reduce prices. Why? A) The publishers believe the demand for their more unique titles to be less elastic. B) The publishers aren't interested in maximizing revenue. C) Amazon's estimate of price elasticity has no implications for revenue. D) The publishers do not benefit from the lower prices Amazon is promoting. E) The publishers wants to set a high price regardless of elasticity. Answer: A Diff: 2 Type: MC Topic: Availability of Close Substitutes Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking Special Feature: Apply the Concept: Amazon and Netflix Test the Price Elasticity of Demand for Their Services 10) The price elasticity of demand for canned soup is estimated at -1.62. What happens to sales revenue if the price of canned soup rises? A) It falls by 162 percent. B) It rises by 1.62 percent. C) It falls. D) It rises. E) It stays the same. Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills

11) Suppose a decrease in the supply of bottled water results in a decrease in revenue. This indicates that A) the demand for bottled water is inelastic in the price range considered. B) the demand for bottled water is elastic in the price range considered. C) the supply of bottled water is inelastic in the price range considered. D) the supply of bottled water is elastic in the price range considered. E) the demand for bottled water is perfectly elastic. Answer: B Diff: 3 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 12) Suppose a decrease in the supply of wheat results in an increase in revenue. This indicates that A) the decrease in quantity sold is proportionately larger than the resulting change in price. B) the resulting increase in price is proportionately greater than decrease in quantity sold. C) the demand curve for wheat must be vertical. D) the supply curve for wheat must be vertical. E) wheat has quite a few substitutes. Answer: B Diff: 3 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 13) Suppose the demand for milk is relatively inelastic. What happens to sales revenue if the government imposes a price floor above the free market equilibrium price in the market for milk? A) Sales revenue falls. B) Sales revenue rises. C) Sales revenue remains unchanged. D) It cannot be determined without information on prices. E) Nothing will change, the market will stay in equilibrium because the floor is not binding. Answer: B Diff: 3 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

14) Suppose the absolute value of the price elasticity of demand for meals at Fortune Buffet House is ∞. What happens to sales revenue if the restaurant increases its price by 5 percent? A) Sales revenue falls by less than 5 percent. B) Sales revenue remains unchanged. C) Sales revenue falls by 100 percent. D) It cannot be determined without information on prices. E) Sales revenue falls by 50 percent. Answer: C Diff: 3 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills 15) It is not uncommon for firms introducing a new product to price the product so low that quantity demanded is much greater than quantity supplied. This is because A) firms have to experiment with different prices to determine own price elasticity of demand. B) firms do not consider own price elasticity of demand when setting prices for new products. C) the own price elasticity of demand has no relationship with a firms revenue. D) no firm can ever estimate own price elasticity of demand. E) they want to find out cross price elasticity of demand. Answer: A Diff: 1 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking Special Feature: Apply the Concept: Amazon and Netflix Test the Price Elasticity of Demand for Their Services

Table 6.4 The publisher of a magazine gives his staff the following information: Current price Current sales Current revenue Current total costs

$2.00 per issue 150,000 copies per month $300,000 per month $450,000 per month

He tells the staff, "Our costs are currently $150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to $3.00 per issue. This will result in our revenue being exactly equal to our cost." 16) Refer to Table 6.4. Which of the following statements is correct? A) The publisher's analysis is correct only if the demand is perfectly elastic. B) The publisher's analysis is correct only if the demand is elastic. C) The publisher's analysis is always correct regardless of elasticity. D) The publisher's analysis is correct only if the demand is unit-elastic. E) The publisher's analysis is correct only if the demand is perfectly inelastic. Answer: E Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills 17) An article in the Wall Street Journal noted the following: Instead of relying on a full-coach, round-trip unrestricted fare of about $2,000 between Cleveland and Los Angeles ... Continental [Airlines] since June has offered a $716 unrestricted fare in that market.... Through October, the test resulted in about the same revenue that Continental thinks it would have collected with its higher fare. Source: Scott McCartney, "Airlines Try Cutting Business Fares, Find They Don't Lose Revenue," Wall Street Journal, November 22, 2002. What is the absolute value of the price elasticity of demand on this airline route? A) 0 B) less than 1 C) greater than 1 D) approximately 1 E) exactly equal Answer: D Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills

18) If a firm's goal is to maximize revenue, it will price its product to correspond to the unit-elastic segment of its demand curve. Answer: TRUE Diff: 1 Type: TF Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 19) When Audrina raised the price of her homemade cookies, her total revenue increased. This suggests that the demand for Audrina's cookies is elastic. Answer: FALSE Diff: 1 Type: TF Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 20) Firms estimate the price elasticity of demand for new products by conducting market experiments in which firms try different prices and observe the resulting change in quantity demanded. Answer: TRUE Diff: 2 Type: TF Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 21) Explain the relationship between price elasticity of demand and total revenue. Answer: If demand is elastic, an increase in price reduces total revenue, and a decrease in price increases total revenue. If demand is inelastic, an increase in price increases total revenue, and a decrease in price decreases total revenue. If demand is unit elastic, a change in price (either up or down) does not affect total revenue. Diff: 2 Type: ES Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills

22) Suppose that at a price of $55, 100 units were sold, while at a price of $33, 153 units were sold. Without calculating the price elasticity value, can you determine whether demand is elastic, unit-elastic, or inelastic? Explain your answer. Answer: The first total revenue is ($55) × (100) = $5,500 while the second total revenue is ($33) × (153) = $5,049. Because total revenue decreased when price fell, demand must be inelastic. Diff: 3 Type: ES Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills Special Feature: Solved Problem: Price and Revenue Don't Always Move in the Same Direction 23) The Mass Rapid Transit (MRT) System in Hong Kong has been running significant losses. Transport Ministry officials have argued over whether to raise fares to combat the losses. One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commuter hours. Suppose that the current fare is $4 and the government is considering raising it to $6. Officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day. a. What is the estimated elasticity of demand for MRT rides? b. What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system? c. Last year, the MRT system incurred a loss of $50,000 per day. Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain. Answer: a. Price elasticity = -0.56. b. Total Revenue will increase. c. The expected increase in revenue is $8,000 per day. It is unlikely that the fare increase alone will resolve the problem. Diff: 2 Type: ES Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills 24) Total revenue is equal to A) the amount of funds earned by a firm minus its costs of production. B) the total quantity sold of a product over a given period of time. C) the price of a product multiplied by the number of units of the product sold. D) the monetary value of the capital (for example, plant and equipment) a firm owns. E) total profit. Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

25) Which of the following statements is true? A) Whenever a firm raises its price, its total revenue will increase. B) When a firm lowers its price, its total revenue may either increase or decrease. C) Whenever a firm increases its quantity sold, its revenue will increase. D) Total revenue will equal zero when the demand for a product is unit-elastic. E) Whenever a firms raises its price, its total revenue will decrease. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 26) If demand is perfectly inelastic, the absolute value of the price elasticity coefficient is A) infinity. B) zero. C) more than one. D) equal to the absolute value of the slope of the demand curve. E) one. Answer: B Diff: 1 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 27) If a firm raised its price and discovered that its total revenue fell, then the demand for its product is A) perfectly inelastic. B) relatively inelastic. C) perfectly elastic. D) relatively elastic. E) unit elastic. Answer: D Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

Table 6.5 Hourly Rental Rate (dollars) $60 75 80 100

Quantity Demanded (hours) 40 32 30 24

28) Refer to Table 6.5. Donna Mercredi owns an all-terrain vehicle (ATV) rental service in Yellowknife. Table 6.5 shows her estimated demand schedule for ATV rentals per week. She would like to increase her sales revenue by changing the price she charges for rentals. At present, she charges $75. Based on the information in the table, Donna A) is not able to increase her revenue by changing her price because the demand for ATV rentals is unitelastic. B) should lower her price to $60 to increase her revenue because the demand for ATV rentals is price elastic. C) should raise her price to $80 to increase her revenue because the demand for ATV rentals is price inelastic. D) should raise her price to earn the most revenue. E) should reduce the price to increase her total revenue. Answer: A Diff: 3 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills 29) Which of the following explains why a firm would be interested in knowing the price elasticity of demand for a good it sells? A) The price elasticity of demand can be used to determine the impact of changes in income on quantity sold. B) Knowing the price elasticity of demand allows the firm to determine how the cost of producing additional units of the good will change. C) Knowing the price elasticity of demand allows the firm to calculate how changes in the price of the good will affect the firm's total profit. D) The price elasticity of demand allows the firm to calculate how changes in the price of the good will affect the firm's total revenue. E) The price elasticity of demand allows the firm to calculate its cost of production. Answer: D Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

30) Opera Estate Girls' School is considering increasing its tuition to raise revenue. If the school believes that raising tuition will increase revenue, A) it is assuming that the demand for attending the school has elasticity equal zero. B) it is assuming that the demand for attending the school is elastic. C) it is assuming that the demand for attending the school is unit-elastic. D) it is assuming that the demand for attending the school is perfectly elastic. E) it is assuming that the demand for attending the school is inelastic. Answer: E Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 31) Along a downward-sloping, linear demand curve, total revenue is the greatest A) where demand is normal. B) where demand is the most inelastic. C) where demand is the most elastic. D) where demand is unit-elastic. E) where demand is maximum. Answer: D Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

Figure 6.7

32) Refer to Figure 6.7. Between points a and b on the demand curve, demand is A) perfectly inelastic. B) unit-elastic. C) perfectly elastic. D) elastic. E) inelastic. Answer: B Diff: 1 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills 33) In September 2018, the average price of gasoline in Canada was $1.30 per litre, and consumers purchased nearly 5 percent less gasoline than they had during September 2022, when the average price of gasoline was $1.03 per litre. Based on these figures, from September 2018 to September 2022, when the price of gasoline rose from $1.03 cents per liter to $1.30 per litre, total revenue A) increased. B) decreased. C) did not change. D) first decreased then increased. E) There is not enough information to determine what happened to total revenue. Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking Special Feature: Chapter Opener: Do Pop Taxes Work? 53 Copyright © 2024 Pearson Canada Inc.

34) Assume that the market for barley is in equilibrium and the demand for barley is inelastic. Predict what happens to the revenue of barley farmers if a prolonged drought reduces the supply of barley. The drought will cause farm revenue to A) rise because there will be a shortage of barley. B) rise because the percentage increase in quantity sold is less than the percentage increase in price. C) rise because the percentage increase in quantity sold is greater than the percentage increase in price. D) fall because of the decrease in the quantity of barley sold. E) rise because the percentage decrease in quantity sold is less than the percentage increase in price. Answer: E Diff: 3 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 35) Assume that you own a small boutique hotel. In an attempt to raise revenue you reduce your rates by 20 percent. However, your revenue falls. What does this indicate about the demand for your boutique hotel rooms? A) Boutique hotel rooms are inferior goods. B) Demand is inelastic. C) The demand curve for your hotel rooms is vertical. D) Demand is elastic. E) Demand is perfectly elastic. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 36) Suppose when Nablom's Bakery raised the price of its breads by 10 percent, the quantity demanded fell by 15 percent. What was the effect on sales revenue? A) Sales revenue increased. B) Sales revenue remained unchanged. C) Sales revenue decreased. D) It cannot be determined without information on prices. E) Sales revenue first decreased then increased. Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

37) Suppose at the current price, the demand for copper is estimated to be -3.14. What happens to sales revenue if the government imposes a price ceiling below the free market equilibrium price in the copper market? A) Sales revenue falls. B) Sales revenue rises. C) Sales revenue remains unchanged because copper is a necessity for most industries. D) It cannot be determined without information on prices. E) Price ceiling has no effect on market equilibrium or revenue because ceiling is not binding. Answer: B Diff: 3 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills 38) Suppose a decrease in the supply of paper results in an increase in revenue. This indicates that A) the demand for paper is inelastic. B) the demand for paper is elastic. C) the supply of paper is inelastic. D) the supply of paper is elastic. E) the supply of paper is perfectly elastic. Answer: A Diff: 3 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 39) Which of the following statements is true? A) If the price of a good is lowered and total revenue decreases, demand is elastic. B) If the price of a good is raised and total revenue does not change, demand is perfectly elastic. C) If the price of a good is raised and total revenue decreases, demand is inelastic. D) If the price of a good is lowered and total revenue increases, demand is inelastic. E) If the price of a good is raised and total revenue increases, demand is inelastic. Answer: E Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

40) Which of the following correctly comments on the following statement? "The only way to increase the revenue from selling a product is to increase the product's price." A) The statement is not true. Revenue will increase as the price of the product increases only if demand is elastic. B) The statement is not true. Revenue will increase as the price of the product increases only if demand is inelastic. C) The statement is true. D) This statement is not true. Revenue will decrease as the price of the product increases because quantity demanded will fall. E) The statement is not true. Increase or decrease in price does not change the total revenue. Answer: B Diff: 3 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking Special Feature: Solved Problem: Price and Revenue Don't Always Move in the Same Direction 41) Toronto is likely to introduce a number of new toll roads (and new tolls on some existing roads) between 2019 and 2024. Which of the following would you expect to observe if the Toronto government was behaving rationally? A) Many different tolls on different roads as the own price elasticity of demand for toll roads isn't known yet. B) Completely uniform tolls on all roads in an effort to maximize revenue. C) Tolls that are identical to those on existing roads to avoid changing traffic patterns. D) Tolls to disappear as demand will fall on all roads in response to the new tolls. E) Roads should be free to travel, tolls are not rational. Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 42) If tolls on a toll road can be raised significantly before commuters will consider using a free alternative, demand for using the toll road must be A) inelastic. B) elastic. C) unit elastic. D) perfectly elastic. E) perfectly inelastic. Answer: A Diff: 1 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

43) If tolls on a toll road can be raised significantly before commuters will consider using a free alternative, then an increase in tolls will result in A) a decrease in total revenue. B) a decrease in non-toll road usage. C) an increase in total revenue. D) an increase in toll road usage. E) none of the above. Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking Table 6.6 Price of Streaming Service $12.99 10.99

Subscriptions Sold at That Price 500,000 650,000

Total Revenue at That Price $6,495,000 7,143,500

44) Refer to Table 6.6. Based on the data in the table, between a price of $10.99 and $12.99, the demand for streaming service is A) elastic. B) unit elastic. C) inelastic. D) perfectly inelastic. Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytical Thinking Special Feature: Apply the Concept: Amazon and Netflix Test the Price Elasticity of Demand for Their Services

45) Refer to Table 6.6. Based on the data in the table and using the midpoint formula, between a price of $10.99 and $12.99, the price elasticity of demand for streaming service is A) -0.64. B) -0.90. C) -1.56. D) -6.30. Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytical Thinking Special Feature: Apply the Concept: Amazon and Netflix Test the Price Elasticity of Demand for Their Services 46) If the price elasticity of demand is unit-elastic, a 10 percent increase in price will result in a 10 percent increase in revenue. Answer: FALSE Diff: 1 Type: TF Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 47) If demand for a product is perfectly inelastic, a change in price will not change total revenue. Answer: FALSE Diff: 1 Type: TF Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking 48) Suppose the absolute value of the price elasticity of demand for basketball game tickets on your campus is greater than 1. Increasing ticket prices will increase the total revenue from ticket sales. Answer: FALSE Diff: 1 Type: TF Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

49) Amazon is a large seller of e-books. Why would Amazon insist on charging a unanimous price of $9.99 for the ebooks from all publishers? Answer: Amazon wants to maximize its total revenues from the sale of e-books and it has realized that lowering the price actually increases its revenue because the price elasticity of demand for ebooks according to Amazon economists is greater than 1 which means lowering the price would increase the quantity sold proportionately more than the fall in price. Diff: 1 Type: SA Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills Special Feature: Apply the Concept: Amazon and Netflix Test the Price Elasticity of Demand for Their Services 50) Why Hachette, a publisher of many best-selling authors, did not agree with Amazon's policy of charging a unanimous price of $9.99 for all its books. Hachette went into a dispute with Amazon to increase the price of its e-books sold on Amazon. If demand for e-books is elastic and total revenue increases with a fall in price, then why Hachette insisted in increasing the price for its books? What was the result of an increase in price after they settle the dispute? Explain. Answer: Hachette believed that while the demand for some authors might be price elastic, the demand for other e-books it published on obscure subjects was price inelastic. For those books, cutting the price would reduce Hachette's revenue. In addition, Hachette believed that lower prices on e-books might come at the expense of sales of hardcover copies of those books, on which the publisher makes higher profits. Eventually, Amazon and Hachette reached an agreement that allowed Hachette to determine the prices of its ebooks on Amazon. Due to this Amazon had to sign similar agreements with other publishers. As a result, prices of e-books on Amazon have risen in recent years. The result of an increase in prices was not in favour of the publisher because the sales revenue fell after the increase in price. Amazon appeared to be correct, however, the publisher believed they would still gain by selling more hardcover books which has a huge profit margin for them. Diff: 1 Type: ES Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills Special Feature: Apply the Concept: Amazon and Netflix Test the Price Elasticity of Demand for Their Services

51) Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut. He estimates that he would be able to sell 200 gyros per day at $3.50 each. a. Calculate the price elasticity of demand using the midpoint formula. b. Calculate the change in revenue as a result of the price cut. Answer: a. Price elasticity of demand = (120 - 200) / [(200 + 120) / 2] / (4.50 - 3.50) / (3.50 + 4.50) / 2] = (-80 / 160) / (1 / 4) = -2 b. Change in revenue = $700 - $540 = $160 Diff: 2 Type: ES Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills 52) You are the manager of a theater. At present the theater charges the same admission price of $8 to all customers, regardless of age. You propose a two-tier pricing scheme: $5 for children under the age of 12 and $10 for adults. You tell your supervisor that your proposal is likely to increase revenues. What must be true about the price elasticity of demand if your proposal is to achieve its goal of raising revenue? Explain your answer. Answer: You believe that the price elasticity of demand for theatre tickets for children is elastic. Hence, a decrease in price will increase revenue. The demand for tickets for adults is inelastic; therefore, increasing the price for this group will increase revenue. Diff: 2 Type: ES Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Reflective Thinking

53) Suppose the Premier of Ontario has proposed increasing toll rates on Ontario's toll roads, and has presented two possible scenarios to implement these increases. Following are projected data for the two scenarios for the Ontario toll roads: Scenario 1: Toll rate in 2022: $10.00. Toll rate in 2026: $22.50. For every 100 cars using the toll roads in 2022, only 81.6 cars will use the toll roads in 2026. Scenario 2: Toll rate in 2022: $10.00. Toll rate in 2026: $17.50. For every 100 cars using the toll roads in 2022, only 96.2 cars will use the toll roads in 2026. a. Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2. b. Assume 20,000 cars use Ontario toll roads every day in 2022. What would be the daily total revenue received for each scenario in 2022 and in 2026? c. Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic. Briefly explain. (For the above questions, assume that nothing other than the toll rate changes during the time frame listed.) Answer: a. For Scenario 1: Percentage change in quantity demanded = [(81.6 - 100) / 90.8] × 100 = -20.3% Percentage change in price = [($22.50 - $10.00) / $16.25] × 100 = 76.9% Price elasticity of demand = -20.3% / 76.9% = -0.26 For Scenario 2: Percentage change in quantity demanded = [(96.2 - 100) / 98.1] × 100 = -3.9% Percentage change in price = [($17.50 - $10.00) / $13.75] × 100 = 54.5% Price elasticity of demand = -3.9% / 54.5% = -0.07 b.

The daily total revenue in 2022 under both scenarios is (10,000 cars × $10.00) = $100,000. The daily total revenue in 2026 under Scenario 1 is (8,160 cars × $22.50) = $183,600. The daily total revenue in 2026 under Scenario 2 is (9,620 cars × $17.50) = $168,320.

c. For both scenarios, total revenue increases when the toll increases, because the demand under both scenarios is price inelastic. Diff: 3 Type: SA Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.3 Explain the relationship between the price elasticity of demand and total revenue AACSB: Analytic Skills

6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants 1) Income elasticity measures A) how a good's quantity demanded responds to change in the goods price. B) how a good's quantity demanded responds to change in the price of another good. C) how a good's quantity demanded responds to change in buyers' incomes. D) how a good's quantity demanded responds to producers' incomes. E) how a good's quantity demanded responds to producers' supply. Answer: C Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 2) Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce. A) -0.66 B) 0.5 C) 1.5 D) 2 E) 3 Answer: B Diff: 2 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills Special Feature: Apply the Concept: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages 3) Studies show that the income elasticity of demand for chocolate is approximately five. What does this mean? A) A one percent decrease in the price of chocolate leads to a five percent increase in chocolate consumption. B) A one percent increase in price leads to a five percent increase in chocolate consumption. C) A five percent increase in income leads to a one percent increase in chocolate consumption. D) Chocolate is a relatively elastic good. E) A one percent increase in income leads to a five percent increase in chocolate consumption. Answer: E Diff: 2 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

4) Which of the following items is likely to have the highest income elasticity of demand? A) a bus ride B) a meal at Taco Bell C) a vacation home in the Swiss Alps D) a tank of gasoline E) a donut from Tim Hortons Answer: C Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 5) If you expect the economy is going to boom and average income in the economy will rise in the foreseeable future, the type of firm that would be able to increase its sales if your expectations are met is A) one that sells an inferior good. B) one that sells a necessity good. C) one that sells a luxury good. D) one that sells a price inelastic good. E) one that just enters production. Answer: C Diff: 2 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 6) Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is A) negative, so Sefton considers potatoes to be an inferior good. B) positive, so Sefton considers potatoes to be an inferior good. C) positive, so Sefton considers potatoes to be a normal good and a necessity. D) negative, so Sefton considers potatoes to be a normal good. E) positive, so Sefton considers potatoes to be a luxury good. Answer: A Diff: 2 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills

7) According to a study of the Canadian demand for alcoholic beverages, the price elasticity of demand for beer is -0.17. Which of the following could explain why the price elasticity of demand for beer is low? A) Beer is an inferior alcoholic beverage. B) More and more people are switching to wine and cocktails rather than beer. C) Most beer drinkers don't see other alcoholic beverages as substitutes. D) There are only a few major suppliers of beer. E) Beer has no substitutes at all. Answer: C Diff: 2 Type: MC Topic: Cross-Price and Income Elasticities of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages 8) Economists estimated that the price elasticity of beer is -0.17 and the income elasticity of beer is -0.05. This means that A) an increase in the price of beer will increase the quantity demanded of beer and beer is a normal good. B) an increase in the price of beer will lead to an increase in revenue for beer sellers and beer is an inferior good. C) a decrease in the price of beer will lead to an increase in revenue for beer sellers and beer is an inferior good. D) an increase in the price of beer will lead to a decrease in the quantity demanded of beer and beer is a necessity. E) an increase in the price of beer will lead to a decrease in revenue for beer sellers and beer is a normal good. Answer: B Diff: 3 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills Special Feature: Apply the Concept: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages

9) Using cross-sectional data from the two Housing Assistance Supply Experiment (HASE) sites, research estimates showed that the long-run "permanent" income elasticity of housing expenditures to be 0.45 for owners. Using this information, what is likely to happen to housing expenditures if the government increases income transfers to recipients in HASE sites? A) Housing expenditures will increase significantly. B) Housing expenditures in HASE sites significantly will fall as recipients moved out of these areas to higher-income areas. C) Housing expenditures will increase, but not significantly. D) Housing expenditures will decrease by a small amount. E) Housing expenditures will decrease significantly. Answer: C Diff: 3 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 10) Linesha, a college student working part-time, receives a wage increase. An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs. Based on this information, A) DVDs and Blu-ray discs are substitutes. B) Blu-ray discs are normal goods, and DVDs are inferior goods. C) DVDs and Blu-ray discs are normal goods. D) the cross-price elasticity between DVDs and Blu-ray discs is negative. E) DVDs and Blu-ray discs both are inferior goods. Answer: B Diff: 2 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 11) Cross-price elasticity of demand is calculated as the A) percentage change in quantity demanded divided by percentage change in price of a good. B) percentage change in quantity demanded of one good divided by percentage change in price of a different good. C) percentage change in quantity sold divided by percentage change in buyers' incomes. D) percentage change in quantity supplied divided by percentage change in price of a good. E) percentage change in quantity demanded divided by percentage change in income. Answer: B Diff: 1 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

12) If the cross-price elasticity of demand for computers and software is negative, this means the two goods are A) substitutes. B) complements. C) inferior. D) normal. E) necessities. Answer: B Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 13) Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result, CineArts Videos experienced a 16 percent decline in its movie club membership. What is the value of the cross-price elasticity between the two movie club memberships? A) -1.6 B) -0.625 C) 0.625 D) 1.6 E) 16 Answer: D Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 14) Consider the following pairs of items: a. shampoo and conditioner b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have a negative cross-price elasticity? A) a and b only B) c and d only C) e only D) a, b, and c only E) b and c only Answer: A Diff: 1 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 66 Copyright © 2024 Pearson Canada Inc.

15) Consider the following pairs of items: a. shampoo and conditioner b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have cross-price elasticity of zero? A) a and b only B) c only since most people cannot do without computers C) e only D) b only E) none of the pairs listed Answer: C Diff: 1 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 16) Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6. What does this mean? A) A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption. B) A 6 percent increase in the price of grapefruit juice leads to a 1 percent increase in orange juice consumption. C) If the price of grapefruit juice rises by $1, 6 more cartons of orange juice will be purchased. D) The demand for orange juice is 6 times more than the demand for grapefruit juice. E) Orange juice and grape fruit juice are complements. Answer: A Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

Figure 6.8

17) Refer to Figure 6.8. Identify the two goods which are substitutes. A) Good X and Good Y B) Good Y and Good Z C) Good X and Good Z D) Good X, Good Y and Good Z E) It is not possible to distinguish any relationship among the goods. Answer: C Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 18) Refer to Figure 6.8. Identify the two goods which are complements. A) Good X and Good Y B) Good Y and Good Z C) Good X and Good Z D) Good X, Good Y and Good Z E) It is not possible to distinguish any relationship among the goods. Answer: B Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

19) In November 2016, the Canadian Food Inspection Agency Issued a recall on Premium Quality Wah brand Basmati Rice due to an "insect infestation". If, following this recommendation, grocery stores started selling much more dried pasta, we would expect, A) dried pasta is a normal good while Basmati rice is an inferior good. B) the cross-price elasticity between dried pasta and Basmati rice is negative. C) the cross-price elasticity between dried pasta and Basmati rice is positive. D) the price elasticity of dried pasta is positive while the price elasticity of Basmati rice falls to zero. E) the cross-price elasticity between dried pasta and Basmati rice is zero. Answer: C Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 20) Amazon estimates the price elasticity of demand for e-books to be -1.74. Yet, some publishers have resisted Amazon's calls to reduce prices. Why? A) The publishers believe the demand for their more unique titles to be less elastic. B) The publishers aren't interested in maximizing revenue. C) Amazon's estimate of price elasticity has no implications for revenue. D) The publishers do not benefit from the lower prices Amazon is promoting. E) Amazon is keeping the additional revenue it generates by lowering the price. Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Demand and Total Revenue Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking Special Feature: Apply the Concept: Amazon and Netflix Test the Price Elasticity of Demand for Their Services 21) For people who live near a bus route, a subway station, or a commuter rail line, public transportation provides a substitute to driving their own cars. So, for these people, the cross-price elasticity of demand between gasoline and public transportation is A) positive. B) negative. C) zero. D) infinity. E) one. Answer: A Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

22) If a firm is in an antitrust court case being accused of monopolizing a product, the firm would hire an economist to show A) the cross-price elasticity of demand between the firm's good and another is negative. B) the cross-price elasticity of demand between the firm's good and another is zero. C) the price elasticity of demand for the firm's good is highly inelastic. D) the income elasticity of the firm's good is inferior. E) the cross-price elasticity of demand between the firm's good and another is positive. Answer: E Diff: 3 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 23) Suppose Québec's largest nursing union, Fédération interprofessionelle de la santé du Québec (FIQ), successfully secured a 12 percent increase in the wages of registered nurses. If a hospital responds by reducing the quantity of registered nurses hired and increasing the quantity of physician's assistants hired, what conclusion can you draw? A) Physician's assistants are more valuable in terms of their productivity. B) The price elasticity of demand for registered nurses is negative while the price elasticity of demand for physician's assistants is positive. C) The cross-price elasticity of demand between registered nurses and physician's assistants is positive. D) The cross-price elasticity of demand between registered nurses and physician's assistants is negative. E) The cross-price elasticity of demand between registered nurses and physician's assistants is one. Answer: C Diff: 3 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 24) If the cross-price elasticity of demand between Breeze Detergent and President's Choice Detergent is a relatively large positive number, then it indicates that A) the two brands are probably made by the same company. B) the two brands of detergent are close substitutes. C) consumers have a distinct preference for one brand versus the other. D) detergents are necessities. E) two brands are complements. Answer: B Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

25) The cross-price elasticity of demand between an unlimited texting option and an unlimited call minutes option offered from a cell phone provider would be A) positive if subscribers consider the services substitutes for each other. B) positive if subscribers consider the services complements to each other. C) negative if subscribers consider the services substitutes for each other. D) negative no matter if subscribers consider the services substitutes or complements for each other. E) positive if subscriber wants to use both the services. Answer: A Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 26) Demand for staples such as dairy products and bread is likely to be both income and price inelastic. Answer: TRUE Diff: 2 Type: TF Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 27) In recent years, the prices of new domestically produced cars have been falling. Suppose consumers respond by reducing their demand for used cars and mass transport services such as bus travel. This information suggests that the cross-price elasticity between new cars and used cars, and the cross-price elasticity between new cars and bus travel are negative. Answer: FALSE Diff: 2 Type: TF Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 28) In the alcohol industry, both wine and spirits are considered to be substitutes for beer. Answer: FALSE Diff: 2 Type: TF Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages

29) What factors would make you more sensitive or less sensitive to price when purchasing soft drinks? Answer: A number of factors are likely to affect your sensitivity to changes in soft drink prices, including your income level, whether you have close substitutes available, and what percentage of income you spend on soft drinks. Diff: 2 Type: SA Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages 30) Suppose a 4 percent increase in income results in a 2 percent decrease in the quantity demanded of a good. Calculate the income elasticity of demand for the good and determine what type of good it is. Answer: Income elasticity of demand = -0.5. The good is inferior. Diff: 2 Type: ES Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 31) The income elasticity of demand measures A) the responsiveness of quantity demanded to changes in consumer's taste. B) how a consumer's purchasing power is affected by a change in the price of a product. C) the percentage change in the price of a product divided by the percentage change in consumer income. D) the income effect of a change in price. E) the responsiveness of quantity demanded to changes in income. Answer: E Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 32) If a good has a negative income elasticity of demand, this indicates that the good is A) a substitute with another good. B) a complement with another good. C) inferior. D) normal. E) necessity. Answer: C Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

33) If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for airline travel, then airline travel is A) a necessity. B) a substitute for another good. C) a luxury. D) an inferior good. E) a complement to another good. Answer: C Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 34) If a 6 percent increase in income leads to a 4 percent increase in quantity demanded for audio books, the income elasticity of demand is A) -0.67. B) 0.67. C) 1.5. D) 2. E) 3. Answer: B Diff: 2 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 35) If a 5 percent increase in income leads to a 10 percent decrease in quantity demanded for a product, this product is A) an income elastic good. B) an inferior good. C) a necessity. D) a luxury good. E) an imported good. Answer: B Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

36) If the quantity demanded for a good rises as income rises, then the income elasticity of demand for this good is ________ than 0, and the good is ________ good. A) greater; an inferior B) less; a normal C) less; an inferior D) greater; a normal E) can't determine Answer: D Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 37) Demand for a luxury item, such as a yacht, is likely to be A) both income and price inelastic. B) both income elastic and price elastic. C) income elastic and price inelastic. D) income inelastic and price elastic. E) income elastic and price perfectly inelastic. Answer: B Diff: 2 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

Figure 6.9

38) Refer to Figure 6.9. The data in the diagram indicates that DVDs are A) luxury goods. B) inelastic goods. C) necessities. D) both luxury goods and inelastic goods. E) both necessities and inelastic goods. Answer: A Diff: 3 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 39) Suppose you have surveyed a few industries and obtained information about the income elasticity of demand for their products. If you expect that the economy is headed for a long recession, you would advise people to look for jobs in an industry with A) a high positive income elasticity coefficient such as 5. B) a low positive income elasticity coefficient such as 0.8. C) a "high" negative income elasticity coefficient such as -4. D) a "low" negative income elasticity coefficient such as -0.2. E) a high negative income elasticity such as -8. Answer: C Diff: 3 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

40) Last year, Joan bought 50 pounds of hamburger when her household income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. Holding everything else constant, Joan's income elasticity of demand for hamburger is A) positive, so Joan considers hamburger to be an inferior good. B) negative, so Joan considers hamburger to be a necessity and inferior. C) positive, so Joan considers hamburger to be a normal good and a necessity. D) negative, so Joan considers hamburger to be a normal good. E) negative, so Joan considers hamburger to be an inferior good. Answer: E Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 41) Which of the following items is likely to have the highest income elasticity of demand? A) a luxury cruise to several European countries B) water C) breakfast cereal D) a hamburger E) a donut Answer: A Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 42) Suppose you are considering buying stock in the stock market, and your objective is to maximize your net worth. Furthermore, your study of the market reveals that the economy will be slowing down over the next several months. Under these conditions, it would be best to purchase stock in companies that produce A) normal goods. B) luxury goods. C) inferior goods. D) price elastic goods. E) complementary good. Answer: C Diff: 3 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

43) The cross-price elasticity of demand measures the A) absolute change in the quantity demanded of one good divided by the absolute change in the price of another good. B) percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. C) percentage change in the price of one good divided by the percentage change in the quantity demanded of another good. D) percentage change in the quantity demanded of one good in one location divided by the price of the same good in another location. E) percentage change in the quantity demanded of a good in one country divided by the price of the same good in another country. Answer: B Diff: 1 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 44) The cross-price elasticity of demand between Tim Hortons coffee and Second Cup coffee is calculated by dividing A) the percentage change in quantity demanded of Tim Hortons coffee by the percentage change in the quantity demanded of Second Cup coffee. B) the percentage change in the price of Second Cup coffee by the percentage change in quantity demanded of Tim Hortons coffee. C) the percentage change in the price of Tim Hortons coffee by the percentage change in the price of Second Cup coffee. D) the percentage change in the quantity demanded of Tim Hortons coffee by the percentage change in the price of Second Cup coffee. E) the percentage change in the quantity demanded of Tim Hortons coffee by the percentage change in quantity supplied of Second Cup coffee. Answer: D Diff: 1 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

45) In order to prove that Buckley's cough syrup and Fisherman's Friends lozenges are substitutes, one should measure the ________ and get a ________. A) cross-price elasticity; positive number B) cross-price elasticity; negative number C) price elasticity of demand; number greater than 1 (in absolute value) D) price elasticity of demand; number less than 1 (in absolute value) E) income elasticity; number equal zero Answer: A Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 46) The cross-price elasticity between BioWare's video games and gaming keyboards is -3.4. What happens to the demand for gaming keyboards if the price of BioWare's video games falls by 10 percent? A) The quantity demanded of the related good rises by 3.4 percent. B) The quantity demanded of the related good falls by 34 percent. C) The quantity demanded of the related good rises by 34 percent. D) The quantity demanded of the related good falls by 3.4 percent. E) The quantity demanded of the related good falls by 0.34 percent. Answer: C Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 47) If the cross-price elasticity of demand between beer and wine is 0.31, then beer and wine are A) complements. B) price inelastic goods. C) substitutes. D) necessities. E) unrelated goods. Answer: C Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

48) Consider the following pairs of items: a. shampoo and conditioner b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air travel and weed killer Which of the pairs listed will have a positive cross-price elasticity? A) a and b only B) c and d only C) e only D) a, b, and c only E) b and c only Answer: B Diff: 1 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 49) Which of the following pairs of goods is likely to have a negative cross-price elasticity of demand? A) pancakes and syrup B) hot dogs and hamburgers C) orange juice and grapefruit juice D) peanuts and cat food E) apples and pears Answer: A Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 50) When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4 percent, and the sale of dips (like salsa and bean dip) fell 8 percent. This set of facts indicates that A) the cross-price elasticity between tortilla chips and dips is 0.8, so the two are substitutes. B) the cross-price elasticity between tortilla chips and dips is -0.4, so the two are complements. C) the cross-price elasticity between tortilla chips and dips is -0.8, so the two are complements. D) the cross-price elasticity between tortilla chips and dips is 0.4, so the two are substitutes. E) the cross-price elasticity between tortilla chips and dips is 0.32, so the two are complements. Answer: C Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills

51) Suppose the cross-price elasticity of demand between Blu-rays at Amazon.ca and Blu-rays at Bestbuy.ca is 3.5. Based on this information, predict what would happen if Amazon.ca lowered its Bluray prices by 10 percent. A) The quantity of Blu-rays demanded on Amazon.ca would increase by 35 percent. B) The quantity of Blu-rays demanded on Bestbuy.ca would increase by 35 percent. C) The quantity of Blu-rays demanded on Amazon.ca would decrease by 35 percent. D) The quantity of Blu-rays demanded on Bestbuy.ca would decrease by 35 percent. E) The quantity of Blu-rays demanded on Bestbuy.ca and Amazon would decrease by 35 percent. Answer: D Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 52) During an economic expansion, as consumer incomes rise, holding everything else constant, A) the demand for most goods, except luxuries, will rise. B) the demand for luxuries will rise while the demand for inferior goods will fall. C) the demand for luxuries and inferior goods will rise. D) the prices of luxuries will fall while the prices of inferior goods will rise. E) the demand for luxuries will fall while the demand for necessities will rise. Answer: B Diff: 1 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 53) Suppose studies show that the income elasticity of demand for wine is 5.03 and the income elasticity of demand for spirits is 1.21. This indicates that A) wine and spirits are luxury goods. B) wine is a luxury good and spirits are inferior goods. C) wine and spirits are highly price elastic. D) wine is a luxury good and spirits are necessities. E) wine and spirits are both inferior goods. Answer: A Diff: 2 Type: MC Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking Special Feature: Apply the Concept: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages

54) Barbara, the consummate hostess, proudly announced as she served dessert, "A French roast coffee is often the perfect end to a meal, sipped with a piece of my scrumptious chocolate cake." Evidently, Barbara views A) French roast coffee and chocolate cake as luxury items. B) French roast coffee and chocolate cake as necessities. C) French roast coffee and chocolate cake as complementary goods. D) French roast coffee and chocolate cake as substitutes to other desserts. E) French roast coffee and chocolate cake as inferior goods. Answer: C Diff: 2 Type: MC Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Communication 55) Economists estimate that the cross-price elasticity of demand for beer and wine is 0.31 and the income elasticity of wine is 5.03. This means that A) beer and wine are substitutes and wine is an inferior good. B) beer and wine are complements and wine is a luxury good. C) beer and wine are substitutes and wine is a luxury good. D) beer and wine are complements and wine is an inferior good. E) beer and wine are substitutes and beer is an inferior good. Answer: C Diff: 2 Type: MC Topic: Cross-Price and Income Elasticities of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills Special Feature: Apply the Concept: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages 56) Economists have estimated that the cross-price elasticity of demand between beer and spirits is 0.15, the income elasticity for spirits is 1.21 and the income elasticity for wine is 5.03. These elasticities mean that A) beer and spirits are complements, and spirits and wine are luxuries. B) beer and spirits are normal goods, and spirits and wine are luxuries. C) beer and spirits are complements, and spirits are substitutes. D) beer and spirits are substitutes, and spirits and wine are luxuries. E) they all are complements. Answer: D Diff: 2 Type: MC Topic: Cross-Price and Income Elasticities of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills Special Feature: Apply the Concept: Price Elasticity, Cross-Price Elasticity, and Income Elasticity in the Market for Alcoholic Beverages

57) The absolute value of the price elasticity of demand for telescopes is 1.5. Therefore, telescopes can be classified as a luxury. Answer: FALSE Diff: 2 Type: TF Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 58) If the income elasticity for canned food is 0.8, then canned food is an inferior good. Answer: FALSE Diff: 1 Type: TF Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 59) If the cross-price elasticity of demand for goods A and B is zero, this means the two goods are unrelated. Answer: TRUE Diff: 1 Type: TF Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking 60) A recent study indicated that "Stricter college alcohol policies such as raising the price of alcohol, or banning alcohol on campus, decreases the number of students who use marijuana." This indicates that the cross-price elasticity between alcohol and marijuana is positive. Answer: FALSE Diff: 2 Type: TF Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking

61) Explain the concepts of cross-price elasticity of demand and income elasticity of demand. What do positive and negative values indicate for each of these demand elasticities? Answer: Cross-price elasticity of demand measures the percentage change in quantity demanded of one good based on the percentage change in the price of another good. If cross price elasticity is positive, the two goods are substitutes. If cross-price elasticity is negative, the two goods are complements. Income elasticity of demand measures the responsiveness of quantity demanded to changes in income. If income elasticity is positive but less than one, the product is a normal good and a necessity. If income elasticity is positive and greater than one, the product is a normal good and a luxury. If income elasticity is negative, the product is an inferior good. Diff: 2 Type: SA Topic: Cross-Price and Income Elasticities of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Reflective Thinking Table 6.7

Income $30,000 50,000

Prices Px = $6, Py = $3 Px = $6, Py = $4

Quantities Purchased Good X 2 5

Quantities Purchased Good Y 20 10

62) Refer to Table 6.7. a. Using the information in the table, calculate the income elasticity of demand for good X and characterize the good. Use the midpoint formula. b. Can you calculate the income elasticity of demand for good Y? If you can, show your calculation and characterize the good. If you cannot, explain why. Answer: a. The income elasticity of demand for good X = (3 / 3.5) / (20,000 / 40,000) = (0.8571 / 0.5) = 1.71. X is both a normal good and a luxury. b. Since both income and Py change, you cannot calculate the income elasticity for good Y. The income elasticity can be measured if a change in income causes the quantity of Y purchased to change, holding everything else constant. Diff: 3 Type: ES Topic: Income Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 63) When the price of Starbucks coffee increased by 8 percent, the quantity demanded of Tim Horton's coffee increased by 10 percent. Calculate the cross price elasticity of demand between Starbucks coffee and Tim Horton's coffee. What is the relationship between the two products? Answer: The cross price elasticity = 1.25. The two products are substitutes. Diff: 2 Type: ES Topic: Cross-Price Elasticity of Demand Learning Outcome: 6.4 Define and calculate the cross-price elasticity of demand and income elasticity of demand and explain their determinants AACSB: Analytic Skills 83 Copyright © 2024 Pearson Canada Inc.

6.5

Use price elasticity and income elasticity to analyze economic issues

1) Which of the following is one reason why the income of small family farms has decreased over time? A) Decreased capital costs and increased labour costs have made it easier for small farms to compete with large ones. B) The demand for farm products is price elastic. C) The demand for farm products is income inelastic. D) The Canadian population has increased greatly since 1960. E) The demand for farm products is price inelastic. Answer: B Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking 2) Between 1960 and 2020 the number of acres devoted to wheat production in Canada ________ and the price of wheat ________. A) declined; declined B) more than doubled; increased by about 50 percent C) declined; more than doubled D) increased; more than doubled E) increased; decreased Answer: C Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking 3) The price of wheat has fallen since 1960. Which of the following explains this price decline? A) The price elasticity of demand is less than 1 (in absolute value), and the income elasticity of demand for wheat is low. B) The price elasticity of demand is greater than 1 (in absolute value), and the income elasticity of demand for wheat is low. C) The price elasticity of demand is less than 1 (in absolute value), and wheat is an inferior good. D) The price elasticity of demand is greater than 1 (in absolute value), and the income elasticity of demand for wheat is greater than 1. E) The price elasticity of demand is zero and income elasticity is one. Answer: A Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking

4) The demand for most farm products is relatively inelastic. All else constant, what is the effect on farm revenues as a result of the introduction of new and better farm equipment which increases in productivity? A) Farm revenues increase. B) Farm revenues decrease. C) Farm revenues remain constant because consumers will not increase their consumption of farm products by much. D) Farm revenues could increase or decrease depending on the cost of this new equipment. E) New equipment is very costly for farmers so they are not able to use it, hence productivity and revenues didn't change. Answer: B Diff: 3 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking 5) Suppose a frost destroys the alfalfa crop in Manitoba, but farmers see an increase in their revenues. Which of the following best explains this? A) The decrease in supply led to huge price increases. B) Alfalfa is a necessity. C) The demand for alfalfa is price inelastic. D) The cross-price elasticity between alfalfa and most other substitute sprouts is very low. E) The demand for alfalfa is price elastic. Answer: C Diff: 3 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking 6) If a soft drink tax is implemented and demand for soft drinks is price elastic, the decline in equilibrium quantity would be ________ and the increase in equilibrium price would be ________ than if demand were inelastic. A) larger; larger B) larger; smaller C) smaller; larger D) smaller; smaller E) same; same Answer: B Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Analytic Skills Special Feature: Solved Problem: Using Price Elasticity to Analyze the Effects of a Pop Tax

7) If a soft drink tax is implemented and demand for soft drinks is price elastic, the effect on discouraging soft drinks consumption would be ________ and ________ tax revenue would be collected than if demand were inelastic. A) larger; more B) larger; less C) smaller; more D) smaller; less E) same; same Answer: B Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Analytic Skills Special Feature: Solved Problem: Using Price Elasticity to Analyze the Effects of a Pop Tax 8) The demand for most farm products is relatively inelastic. A drought that reduces the supply of farm products will also cause farm revenues to fall. Answer: FALSE Diff: 2 Type: TF Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking 9) A study of the effects of the minimum wage on employment of low-skilled workers estimated the price elasticity of demand for low-skilled workers is -0.75. Suppose that the government of New Brunswick is considering raising the minimum wage from $10.00 per hour to $10.60 per hour. Based on this information, calculate the percentage change in the employment of low-skilled workers. Use the midpoint formula. Answer: percent change in quantity demanded = -4.37 percent. Diff: 3 Type: ES Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Analytic Skills 10) A soft drink tax is more effective at reducing soda consumption when demand is price ________ and is more effective at raising tax revenue when demand is price ________. A) elastic; elastic B) perfectly elastic; inelastic C) inelastic; elastic D) inelastic; inelastic E) elastic; inelastic Answer: E Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Analytic Skills Special Feature: Solved Problem: Using Price Elasticity to Analyze the Effects of a Pop Tax

11) Suppose the price elasticity of demand for cigarettes is -0.4. Health Canada decides to regulate tobacco production, which increases the price of cigarettes and causes the quantity of cigarettes demanded to decrease by 25 percent. What is the percentage increase in price which would lead to the 25 percent decrease in quantity demanded? If the price elasticity was -4, what would be the percentage increase in price? Answer: If price elasticity of demand is -0.4, a 25 percent decrease in quantity demanded would result from a 62.5 increase in price. If price elasticity of demand is -4, a 25 percent decrease in quantity demanded would result from a 6.25 increase in price. Diff: 3 Type: ES Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Analytic Skills Special Feature: Solved Problem: Using Price Elasticity to Analyze the Effects of a Pop Tax 12) Assume that a 2 percent pop tax led to a large increase in its price and only a small decrease in the quantity of pops demanded. Economic analysis would lead one to conclude that A) pops should be taxed because the benefits of the tax would exceed the costs. B) pops should not be taxed because the benefits are uncertain. C) pops should not be taxed on ethical grounds since ethical benefits and costs can't be measured. D) the benefits of taxing pops is a normative issue. Economic analysis can be used to contribute to discussion of this issue but cannot decide it. E) the tax will only lead to raise revenue for the government, people will still buy pops. Answer: D Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Analytic Skills Special Feature: Solved Problem: Using Price Elasticity to Analyze the Effects of a Pop Tax 13) From 1960 to 2020 the number of people who lived on farms fell from about 31.7 percent of the population to approximately 2 percent of the population. Which of the following factors have contributed to this trend? A) increases in the cost of farming and a desire for young adults to move to urban areas B) rapid growth in farm production and low income and price elasticities for food products C) slow growth in agricultural productivity and low-income elasticities for food products D) government policies that have increased the cost of living and working on farms E) government policies that made relaxation in imported agriculture products Answer: B Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking

14) Between 1960 and 2020 the productivity of wheat farmers in Canada almost tripled. This means that A) the amount of land and other resources devoted to wheat production almost tripled. B) the incomes of wheat farmers almost tripled. C) the total amount of wheat produced almost tripled. D) the amount of wheat produced by the average farmer almost tripled. E) the family size of the farmers has tripled. Answer: D Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking 15) The paradox of Canadian farming is A) the demand for imported luxury food products has risen as the demand for domestic food products has fallen. B) the demand for food has risen as the number of people who pursue farming as a career has fallen. C) food has become cheaper and more abundant as the number of farms has decreased. D) the amount of food produced has increased as the average farm size has fallen. E) food has become more expensive as the number of farmers has fallen. Answer: C Diff: 1 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking 16) Since 1960, there has been a substantial increase in wheat production. The increase in production has led to a decrease in the price of wheat because of which of the following factors? A) The absolute value of the price elasticity of demand for wheat is less than 1 and the income elasticity of demand for wheat is greater than 1. B) The absolute value of the price elasticity of demand for wheat is greater than 1 and wheat is a close substitute for other food products. C) The absolute value of the price elasticity of demand for wheat is 1 and the income elasticity of demand for wheat is also 1. D) The income elasticity of demand for wheat is high and wheat is an inferior good. E) The absolute value of the price elasticity of demand for wheat is less than 1 and the income elasticity of demand for wheat is low. Answer: E Diff: 3 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking

17) Assume that the price elasticity of demand for soft drinks is -0.06. If the government tax causes the price of soft drinks to increase by 50 percent, what will be the decrease in the quantity of soft drinks demanded? A) 0.5 percent B) 3.0 percent C) 8.33 percent D) 25 percent E) 50 percent Answer: B Diff: 2 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking Special Feature: Solved Problem: Using Price Elasticity to Analyze the Effects of a Pop Tax 18) Assume that a 50 percent soft drink tax led to a large increase in its price and only a small decrease in the quantity of soft drinks demanded. Economic analysis would lead one to conclude that A) soft drinks should be taxed because the benefits of the tax would exceed the costs. B) soft drinks should not be taxed because the benefits are uncertain. C) soft drinks should not be taxed on ethical grounds since ethical benefits and costs can't be measured. D) the benefits of taxing soft drinks is a normative issue. Economic analysis can be used to contribute to discussion of this issue but cannot decide it. E) it only raises revenue for the government. Answer: D Diff: 1 Type: MC Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking Special Feature: Solved Problem: Using Price Elasticity to Analyze the Effects of a Pop Tax 19) Most food products have low income and price elasticities of demand. Answer: TRUE Diff: 2 Type: TF Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking 20) The government of Bassaland is looking for new revenue sources. It is considering imposing an excise tax on two goods: palm wine and diapers. If the price elasticity of demand for the goods are -0.47 and 1.89 respectively, which good should it tax if the goal is to raise revenue? If the government wants to tax only one good, which good should it tax if the goal is to discourage consumption? Explain your answer. Answer: If the goal is to raise revenue, it should tax palm wine. The demand for palm wine is inelastic, so an increase in its price will result in an increase in revenue. If the goal is to discourage consumption it should tax diapers since the demand for diapers is elastic, while the demand for palm wine is inelastic. Diff: 2 Type: ES Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Reflective Thinking 89 Copyright © 2024 Pearson Canada Inc.

21) Suppose a tax of $0.75 is implemented on soft drinks. The market equilibrium price before the tax is $1.75 and quantity is 90,000 (2L) bottles of soft drinks per day. Explain how the tax will affect the market equilibrium price and quantity if demand is price elastic and if demand is price inelastic. Answer: Supply curve will shift to the left by the amount of tax ($0.75). If the demand is elastic, there will be a significant change in quantity and it will decrease from 90,000 to 70,000 bottles per day and the price per bottle will increase to $2.00. If demand is price inelastic, the quantity will change from 90,000 to 80,000 bottles per day and the price will increase to $2.25. Diff: 2 Type: ES Topic: Elasticity and Economic Issues Learning Outcome: 6.5 Use price elasticity and income elasticity to analyze economic issues AACSB: Analytic Skills Special Feature: Solved Problem: Using Price Elasticity to Analyze the Effects of a Pop Tax

6.6

Define price elasticity of supply and explain its main determinants and how it is measured

1) The price elasticity of an upward-sloping supply curve is always A) positive. B) negative. C) greater than one. D) impossible to determine. E) zero. Answer: A Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 2) Price elasticity of supply is used to gauge A) how responsive suppliers are to price changes. B) how responsive suppliers are to changes in future prices. C) how responsive suppliers are to a change in demand. D) how responsive sales are to a change in input prices. E) how responsive suppliers are to change in government regulations. Answer: A Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking

3) The price elasticity of supply is equal to A) the value of the slope of the supply curve. B) the change in quantity supplied divided by the change in price. C) the percentage change in price divided by the percentage change in quantity supplied. D) the percentage change in quantity supplied divided by the percentage change in price. E) the value of the slope of supply curve divided by the value of the slope of demand curve. Answer: D Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 4) Suppose the value of the price elasticity of supply is 4. What does this mean? A) A 4 percent increase in the price of the good causes quantity supplied to increase by 1 percent. B) A 1 percent increase in the price of the good causes the supply curve to shift upward by 4 percent. C) A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent. D) For every $1 increase in price, quantity supplied increases by 4 units. E) A 4 percent increase in the price of the good causes quantity supplied to increase by 4 percent. Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 5) Suppose a 4 percent increase in price results in a 2 percent increase in the quantity supplied of a good. Calculate the price elasticity of supply and characterize the product. A) 2; The product is elastic. B) 0.2; The product is inelastic. C) 0.5; The product is inelastic. D) 50%; The product is inelastic. E) 100%; The product is inelastic. Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills

6) Suppose that the price of a money clip increases from $0.75 to $0.90 and quantity supplied rises from 8,000 units to 10,000 units. Use the midpoint formula to calculate the price elasticity of supply. A) 1.22 B) 1.0 C) 0.82 D) 0.07 E) 0.05 Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills Figure 6.10

7) Refer to Figure 6.10. The supply curve on which price elasticity changes at every point is shown in A) Panel A. B) Panel B. C) Panel C. D) Panel D. E) Panel C and D. Answer: D Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 92 Copyright © 2024 Pearson Canada Inc.

8) Refer to Figure 6.10. A perfectly elastic supply curve is shown in A) Panel A. B) Panel B. C) Panel C. D) Panel D. E) Panel A and B. Answer: B Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 9) Refer to Figure 6.10. A perfectly inelastic supply curve is shown in A) Panel A. B) Panel B. C) Panel C. D) Panel D. E) Panel A and B. Answer: A Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 10) Refer to Figure 6.10. A unit-elastic supply curve is shown in A) Panel A. B) Panel B. C) Panel C. D) Panel D. E) Panel A and B. Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking

11) The price elasticity of the supply of teenage labour services is approximately 1.36. Suppose the government of Prince Edward Island raises the minimum wage rises from $11.00 per hour to $11.27. Using the midpoint formula, calculate the approximate change in the quantity supplied of teenage labour. A) 17.3 percent B) 24.4 percent C) 3.4 percent D) 2.5 percent E) There is insufficient information to answer the question. Answer: C Diff: 3 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 12) An increase in the demand for green tea raises the price of apples from $16 a pound to $20 a pound. As a result, quantity supplied increases by 30 percent..Using the midpoint formula, calculate the value of the price elasticity of supply? A) 3.33 B) 1.875 C) 2.22 D) 7.5 E) 1.35 Answer: E Diff: 3 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills

Figure 6.11

13) Refer to Figure 6.11. What is the value of the price elasticity of supply between g and h? A) 20 percent B) 0.5 C) 2 D) 0.02 E) 0.05 Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 14) The price elasticity of supply for umbrellas is 2. Suppose you're told that following a price increase, quantity supplied increased by 30 percent. What was the percentage change in price that brought this about? A) 60 percent B) 15 percent C) 6.7 percent D) 3.6 percent E) impossible to determine without additional information Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills

15) If, for a given percentage increase in price, quantity supplied increases by a proportionately larger percentage, then supply is A) unit-elastic. B) perfectly elastic. C) relatively inelastic. D) elastic. E) perfectly inelastic. Answer: D Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 16) If firms do not increase their quantity supplied when price changes, then supply is A) perfectly elastic. B) perfectly inelastic. C) relatively inelastic. D) elastic. E) inelastic. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 17) If, for a given percentage decrease in price, quantity supplied decreases by a proportionately smaller percentage, then supply is A) unit-elastic. B) perfectly elastic. C) relatively inelastic. D) elastic. E) perfectly inelastic. Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking

18) Bringing oil to the market is a relatively long and costly process. The whole process from exploration to pumping significant amounts of oil can take years. What does this indicate about the price elasticity of supply for oil? A) The elasticity coefficient is likely to be very high and supply is inelastic. B) The elasticity coefficient is likely to be close to zero and supply is perfectly elastic. C) The elasticity coefficient is likely to be low and supply is highly inelastic. D) The elasticity coefficient is likely to be low and supply is highly elastic. E) The elasticity coefficient is likely to be high and supply is perfectly inelastic. Answer: C Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Are Oil Prices So Unstable? 19) Over longer periods of time, increases in oil prices provide firms with incentives to explore and recover oil. What does this indicate about the long run price elasticity of supply for oil? A) The elasticity coefficient is likely to be one in the long run and in the short run. B) The elasticity coefficient is likely to be lower in the long run than in the short run. C) The elasticity coefficient approaches 0 in the long run as supplies are depleted. D) The elasticity coefficient is unstable in the long run because oil supplies may be depleted. E) The elasticity coefficient is likely to be higher in the long run than in the short run. Answer: E Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills Special Feature: Apply the Concept: Why Are Oil Prices So Unstable? 20) In 2014, Saudi Arabia decided to increase production. As a result of a relatively small increase in production and little change in demand, the price of oil fell from $85 in 2014 to $42 in 2015. The best explanation for this large drop in prices is A) both supply and demand are highly inelastic. B) both supply and demand are highly elastic. C) supply is highly inelastic while demand is highly elastic. D) supply is highly elastic while demand is highly inelastic. E) supply is perfectly elastic while demand is perfectly inelastic. Answer: A Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Are Oil Prices So Unstable?

21) Suppose at the going wage rate of $20 per hour, firms can hire as many hours of janitorial services as it desires. If any firm tries to lower the wage rate to $19, it will not be able to hire any janitor. What does this indicate about the supply curve for janitorial services? A) Supply is unit-elastic. B) Supply is perfectly elastic. C) Supply is perfectly inelastic. D) Supply is relatively inelastic. E) Supply is relatively elastic. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 22) Suppose the demand curve for a product is represented by a typical downward-sloping curve. Now suppose the demand for this product decreases. Which of the following statements accurately predicts the resulting decrease in price? A) The more elastic the supply curve, the greater the price increase. B) The more elastic the supply curve, the smaller the price decrease. C) The increase in price is not affected by the elasticity of the supply curve. D) The decrease in price will always be proportional to the magnitude of the demand shift. E) The more inelastic the supply curve, the smaller the price increase. Answer: B Diff: 3 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 23) The price elasticity of supply is calculated as the change in supply divided by the change in price. Answer: FALSE Diff: 1 Type: TF Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 24) Suppose the supply curve for digital cameras shifts to the right. This will cause a relatively large decrease in the price of digital cameras if both demand and supply are inelastic. Answer: TRUE Diff: 3 Type: TF Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills

25) The value of the price elasticity of supply depends primarily on how quickly firms can acquire inputs to increase quantity supplied when price increases. Answer: TRUE Diff: 1 Type: TF Topic: Determinants of the Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 26) Explain the economic concept of price elasticity of supply. How is price elasticity of supply calculated? Answer: Price elasticity of supply refers to the responsiveness of the quantity of a product supplied to a change in price. Price elasticity of supply is calculated by dividing the percentage change in the quantity of a product supplied by the percentage change in the product's price. Diff: 3 Type: ES Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 27) Suppose the current price of oil is $90 a barrel and the quantity supplied is 800 million barrels per day. If the price elasticity of supply for oil in the short run is estimated at 0.5, use the midpoint formula to calculate the percentage change in quantity supplied when the price of oil rises to $98 a barrel. Answer: The percentage change in quantity supplied = [(98 - 90) / (98 + 90) / 2] × 0.5 × 100 = (8 / 94) × 0.5 × 100 = 4.26 percent. Diff: 3 Type: ES Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 28) The price elasticity of supply measures A) the responsiveness of quantity supplied to changes in input prices. B) the responsiveness of quantity supplied to changes in technology. C) the responsiveness of quantity supplied to changes in price. D) a supplier's ability to produce a good in the face of scarcity. E) a supplier's ability to produce enough to eliminate the shortage. Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking

29) To calculate the price elasticity of supply, we divide A) the percentage change in price by the percentage change in quantity supplied. B) the percentage change in quantity supplied by the percentage change in price. C) rise by the run. D) the average price by the average quantity supplied. E) total quantity supplied by total revenue received. Answer: B Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 30) Suppose the supply of bicycles is price elastic. This means that A) consumers will respond significantly to an increase in the quantity supplied of bicycles. B) suppliers will increase the quantity supplied of bicycles, but not immediately. C) suppliers face many substitutes for bicycles. D) suppliers will do nothing in response to changes in the price of bicycles. E) suppliers will respond significantly to changes in the price of bicycles. Answer: E Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 31) If the quantity supplied of walkie-talkies increases by 5 percent when prices increase by 12 percent, then A) the supply of walkie-talkies is inelastic. B) the supply of walkie-talkies is elastic. C) the walkie-talkie supply curve will shift to the right. D) the walkie-talkie supply curve will shift to the left. E) the supply of walkie-talkies is perfectly inelastic. Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking

32) Suppose when the price of jean-jackets increased by 10 percent, the quantity supplied increased by 16 percent. Based on this information, the price elasticity of supply of jean-jackets is A) 0.625. B) 6%. C) 1.6. D) 1.6%. E) 0.16. Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 33) If an 8 percent decrease in the price of lobster leads to a 15 percent decrease in the quantity supplied of lobster, then the supply of lobster is A) unit-elastic. B) unitarily elastic. C) elastic. D) perfectly inelastic. E) perfectly elastic. Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 34) Inelastic supply occurs whenever the elasticity of supply value is A) negative and < -1. B) any positive number. C) positive and > 1. D) positive and < 1. E) equal 1. Answer: D Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking

35) If a supply curve is a horizontal line, supply is said to be A) perfectly inelastic. B) unit-elastic. C) inelastic. D) perfectly elastic. E) elastic. Answer: D Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 36) A supply curve that is vertical A) is perfectly elastic. B) is perfectly inelastic. C) is impossible. D) has an elasticity equal to 1. E) elastic. Answer: B Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking

Table 6.8 Price $6 7 8 9 10

Quantity Demanded 5,000 4,000 3,000 2,000 1,000

Quantity Supplied 2,000 2,000 2,000 2,000 2,000

The town of Bienfait is well known for its basketball team. The price of basketball game tickets is determined by market forces. Table 6.8 shows the demand and supply schedules for basketball games tickets. 37) Refer to Table 6.8. What is the most distinctive feature of the supply curve? A) The supply curve is perfectly inelastic. B) The supply curve is horizontal. C) The supply curve is upward sloping. D) The supply curve is perfectly elastic. E) The supply curve is vertical. Answer: A Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 38) Refer to Table 6.8. What is the numerical value of the price elasticity of supply? A) 1 B) greater than 0 but less than 1 C) 0 D) greater than 1 E) less than 0 Answer: C Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills

39) The price elasticity of supply is usually a positive number because A) quantity supplied increases in response to income increases. B) quantity supplied increases in response to price increases. C) the quantity demanded usually rises when price falls, and therefore suppliers would want to capitalize on this increase in demand. D) price rises when supply increases. E) supply curve shifts right with an increase in price. Answer: B Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 40) The price elasticity of supply of hot dog buns is estimated to be 1.5. Holding everything else constant, this means that a 10 percent decrease in the price of hot dog buns will cause the quantity of hot dog buns supplied to decrease by A) 1.5 percent. B) 15 percent. C) approximately 25 percent. D) approximately 5 percent. E) 30 percent. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 41) Which of the following is a key determinant of the price elasticity of supply? A) the slope of the supply curve B) the availability of substitutes in production C) the available technology D) the time it takes to change output in response to a change in price E) the number of competitors in the market Answer: D Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking

Figure 6.12

42) Refer to Figure 6.12. Suppose the diagram shows the supply curves for a product in the short run and in the long run. Which supply curve represents supply in the short run and which curve represents supply in the long run? A) SB represents supply in the short run and SA represents supply in the long run. B) Either SA or SB could represent supply in the short run; in the long run the supply curve must be a vertical line. C) Either SA or SB could represent supply in the long run; in the short run the supply curve must be a horizontal line. D) SA represents supply in the short run and SB represents supply in the long run. E) SA represents elastic supply curve while SB represents an inelastic supply curve. Answer: D Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 43) Refer to Figure 6.12. The diagram shows two supply curves, SA and SB. As price rises from P0 to P1, which supply curve is more elastic? A) SA B) SB C) They are equally inelastic. D) They are equally elastic. E) We need information to determine elasticity. Answer: B Diff: 1 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 105 Copyright © 2024 Pearson Canada Inc.

44) Suppose the demand curve for a product is represented by a typical downward-sloping curve. Now suppose the demand for this product increases. Which of the following statements accurately predicts the resulting increase in price? A) The more elastic the supply curve, the greater the price increase. B) The more inelastic the supply curve, the smaller the price increase. C) The increase in price is not affected by the elasticity of the supply curve. D) There will be no increase in price if the supply curve is perfectly inelastic. E) The more elastic the supply curve, the smaller the price increase. Answer: E Diff: 3 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 45) Suppose the demand curve for hybrid cars shifts to the right. This will cause a relatively small increase in the price of hybrid cars if A) demand is elastic and supply is inelastic. B) demand is inelastic and supply is elastic. C) both demand and supply are inelastic. D) both demand and supply are elastic. E) both demand and supply are unit elastic. Answer: D Diff: 3 Type: MC Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 46) The process involved in bringing oil to world markets can take years. Substitutes for oil-based products such as gasoline are limited. As a result A) the supply of oil is very elastic and the demand for oil is very elastic over short periods of time. B) the supply of oil is very inelastic and the demand for gasoline is inelastic over short periods of time. C) the supply of oil and the demand for oil shift to the right over short periods of time. D) the supply of oil and the demand for oil are both perfectly elastic over short periods of time. E) prices of oil are too low. Answer: B Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Are Oil Prices So Unstable?

47) Shifts in the supply of oil have caused large changes in price since the 1970s because A) the supply of oil is very inelastic while the demand for oil is very elastic over short periods of time. B) the supply of oil is very elastic while the demand for oil is inelastic over short periods of time. C) both the supply of oil and the demand for oil are inelastic over short periods of time. D) the supply of oil and the demand for oil are perfectly elastic over short periods of time. E) both the supply of oil and demand for oil are elastic in the short period of time. Answer: C Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Are Oil Prices So Unstable? 48) Which of the following statements is true? A) The supply of oil is very elastic over short time periods but becomes perfectly inelastic over time. A given shift in supply results in a greater increase in the price of oil when the supply of oil is perfectly inelastic. B) The supply of oil is very inelastic over short time periods but becomes more elastic over time. A given shift in supply results in a smaller increase in the price of oil when the supply is more elastic. C) The supply of oil is perfectly inelastic; therefore, as the demand for oil increases over time the price of oil increases significantly. D) Over short periods of time, increases in the demand for oil are greater than increases in the supply of oil. In the long run, increases in the demand and the supply of oil are about equal. As a result, the price of oil increases greatly in the short run but is stable in the long run. E) The supply of oil is elastic in the short run but inelastic in the long run. Answer: B Diff: 2 Type: MC Topic: Determinants of the Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Are Oil Prices So Unstable? 49) Supply is elastic whenever the elasticity value for supply is positive and greater than 1. Answer: TRUE Diff: 1 Type: TF Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking

50) There is a limited number of original Emily Carr paintings. This means that the supply of original Emily Carr paintings is perfectly inelastic. Answer: TRUE Diff: 1 Type: TF Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Reflective Thinking 51) Suppose the current price of copper is $3 per kg and the quantity supplied is 200 kg per day. If the price of copper falls to $2.50 per kg, the quantity supplied drops to 180 kg per day. Use the midpoint formula to calculate the price elasticity of supply for copper. Answer: The price elasticity of supply for copper = (20 / 190) / (0.5 / 2.75) = (0.1053 / 0.1818) = 0.58. Diff: 2 Type: ES Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 52) For a given demand curve, will there be a greater loss of economic efficiency from a binding price floor when supply is elastic or inelastic? Illustrate your answer with a demand and supply graph. In your graph you must show two supply curves, one elastic and the other inelastic. Answer:

See the figure above. SA is the elastic supply curve, and SB the inelastic supply curve. For a given demand curve, a binding price floor at Pf creates a greater loss of economic efficiency when supply is inelastic rather than elastic. This can be seen from the diagram: When the supply curve is SA (elastic) the loss in economic efficiency is represented by the area abe, while the loss in economic efficiency is represented by the area ace when the supply curve is SB (inelastic). Diff: 3 Type: ES Topic: Price Elasticity of Supply Learning Outcome: 6.6 Define price elasticity of supply and explain its main determinants and how it is measured AACSB: Analytic Skills 108 Copyright © 2024 Pearson Canada Inc.

Microeconomics, 4Ce (Hubbard) Chapter 7 Comparative Advantage and the Gains from International Trade 7.1

Discuss the role of international trade in the Canadian economy

1) Why would Canadian firms that sell products in foreign markets protest a "Buy Canadian" policy? A) Foreign countries would likely retaliate by limiting Canadian exports. B) Foreign firms would stop selling all products in Canada. C) Canadian firms would never be able to meet the increased demand for Canadian-produced goods. D) Eventually the government would demand price cuts from Canadian manufacturers. E) Canadian firms want people to buy imported goods. Answer: A Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking Special Feature: Chapter Opener: Is "Buying Canadian" a Good Idea for Your Community? 2) Workers in industries protected by tariffs and quotas are likely to support these trade restrictions because A) they do not want to offend their employers who want them. B) politicians lobby to convince workers the restrictions will make them better off. C) they believe the restrictions will protect their jobs. D) they don't understand that the restrictions will threaten their jobs. E) they want the market to be competitive. Answer: C Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking Special Feature: Economics in Your Life: Should Your Member of Parliament Support a Tariff on Running Shoes? 3) The purpose of international trade sanctions levied on North Korea are A) to limit North Korean's opportunities for specialization as punishment for its nuclear weapons program. B) to keep high paying jobs in countries like Canada and the U.S. C) to ensure that products sold in the international market meet the European Union's quality and safety standards. D) to help the North Korean people achieve the standards of living achieved in South Korea. E) to keep North Korea away from interacting with any other country of the world. Answer: A Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking Special Feature: Chapter Opener: Is "Buying Canadian" a Good Idea for Your Community?

4) Over the last 50 years, most countries have A) increased tariffs. B) completely eliminated tariffs. C) doubled tariffs. D) dramatically reduced tariffs. E) done nothing about tariffs. Answer: D Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 5) A tariff is a tax imposed by a government on A) exports. B) services. C) imports. D) luxury items. E) locally produced goods. Answer: C Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 6) Goods and services bought domestically but produced in other countries are referred to as A) exports. B) imports. C) transfer payments. D) foreign consumption. E) luxury items. Answer: B Diff: 1 Type: MC Topic: Imports Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 7) Exports are domestically produced goods and services A) sold to other countries. B) sold to the government. C) sold at home. D) sold to foreign national within the country. E) which are used to produce other goods and services. Answer: A Diff: 1 Type: MC Topic: Exports Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking

8) When Roxanne, a Canadian citizen, purchases a designer dress from Holt Renfrew that was made in Milan (Italy), the purchase is A) a Canadian import and an Italian export. B) a Canadian export and an Italian import. C) both a Canadian and an Italian import. D) neither an export nor an import for either country. E) a gift. Answer: A Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 9) Which of the following statements about the importance of trade to the Canadian economy is true? A) Since 1981, both exports and imports have steadily decreased as a fraction of U.S. gross domestic product. B) Overall, about 80 percent of Canadian jobs depend directly or indirectly on exports. C) Canadian exports account for approximately one-third of GDP. D) International trade plays very little part in the Canadian economy. E) Canada trades only with U.S and Mexico. Answer: C Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 10) In 2021, Canada exported ________ in goods to other countries. A) $23 billion B) $50 billion C) $75 billion D) $95 billion E) more than $630 billion Answer: E Diff: 1 Type: MC Topic: Exports Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking Special Feature: Apply the Concept: Canada Trades, But What?

11) In 2021, Canada imported more than ________ of merchandise. A) $85 billion B) $150 billion C) $200 billion D) $413 billion E) $613 billion Answer: E Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking Special Feature: Apply the Concept: Canada Trades, But What? 12) Which of the following statements is true? A) Japan is more dependent on foreign trade than Canada. B) Imports and exports account for over one-half of the GDP of the Netherlands. C) France is the leading exporting country, accounting for 10 percent of total world exports. D) Because the cost of labour used on farms is so high, Canada exports very little of its wheat, canola, and barley crops. E) Developing countries cannot engage in trade with developed countries. Answer: B Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 13) Twenty-seven countries in Europe have eliminated all tariffs with each other. This group of countries is known as the A) European Union. B) United Federation of Europe. C) Gruppo Euro. D) European Free Trade Association. E) Euro Region. Answer: A Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking

14) USMCA refers to a 2018 agreement that eliminated most tariffs among which countries? A) Canada, the United Kingdom and Mexico B) the United States, the United Kingdom and Mexico C) the United States, Canada and Mexico D) the United States, Mexico and Cuba E) the United States, Mexico and New Zealand Answer: C Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 15) Early international trade in Canada involved A) exporting consumer goods and importing raw materials. B) greater costs than in any other country. C) importing consumer goods and exporting furs and agricultural products. D) importing raw materials and exporting intermediate goods. E) only exports to other countries. Answer: C Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 16) Which of the following statements is true? A) Exports benefit trading countries because exports create jobs. Imports do not benefit trading countries because they result in a loss of jobs. B) China plays little role in global trade. C) Most of the leading exporting countries are developing countries. D) All sectors of the Canadian economy are affected equally by international trade. E) Most of the leading exporting countries are high-income countries. Answer: E Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 17) In Canada, imports and exports combined make up more than half of GDP. Answer: TRUE Diff: 1 Type: TF Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking

18) Canada's cold climate and relatively small labour force makes importing food more efficient than producing in Canada. Answer: TRUE Diff: 1 Type: TF Topic: Exports Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking Special Feature: Apply the Concept: Canada Trades, But What? 19) How have Canadian imports and exports, as a fraction of GDP, changed since the 1960s? Answer: Canadian imports and exports have risen in importance since the 1960s. Although there was a huge drop-off in both exports and imports that occurred between 2000 and 2009, international trade has nearly doubled in importance. Currently almost one-third of GDP is sold in other countries. At the same time, close to one-third of what we consume in Canada is produced in other countries. Diff: 1 Type: SA Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 20) Shortly after taking office in 2021, President Biden signed an executive order that was intended to reduce the quantity of imported goods the federal government buys and increase the quantity of goods made within the United States. Most economists predict such policies will A) increase total employment in the United States and reduce costs for American consumers. B) an increase in the variety of goods and services available to American consumers. C) create relatively few new jobs in the United States and higher costs for American consumers. D) increased opportunities for trade and specialization throughout the world. E) create more job opportunities in the United States and they will become self-sufficient. Answer: C Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking Special Feature: Chapter Opener: Is "Buying Canadian" a Good Idea for Your Community? 21) Trade restrictions tend to preserve ________ in the protected industries and lead to ________ in other industries. A) almost all jobs; economic growth B) well over half of the jobs; price decreases C) relatively few jobs; job losses D) no jobs; increased productivity E) more jobs; job creation Answer: C Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking Special Feature: Economics in Your Life: Should Your Member of Parliament Support a Tariff on Running Shoes? 6 Copyright © 2024 Pearson Canada Inc.

22) "Buy Canadian" laws and movements create winners and losers. Winners include ________ and losers include ________. A) Canadian consumers and taxpayers; foreign firms that rely on Canadian exports B) firms sheltered from foreign competition; Canadian consumers and taxpayers C) Canadian firms that rely on exports to foreign countries; foreign manufacturers D) the Canadian government; firms sheltered from foreign competition E) Canadian firms; Canadian government Answer: B Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking Special Feature: Chapter Opener: Is "Buying Canadian" a Good Idea for Your Community? 23) Over the past several decades there has been a rapid growth in international trade. This growth has been due to all except one of the following factors. Which factor has not contributed to the growth of international trade? A) the spread of reliable communications B) a change in the tariffs charged on many goods C) a reduction in shipping costs D) favourable changes in government policies E) None of the above. Answer: B Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 24) A tax imposed by a government on imports of a good into a country is called A) an import levy. B) an import fine. C) a tariff. D) an import quota. E) a penalty. Answer: C Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking

25) Imports are goods and services bought domestically A) and produced domestically. B) but produced in other countries. C) and resold at a profit. D) and not subject to tariffs. E) after paying high tariffs. Answer: B Diff: 1 Type: MC Topic: Imports Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 26) Domestically produced goods and services sold to other countries are referred to as A) exports. B) imports. C) transfer payments. D) capital outflow. E) consumer goods. Answer: A Diff: 1 Type: MC Topic: Exports Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 27) When Sophie, a French citizen, purchases a new Dell computer in France that was produced in Canada, the purchase is A) both a Canadian and a French import. B) a Canadian import and a French export. C) a present for her mother. D) neither an export nor an import for either country. E) a Canadian export and a French import. Answer: E Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking

28) Which of the following statements about the importance of trade to the Canadian economy is false? A) Since 1980, both exports and imports have steadily increased as a fraction of Canadian gross domestic product. B) Overall, about 30 percent of Canadian output is exported. C) Canadian exports were unaffected by the 2007-2009 financial crisis. D) The Canadian economy depends very little on international trade for growth in its gross domestic product. E) In 2015, 14 percent of Bombardier's sales were to North America. Answer: D Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 29) Eliminating a tariff on running shoes would ________ businesses that sell running shoes and ________ consumers who purchase them. A) benefit; benefit B) benefit; harm C) harm; benefit D) harm; harm E) not affect; benefit Answer: A Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Analytical Thinking Special Feature: Economics in Your Life and Career: Should Your Member of Parliament Support a Tariff on Running Shoes? 30) More than 85 percent of Bombardier's sales are made A) outside North America. B) to the United States. C) in Latin America. D) in China. E) to Mexico. Answer: A Diff: 1 Type: MC Topic: Exports Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking

31) Which of the following statements is false? A) Japan is less dependent on foreign trade than is Canada. B) Imports and exports account for over one-half of the GDP of the Netherlands. C) The United States is a major exporting country, accounting for almost 8 percent of total world exports. D) Exports and imports make up a larger share of China's GDP than Canada's. E) Major portion of Canada's trade is with the United States. Answer: D Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 32) Twenty-seven countries in Europe have formed the European Union (EU). After the EU was formed, it A) eliminated all tariffs among its member countries. B) completed a trade treaty (USMCA) that reduced tariff rates between the EU and North American countries. C) greatly decreased imports and exports among its member countries. D) barred imports of 747 jumbo jets by its member countries; all EU countries must now buy jets from Airbus, a European company. E) reduced tariffs for all the member countries. Answer: A Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 33) The 2018 agreement that eliminated most tariffs among the United States, Canada, and Mexico is known as A) the Pacific Trade Association. B) Trade Without Borders. C) USMCA. D) the Western Trade Union. E) North American Development Act. Answer: C Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking

34) In the 1930s, tariffs A) were less than the average in 2014. B) were designed to increase imports. C) were less than 2 percent. D) that exceeded 50 percent were common. E) were not known because there was no trade. Answer: D Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 35) Which of the following statements is false? A) Exports benefit trading countries because exports create jobs. Imports do not benefit trading countries because they result in a loss of jobs. B) Each year Canada exports about 30 percent of everything made here. C) Most of the leading exporting countries are large, high-income countries. D) Not all sectors of the Canadian economy are affected equally by international trade. E) Trade benefits all countries although there are losers and winners within the countries. Answer: A Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 36) When BMW, a German company, purchases a welding machine that was made in Toronto, the purchase is A) both a German and a Canadian import. B) a German import and a Canadian export. C) a German export and a Canadian import. D) neither an export nor an import for either country. E) both a German and a Canadian export. Answer: B Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Analytical Thinking 37) Although China is the leading exporting country, international trade is less important to China than it is to many other countries. Answer: TRUE Diff: 1 Type: TF Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking

38) Magna International would benefit from a reduction in international trade. Answer: FALSE Diff: 1 Type: TF Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 39) What are three primary reasons for the growth of international trade over the past 50 years? Answer: The increase in trade is the result of the falling costs of shipping products around the world, the spread of inexpensive and reliable communications, and changes in government policies. Diff: 1 Type: SA Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Reflective Thinking 40) What is a tariff? Answer: A tariff is a tax imposed by a government on imports. Diff: 1 Type: SA Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Analytical Thinking 41) What is the difference between imports and exports? Answer: Imports are goods and services bought domestically but produced in other countries. Exports are goods and services produced domestically but sold in other countries. Diff: 1 Type: SA Topic: Trade Learning Outcome: 7.1 Discuss the role of international trade in the Canadian economy AACSB: Analytical Thinking

7.2 Understand the difference between absolute and comparative advantage in international trade 1) Absolute advantage is A) the ability to produce more of a good or service than competitors when using the same number of resources. B) the ability to produce higher quality goods compared to one's competitors. C) the ability to produce a good or service at a higher opportunity cost than one's competitors. D) the ability to produce more of a good or service than competitors that have more resources. E) the ability to produce more of all the goods and services than a competitor and does not need to trade with other countries. Answer: A Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 2) ________ is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. A) Absolute advantage B) Specialization C) Autarky D) Comparative advantage E) Opportunity advantage Answer: D Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking

Table 7.1 Linda Sandy

Bathing 60 50

Grooming 20 25

Linda and Sandy own The Preppy Puppy, a dog grooming business. Table 7.1 lists the number of dogs Linda and Sandy can each bathe and groom in one week. 3) Refer to Table 7.1. Select the statement that accurately interprets the data in the table. A) Linda has an absolute advantage in dog bathing, and Sandy has an absolute advantage in dog grooming. B) Sandy has an absolute advantage in dog bathing, and Linda has an absolute advantage in dog grooming. C) Sandy has an absolute advantage in dog bathing and dog grooming. D) Linda has an absolute advantage in dog bathing and dog grooming. E) Both have an absolute advantage in dog bathing because they both can do more than grooming. Answer: A Diff: 2 Type: MC Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills 4) Refer to Table 7.1. Select the statement that accurately interprets the data in the table. A) Sandy has a greater opportunity cost than Linda for dog grooming. B) Sandy's opportunity cost for dog grooming is less than Linda's. C) Linda has a greater opportunity cost than Sandy for dog bathing. D) Sandy's opportunity cost for dog grooming and dog bathing are both greater than Linda's. E) Both have lower opportunity cost for dog grooming. Answer: B Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills 5) Refer to Table 7.1. Select the statement that accurately interprets the data in the table. A) Sandy has a comparative advantage in dog grooming. B) Linda has a comparative advantage in dog grooming. C) Linda has a comparative advantage in dog grooming and dog bathing. D) Sandy has a comparative advantage in dog bathing. E) Sandy and Linda both have absolute advantage in dog bathing. Answer: A Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills 14 Copyright © 2024 Pearson Canada Inc.

6) Refer to Table 7.1. Select the statement that accurately interprets the data in the table. A) Linda has a comparative advantage in dog bathing. B) Sandy has an absolute advantage in dog bathing. C) Sandy has a comparative advantage in dog bathing. D) Linda has a comparative advantage in dog grooming and dog bathing. E) Sandy and Linda both have absolute advantage in dog bathing. Answer: A Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills 7) An economic principle that explains why countries produce different goods and services is A) absolute advantage. B) trade as a percentage of GDP. C) comparative advantage. D) USMCA. E) rationality. Answer: C Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 8) Assume that China has a comparative advantage in producing corn and exports corn to Japan. We can conclude that A) China also has an absolute advantage in producing corn relative to Japan. B) China has a lower opportunity cost of producing corn relative to Japan. C) Japan has an absolute disadvantage in producing corn relative to China. D) labour costs are higher for corn producers in Japan than in China. E) China has higher production of corn than Japan. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking

9) Whenever a buyer and a seller agree to trade, A) the agreement is made based on absolute advantage. B) they must have identical opportunity costs in producing their respective products. C) one party will always be worse off. D) both must believe they will be made better off. E) they just want good relationship even if it is making them worse off. Answer: D Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 10) If Japanese workers are more productive than French workers, then trade between Japan and France A) can take place only if France has an absolute advantage in producing a good or service Japanese buyers want. B) cannot take place because Japanese goods and services will be less expensive than French goods and services. C) cannot take place until French workers become more productive. D) will take place only if a country has absolute advantage in a good or service that buyers in the other country want. E) will take place so long as each country has a comparative advantage in a good or service that buyers in the other country want. Answer: E Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 11) If the opportunity cost of production for two goods is different between two countries, then A) trade cannot benefit either country. B) only one country can be made better off by trade. C) mutually beneficial trade is possible. D) trade will only benefit both countries if one can lower its opportunity costs. E) there is no possibility of trade. Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking

12) If Canada has a comparative advantage relative to Mexico in the production of timber, then A) the explicit cost of production for timber is lower in Canada than in Mexico. B) the opportunity cost of production for timber is lower in Canada than in Mexico. C) the implicit costs of production for timber are lower in Canada than in Mexico. D) the average cost of production for timber is lower in Canada than in Mexico. E) Canada has no need to engage in trade with Mexico because it's producing timber at a lower cost. Answer: B Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 13) If Canada imports fishing poles from Mexico and Mexico imports bacon from Canada, which of the following would explain this pattern of trade? A) Mexico has a lower opportunity cost of producing bacon than Mexico, and Mexico has a comparative advantage in producing fishing poles. B) The opportunity cost of producing fishing poles in Canada is higher than the opportunity cost of producing bacon in Mexico. C) Mexico must have an absolute advantage in producing fishing poles, and Canada must have an absolute advantage in bacon. D) Mexico has a higher opportunity cost of producing fishing poles than Canada, and Canada has a higher opportunity cost of producing bacon. E) Canada has more demand for fishing poles and Mexico has more demand for bacon. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 14) The ability of a firm or country to produce a good or service at a lower opportunity cost than other producers is called absolute advantage. Answer: FALSE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 15) If Estonia has an absolute advantage in the production of two goods compared to Norway, Estonia cannot benefit from trade with Norway. Answer: FALSE Diff: 1 Type: TF Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 17 Copyright © 2024 Pearson Canada Inc.

Table 7.2 Output Per Hour of Work Handbags Cambodia 15 Thailand 24

Jackets 3 6

Table 7.2 shows the output per hour of work for handbags and jackets in Cambodia and in Thailand. 16) Refer to Table 7.2. Fill in the following table with the opportunity costs of producing handbags and jackets for Cambodia and Thailand. Handbags

Jackets

Handbags 0.20 0.25

Jackets 5 4

Cambodia Thailand Answer: Cambodia Thailand

Diff: 1 Type: SA Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills 17) Refer to Table 7.2. a. Which country has an absolute advantage in the production of handbags and jackets? b. Which country has a comparative advantage in the production of handbags? c. Which country has a comparative advantage in the production of jackets? Answer: a. Thailand has an absolute advantage in the production of both products. b. Cambodia has a comparative advantage in the production of handbags. c. Thailand has a comparative advantage in the production of jackets. Diff: 1 Type: SA Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills

18) ________ is the ability to produce more of a good or service than competitors when using the same amount of resources. A) Absolute advantage B) Comparative advantage C) Trade superiority D) Trade autarky E) USMCA Answer: A Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 19) Trade that is within a country or between countries is based on the principle of A) absolute advantage. B) scarcity. C) competition. D) comparative advantage. E) willingness to trade. Answer: D Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking

Table 7.3 Rob Bill

Berries 20 30

Fish 80 60

Rob Crusoe and Bill Friday spent their week-long vacation on a desert island where they had to find and make their own food. Rob and Bill spent one day each fishing and picking berries. The table lists the kilograms of output Rob and Bill produced. 20) Refer to Table 7.3. Use the table above to select the statement that accurately interprets the data in the table. A) Rob has an absolute advantage in picking berries, and Bill has an absolute advantage in catching fish. B) Bill has an absolute advantage in picking berries, and Rob has an absolute advantage in catching fish. C) Bill has an absolute advantage in picking berries and catching fish. D) Rob has an absolute advantage in picking berries and catching fish. E) Both have an absolute advantage in catching fish because they both can catch bigger amount of fish than berries. Answer: B Diff: 2 Type: MC Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills 21) Refer to Table 7.3. Use the table above to select the statement that accurately interprets the data in the table. A) Bill has a greater opportunity cost than Rob for picking berries. B) Bill's opportunity cost for catching fish is less than Rob's. C) Rob has a greater opportunity cost than Bill for picking berries. D) Bill's opportunity cost for picking berries and catching fish are both greater than Rob's. E) Both have an absolute advantage in catching fish because they both can catch bigger amount of fish than berries. Answer: C Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills

22) Refer to Table 7.3. Use the table above to select the statement that accurately interprets the data in the table. A) Bill has a comparative advantage in catching fish. B) Rob has a comparative advantage in picking berries. C) Rob has a comparative advantage in catching fish and picking berries. D) Bill has a comparative advantage in picking berries. E) Both have an absolute advantage in catching fish because they both can catch bigger amount of fish than berries. Answer: D Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills 23) Refer to Table 7.3. Use the table above to select the statement that accurately interprets the data in the table. A) Rob has a comparative advantage in catching fish. B) Bill has an absolute advantage in catching fish. C) Bill has a comparative advantage in catching fish. D) Rob has a comparative advantage in picking berries and catching fish. E) No one has comparative advantage in either good. Answer: A Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills 24) An economic principle that explains why people pursue different occupations is A) absolute advantage. B) international trade. C) comparative advantage. D) USMCA. E) rationality. Answer: C Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking

25) Assume that Honduras has a comparative advantage in producing bananas and exports bananas to Brazil. We can conclude that A) Honduras also has an absolute advantage in producing bananas relative to Brazil. B) Honduras has a lower opportunity cost of producing bananas relative to Brazil. C) Brazil has an absolute disadvantage in producing bananas relative to Honduras. D) Labour costs are higher for banana producers in Brazil than in Honduras. E) Honduras wanted to send excess bananas to Brazil to develop friendship. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 26) Whenever a buyer and a seller agree to trade, both must believe they will be made better off A) unless the buyer resides in a different country than the seller resides in. International trade may make the buyer or seller worse off. B) unless one party is richer than the other. C) only if the buyer and seller live in countries with market economies. D) whether the buyer and seller live in the same city or different countries. E) because they both are of equal economic status. Answer: D Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 27) If Norwegian workers are more productive than Albanian workers, then trade between Norway and Albania A) cannot take place because Norwegian goods and services will be less expensive than Albanian goods and services. B) will take place so long as each country has a comparative advantage in a good or service that buyers in the other country want. C) cannot take place until Albanian workers become more productive. D) can take place only if Albania has an absolute advantage in producing a good or service Norwegian buyers want. E) can take place only if we have information about their production of the specific goods they want to trade in. Answer: B Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking

28) If the ________ cost of production for two goods is different between two countries, then mutually beneficial trade is possible. A) marginal B) explicit C) opportunity D) implicit E) average Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 29) If Brazil has a comparative advantage relative to Cuba in the production of sugar cane, then A) the average cost of production for sugar cane is lower in Brazil than in Cuba. B) the implicit costs of production for sugar cane are lower in Brazil than in Cuba. C) the opportunity cost of production for sugar cane is lower in Brazil than in Cuba. D) the explicit cost of production for sugar cane is lower in Brazil than in Cuba. E) the input costs are lower in Brazil than in Cuba. Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 30) If Sweden exports cell phones to Denmark and Denmark exports butter to Sweden, which of the following would explain this pattern of trade? A) Sweden has a lower average cost of producing cell phones than Denmark, and Denmark has a average cost in producing butter. B) The opportunity cost of producing butter in Denmark is higher than the opportunity cost of producing butter in Sweden. C) Sweden must have an absolute advantage in producing cell phones, and Denmark must have an absolute advantage in producing butter. D) Sweden has a higher opportunity cost of producing cell phones than Denmark, and Denmark has a higher opportunity cost of producing butter. E) Sweden has a lower opportunity cost of producing cell phones than Denmark, and Denmark has a comparative advantage in producing butter. Answer: E Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking

31) Canada sells lentils to India and India sells technical support services to Canada; this indicates A) Canada has a comparative advantage in lentils. B) India has an absolute advantage in lentils. C) Canada has an absolute advantage in lentils. D) India has a comparative advantage in lentils. E) Canada has comparative advantage in technical support services. Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 32) The ability of a firm or country to produce a good or service at a lower opportunity cost than other producers is called comparative advantage. Answer: TRUE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking 33) If Finland has an absolute advantage in the production of two goods compared to Latvia, Finland can still benefit from trade with Latvia. Answer: TRUE Diff: 1 Type: TF Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Reflective Thinking

Table 7.4

Sarita Gabriel

Pies 15 12

Cakes 25 16

Sarita and Gabriel own S&G Bakery. Table 7.4 lists the number of pies and cakes Sarita and Gabriel can each bake in one day. 34) Refer to Table 7.4. Select the statement that accurately interprets the data in the table. A) Sarita has an absolute advantage in baking cakes and Gabriel has an absolute advantage in baking pies. B) Sarita has an absolute advantage in baking pies and Gabriel has an absolute advantage in baking cakes. C) Sarita has an absolute advantage in baking pies and cakes. D) Gabriel has an absolute advantage in baking pies and cakes. E) None of them has an absolute advantage in pies and cakes. Answer: C Diff: 2 Type: MC Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking 35) Refer to Table 7.4. Select the statement that accurately interprets the data in the table. A) Sarita has a greater opportunity cost than Gabriel for baking cakes. B) Sarita's opportunity cost for baking cakes is less than Gabriel's. C) Gabriel has a greater opportunity cost than Sarita for baking pies. D) Gabriel's opportunity cost for baking cakes and baking pies are both greater than Sarita's. E) The opportunity cost is same for both and there is no gain from trade. Answer: B Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking

36) Refer to Table 7.4. Select the statement that accurately interprets the data in the table. A) Sarita has a comparative advantage in baking pies. B) Gabriel has a comparative advantage in baking cakes. C) Sarita has a comparative advantage in baking pies and baking cakes. D) Sarita has a comparative advantage in baking cakes. E) No one has a comparative advantage in any good. Answer: D Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking 37) Refer to Table 7.4. Select the statement that accurately interprets the data in the table. A) Sarita has a comparative advantage in baking pies. B) Gabriel has an absolute advantage in baking cakes. C) Gabriel has a comparative advantage in baking pies. D) Gabriel has a comparative advantage in baking pies and baking cakes. E) Both of them have an absolute advantage in pies and cakes. Answer: C Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking

Table 7.5

Bryce Tina

Candles 150 200

Soap 450 450

Bryce and Tina are artisans who produce homemade candles and soap. Table 7.5 lists the number of candles and bars of soap Bryce and Tina can each produce in one month. 38) Refer to Table 7.5. Select the statement that accurately interprets the data in the table. A) Bryce has an absolute advantage in making candles and Tina has an absolute advantage in making soap. B) Bryce has an absolute advantage in making soap and Tina has an absolute advantage in making candles. C) Bryce has an absolute advantage in making soap. D) Tina has an absolute advantage in making candles. E) Both of them have an absolute advantage in making soap. Answer: D Diff: 2 Type: MC Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking 39) Refer to Table 7.5. Select the statement that accurately interprets the data in the table. A) Bryce has an absolute advantage in making candles and soap. B) Tina has an absolute advantage in making candles and soap. C) Neither Bryce nor Tina has an absolute advantage in making candles. D) Neither Bryce nor Tina has an absolute advantage in making soap. E) Both of them have an absolute advantage in making soap. Answer: D Diff: 2 Type: MC Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking

40) Refer to Table 7.5. Select the statement that accurately interprets the data in the table. A) Bryce has a greater opportunity cost than Tina for making candles. B) Bryce's opportunity cost for making candles is less than Tina's. C) Tina has a greater opportunity cost than Bryce for making candles. D) Bryce's opportunity cost for making candles and making soap are both greater than Tina's. E) Both have the same opportunity cost of making soap. Answer: A Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking 41) Refer to Table 7.5. Select the statement that accurately interprets the data in the table. A) Tina has a comparative advantage in making soap. B) Bryce has a comparative advantage in making soap. C) Tina has a comparative advantage in making candles and making soap. D) Neither Bryce nor Tina has a comparative advantage in making soap. E) Both of them have a comparative advantage in making soap. Answer: B Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking 42) Refer to Table 7.5. Select the statement that accurately interprets the data in the table. A) Tina has a comparative advantage in making candles. B) Bryce has an absolute advantage in making soap. C) Bryce has a comparative advantage in making candles. D) Bryce has a comparative advantage in making candles and making soap. E) Both of them have a comparative advantage in making soap. Answer: A Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking

Table 7.6 Output Per Hour of Work Light Bulbs Mexico 20 Canada 8

Flash Drives 5 32

Table 7.6 shows the output per hour of work for light bulbs and flash drives in Mexico and in Canada. 43) Refer to Table 7.6. Fill in the following table with the opportunity costs of producing light bulbs and flash drives for Mexico and Canada. Light Bulbs

Flash Drives

Light Bulbs 0.25 4

Flash Drives 4 0.25

Mexico Canada Answer: Mexico Canada

Diff: 1 Type: SA Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills 44) Refer to Table 7.6. a. Which country has an absolute advantage in the production of light bulbs and flash drives? b. Which country has a comparative advantage in the production of light bulbs? c. Which country has a comparative advantage in the production of flash drives? Answer: a. Neither country has an absolute advantage in the production of both products. b. Mexico has a comparative advantage in the production of light bulbs. c. Canada has a comparative advantage in the production of flash drives. Diff: 1 Type: SA Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytic Skills

45) Explain whether it is possible for a country to have an absolute advantage in the production of a product without having a comparative advantage in the production of that product. Answer: A country can have an absolute advantage without having a comparative advantage in the production of a product, because having an absolute advantage means a country can produce more of the product than another country while using the same amount of resources, and having a comparative advantage means that the country can produce the product at a lower opportunity cost than another country. Having a comparative advantage is not required to have an absolute advantage. Diff: 2 Type: SA Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking 46) What does it mean for a country to have an absolute advantage in producing a product? Answer: A country has an absolute advantage in producing a product when it has the ability to produce more of that product than competitors when using the same amount of resources. Diff: 2 Type: SA Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking Table 7.7

Ahmet MyLinh

Bows 20 25

Arrows 80 75

Table 7.7 shows the output per week for bows and arrows by Ahmet and MyLinh. 47) Refer to Table 7.7. Fill in the following table with the opportunity costs of producing bows and arrows for Ahmet and MyLinh. Bows Arrows Ahmet MyLinh Answer: Ahmet MyLinh

Bows 4 3

Arrows 0.25 0.33

Diff: 2 Type: SA Topic: Opportunity Cost Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking

48) Refer to Table 7.7. a. Which person has an absolute advantage in the production of bows? arrows? b. Which person has a comparative advantage in the production of bows? c. Which person has a comparative advantage in the production of arrows? Answer: a. MyLinh has an absolute advantage in the production of bows and Ahmet has an absolute advantage in the production of arrows. b. MyLinh has a comparative advantage in the production of bows. c. Ahmet has a comparative advantage in the production of arrows. Diff: 2 Type: SA Topic: Absolute Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking 49) What does it mean for a country to have a comparative advantage in producing a product? Answer: A country has a comparative advantage in producing a product when it has the ability to produce that product at a lower opportunity cost than competitors. Diff: 2 Type: SA Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking 50) Explain whether it is possible for a country to have a comparative advantage in the production of a product without having an absolute advantage in the production of that product. Answer: A country can have a comparative advantage without having an absolute advantage in the production of a product because having a comparative advantage means that the country can produce the product at a lower opportunity cost than another country, and having an absolute advantage means a country can produce more of the product than another country while using the same amount of resources. Having an absolute advantage is not required to have a comparative advantage. Diff: 2 Type: SA Topic: Comparative Advantage Learning Outcome: 7.2 Understand the difference between absolute and comparative advantage in international trade AACSB: Analytical Thinking

7.3

Explain how countries gain from international trade

1) A situation in which a country does not trade with other countries is called A) autarky. B) self-actualization. C) autonomy. D) independence. E) landlocked. Answer: A Diff: 1 Type: MC Topic: Autarky Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 2) The ratio at which a country can trade its exports for imports from other countries is called A) a trade barrier. B) the terms of trade. C) autarky. D) a free trade agreement. E) opportunity cost. Answer: B Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 3) Countries that engage in trade will tend to specialize in the production of goods and services in which they have ________ and will ________ these goods and services. A) a comparative advantage; import B) an absolute advantage; export C) a comparative advantage; export D) an absolute advantage; import E) an abundance; export Answer: C Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

4) Examples of ________ show how trade between two countries can make each better off. A) absolute advantage B) comparative advantage C) autarky D) trade barriers Answer: B Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 5) The main beneficiaries of international trade in Canada have been A) Canadian firms. B) American firms. C) Canadian consumers. D) American Consumers. E) all firms and consumers involved benefit equally. Answer: C Diff: 2 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 6) Imports due to international trade agreements will always benefit ________ more than the loses to ________. A) consumers; producers who face additional competition B) producers; consumers who face higher prices C) foreign producers; domestic producers who have lower costs D) producers; government revenue due to ending tariffs E) producers; consumers Answer: A Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Trade Creates Both Winners and Losers

7) In the real world we don't observe countries completely specializing in the production of goods for which they have a comparative advantage. One reason for this is A) comparative advantage works better in theory than in practice. B) some countries have more resources than other countries. C) tastes for many traded goods are similar in many countries because of globalization. D) production of most goods involves increasing opportunity costs. E) production of most goods involves subsidies from governments. Answer: D Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 8) Tastes for products such as beer differ. As a result A) we see countries specializing completely in the production of beer. B) consumers of beer have difficulty deciding what type of imported beer to buy. C) the quality of imported beer is less than it could be. D) different countries may each have a comparative advantage in producing different types of beer. E) every country tries to produce as many varieties of beer as possible. Answer: D Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 9) A consequence of increasing marginal costs of producing smart phones in South Korea is A) South Korea will not export smart phones. B) South Korea will stop complete specialization in the production of smart phones. C) South Korea will import smart phones from countries that don't experience increasing marginal costs. D) South Korea will likely impose trade restrictions on imported smart phones. E) South Korea will lift tariffs from imported smart phones. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

10) Which of the following statements is true? A) All individuals in both countries are made better off as a result of international trade. B) Within each country, some individuals are made better off as a result of international trade, but one of the countries will be worse off overall. C) Although some individuals are made better off as a result of international trade, both countries may be made worse off overall. D) Each country as a whole is made better off as a result of international trade, but individuals within each country may be made worse off. E) Producers are always better off as a result of engaging in trade. Answer: D Diff: 2 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Trade Creates Both Winners and Losers 11) Many proponents of globalization claim "Trade is a win-win situation for all countries that participate." This statement is A) false since it ignores the workers who lose their jobs as result of international trade. B) false since not all countries participate in international trade. C) true because it refers to countries; individuals may be losers as a result of international trade. D) true because all consumers and workers benefit from international trade. E) only true for developed countries. Answer: C Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Trade Creates Both Winners and Losers 12) Which of the following is not a source of comparative advantage? A) relative abundance of labour and capital B) technology C) climate D) a strong foreign currency exchange rate E) natural resources Answer: D Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

13) Japan has developed a comparative advantage in designing and producing automobiles. The source of its comparative advantage in these products is A) abundant supplies of natural resources. B) a favourable climate. C) a strong central government. D) technology. E) labour. Answer: D Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 14) China has developed a comparative advantage in the production of clothing. The source of this comparative advantage is A) a large supply of natural resources. B) a large supply of unskilled workers and relatively little capital. C) investment in capital used to produce clothing. D) superior process technology. E) technology. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 15) ________ refer(s) to reductions in a firm's costs that result from an increase in the size of an industry. A) Internal economies B) External economies C) Autarkial dominance D) Streamlining E) Externalities Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

16) Once a country has lost its comparative advantage in producing a good, its income will be ________ and its economy will be ________ if it switches from producing the good to importing it. A) higher; less efficient B) higher; more efficient C) lower; less efficient D) lower; more efficient E) same; same Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 17) Canada exports a wide variety of goods to the rest of the world. In 2021, Canada's merchandise exports accounted for _________ of its total exports. A) 15 percent. B) 24 percent. C) 54 percent. D) 64 percent. E) 84 percent. Answer: B Diff: 2 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytic Skills Special Feature: Apply the Concept: Canada Trades, But What? 18) Canada is a leading exporter of wheat. What explains the comparative advantage of Canada in wheat production? A) positive externalities B) investment by large firms such as Viterra and Pioneer C) climate and soil conditions in Canada which are well-suited for wheat production D) a large supply of unskilled labour E) technology Answer: C Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

19) In the 1970s and 1980s, North America lost its comparative advantage in consumer electronics goods to Japan. What factor was most responsible for the development of Japan's comparative advantage in consumer electronics goods? A) Japanese firms benefited from external economies. B) Japan has abundant supplies of labour. C) Japanese firms excelled in process technology. D) Japan has abundant supplies of natural resources needed to produce electronics goods. E) Japan has accumulated a lot of capital. Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 20) One reason a country does not specialize completely in production is that not all goods and services are traded internationally. Answer: TRUE Diff: 1 Type: TF Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 21) One of the main sources of comparative advantage is internal economies. Answer: FALSE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 22) What is autarky? Answer: Autarky is a situation in which a country does not trade with other countries. Diff: 2 Type: SA Topic: Autarky Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

23) The simple trade model demonstrates that countries can expand consumption by specializing in the production of goods and services in which they have a comparative advantage. In reality we do not see complete specialization in production. State three reasons why this is case. Answer: Three reasons outlined in the text are: 1. Not all goods and services are traded internationally. 2. As more exported goods are produced, the opportunity cost of producing additional units eventually increases. 3. Since most products are differentiated some buyers prefer to purchase domestically produced products while others will prefer to buy similar products produced abroad. The automobile industry is a good example of this. Diff: 3 Type: SA Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

24) Suppose in Finland a worker can produce either 32 cell phones or 4 kayaks, while in Canada a worker can produce either 40 cell phones or 10 kayaks. a. Which country has an absolute advantage in cell phone production? In kayak production? b. What is the opportunity cost of 1 cell phone in Finland? In Canada? c. What is the opportunity cost of 1 kayak in Finland? In Canada? d. Which country has a comparative advantage in cell phone production? In kayak production? e. Suppose each country has 1,000 workers. Currently, each country devotes 40 percent of its labour force to cell phone production and 60 percent to kayak production. What is the output of cell phones and kayaks for each country and what is the total output of cell phones and kayaks between the two countries? f. Suppose each country specializes in the production of the good in which it has a comparative advantage. What is the total output of cell phones and kayaks in the two countries? g. Provide a numerical example to show how Finland and Canada can both gain from trade. Assume that the terms of trade are established at 6 cell phones for 1 kayak.

Answer: a. Canada has an absolute advantage in the production of both goods. b. In Finland, the opportunity cost of 1 cell phone = 1/8 kayak. In Canada, the opportunity cost of 1 cell phone = 1/4 kayak. c. In Finland, the opportunity cost of 1 kayak = 8 cell phones. In Canada, the opportunity cost of 1 kayak = 4 cell phones. d. Finland has a comparative advantage in cell phone production and Canada in kayak production. e.

Finland Canada Total f.

Cell Phones 400 × 32 = 12,800 400 × 40 = 16,000 28,800

Kayaks 600 × 4 = 2,400 600 × 10 = 6,000 8,400

If each country specializes, output is: Cell Phones 1,000 × 32 = 32,000

Finland Canada Total

32,000

Kayaks 1,000 × 10 = 10,000 10,000

g. Finland Output Exports Consumes Imports

32,000 cell phones 18,000 cell phones 14,000 cell phones 3,000 kayaks

Canada Output Exports Consumes Imports

10,000 kayaks 3,000 kayaks 7,000 kayaks 18,000 cell phones

Diff: 3 Type: ES Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytic Skills

25) What are the four main sources of comparative advantage? Briefly explain each source and provide examples. Answer: The 4 main sources cited are: 1. climate and natural resources 2. relatively abundant supplies of labour and capital 3. technology 4. external economies. Some examples of natural resource rich countries include Canada, Saudi Arabia (rich in oil), Malaysia (rich in palm oil), Indonesia (rich in tropical hardwoods), and Kenya with its exotic wildlife (for tourism). Advantageous climate is also a source of comparative advantage. For example, the South of France and certain parts of Italy have a particular blend of climatic conditions and land that is well suited to the cultivation of truffles. Countries like the United States have many highly skilled workers and a huge stock of capital equipment compared to, say, China and India which have more low-skilled workers and relatively little machinery. As a result, the United States has a comparative advantage in the production of goods that require skilled workers or sophisticated machinery (software, biotechnology) while China and India have a comparative advantage in the production of goods that require low-skilled workers and small amounts of simple machinery (carpets, clothing items). Canada, by contrast has huge reserves of natural resources (oil, gas, potash, gold, timber, etc.). As a result, Canada has a comparative advantage in the production of natural resources. The text discusses the distinction between product technologies and process technologies and how they lead to specialization in different kinds of products. For example, rich, western economies are undoubtedly the world leader in research and development leading to a comparative advantage in technology-intensive products and services. Examples include the development of new products in the field of medicine, telecommunications and bioengineering. Countries that are strong in process technologies are likely to concentrate on improving the process used to make existing products. External economies occur outside of a firm, within an industry. Thus, when an industry's scope of operations expands due to, for example, the creation of a better transportation network, firms located in that network gain advantages over firms located outside the network. Diff: 3 Type: ES Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

26) Autarky is a situation in which a country A) only exports products. B) only imports products. C) does not trade with other countries. D) has no absolute advantage in any production. E) engages in international trade without restrictions. Answer: C Diff: 1 Type: MC Topic: Autarky Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 27) The terms of trade refer to A) the rules and regulations that countries must adhere to when trading. B) the ratio at which a country can trade its exports for imports from other countries. C) the role of the government in overseeing international trade. D) a legal document that specifies the trade quantities agreed to by two countries. E) all of the above. Answer: B Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 28) Countries gain from specializing in producing goods in which they have ________ and trading for goods in which other countries have ________. A) a comparative advantage; an absolute advantage B) an absolute advantage; an absolute advantage C) a comparative advantage; a comparative advantage D) an absolute advantage; a comparative advantage E) no advantage at all; comparative advantage Answer: C Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

29) Which of the following is a reason why we don't observe complete specialization in modern economies? A) government policies actively prevent specialization B) all goods and services are now traded internationally C) external economies provide cost advantages for firms located in the same city D) production of most goods and services involves increasing opportunity costs E) none of the above Answer: D Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 30) In which situation would we be most likely to see countries engage in complete specialization? A) both countries have equal opportunity costs for goods and services B) both countries consume goods that are not traded across borders C) both countries have different tastes for goods and services D) one country has an absolute advantage in the production of both goods E) both countries have constant opportunity costs Answer: E Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 31) Examples of comparative advantage show how trade between two countries can make each better off. Compared to their pre-trade positions, trade makes both countries better off because in each country, A) total employment is greater. B) total consumption of goods is greater. C) wages are higher. D) total welfare is greater. E) total production is greater. Answer: B Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

32) In the real world we don't observe countries completely specializing in the production of goods for which they have a comparative advantage. All of the following are reasons for this except A) not all goods and services are traded internationally. B) some countries have more resources than other countries. C) tastes for many traded goods are different in many countries because of globalization. D) production of most goods involves increasing opportunity costs. E) none of the above is a reason for this. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 33) Automobiles and many other products are differentiated. As a result, A) different countries may each have a comparative advantage in producing different types of automobiles. B) consumers of automobiles have difficulty deciding what type of imported automobile to buy. C) the quality of imported automobiles is less than it could be. D) we see countries specializing completely in the production of automobiles. E) there is no trade in automobiles among countries. Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 34) A consequence of increasing marginal costs of producing laptop computers in Canada is A) Canada will import laptop computers from countries that don't experience increasing marginal costs. B) Canada will stop complete specialization in the production of laptop computers. C) Canada will not export laptop computers. D) Canada will likely impose trade restrictions on imported laptop computers. E) Canada will purchase all its laptops from China. Answer: B Diff: 2 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

35) Textbook examples of trade between two nations are simplified in order to show how two nations both benefit from trade. These examples are misleading because A) in the real world, rich countries can take advantage of poor countries. B) they do not account for the reduction in wages that occurs in both countries as a result of trade. C) some individuals in both countries may be made worse off because of trade. D) trade restrictions are likely to be imposed as trade grows over time. E) trade benefits only those countries who are not able to produce anything. Answer: C Diff: 2 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Trade Creates Both Winners and Losers 36) Which of the following statements is false? A) Not all individuals in both countries are made better off as a result of international trade. B) Within each country, some individuals are made better off as a result of international trade, but one of the countries will be worse off overall. C) Although some individuals may not be made better off as a result of international trade, both countries may be made better off overall. D) Each country as a whole is made better off as a result of international trade, but individuals within each country may be made worse off. E) None of the above. Answer: B Diff: 2 Type: MC Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 37) All of the following are sources of comparative advantage except A) climate. B) relative abundance of labour and capital. C) a strong foreign currency exchange rate. D) technology. E) natural resources. Answer: C Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

38) Canada has developed a comparative advantage in mining, oil and gas extraction, and lumber. The source of comparative advantage in these products is A) a favourable climate. B) technology. C) abundant supplies of natural resources. D) a strong central government. E) a strong Canadian dollar. Answer: C Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 39) Once an industry becomes established in a certain area, firms that locate in that area gain advantages over firms located elsewhere, leading to lower costs of production. Economists refer to the lower costs that result from increases in the size of an industry in a certain area as A) external economies. B) positive externalities. C) strategic advantages. D) technological change. E) a strong foreign currency exchange rate. Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 40) China has developed a comparative advantage in the production of children's toys. The source of this comparative advantage is A) superior process technology. B) a large supply of unskilled workers and relatively little capital. C) investment in capital used to produce toys. D) a large supply of natural resources. E) all of the above. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

41) Costa Rica is a leading exporter of bananas. What explains the comparative advantage of this country in banana production? A) climate and soil conditions in Costa Rica that are well-suited for banana production B) investment by multinational firms such as Chiquita Brands International and the Dole Food Company C) a large supply of unskilled labour D) positive externalities E) economies of scale Answer: A Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 42) In the past two decades, North America lost its comparative advantage in automobiles to Japan. What factor was most responsible for the development of Japan's comparative advantage in automobiles? A) Japanese firms got advantage of positive externalities. B) Japan has abundant supplies of labour. C) Japanese firms benefited from external economies. D) Japan has abundant supplies of natural resources needed to produce automobiles. E) Japanese firms excelled in technology. Answer: E Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

Table 7.8 Output per hour of work

Denmark Belize

Clocks 6 1

Hats 3 2

Production and Consumption without Trade Clocks 900 150

Hats 150 100

Production with Trade Clocks 1,200 0

Hats 0 400

Denmark and Belize can produce both clocks and hats. Each country has a total of 200 available labor hours for the production of clocks and hats. Table 7.8 shows the output per hour of work, the production and consumption quantities without trade, and the production numbers with trade. 43) Refer to Table 7.8. Which country has an absolute advantage in producing clocks? A) Denmark B) Belize C) both countries D) neither country E) more information is needed to determine that. Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 44) Refer to Table 7.8. Which country has an absolute advantage in producing hats? A) Denmark B) Belize C) both countries D) neither country E) more information is needed to determine that. Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 45) Refer to Table 7.8. Which country has a comparative advantage in producing clocks? A) Denmark B) Belize C) both countries D) neither coutry E) more information is needed to determine that. Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 49 Copyright © 2024 Pearson Canada Inc.

46) Refer to Table 7.8. Which country has a comparative advantage in producing hats? A) Denmark B) Belize C) both countries D) neither country E) more information is needed to determine that. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 47) Refer to Table 7.8. What is the opportunity cost to produce 1 hat in Denmark? A) 1/6 of a clock B) 1/2 of a clock C) 2 clocks D) 6 clocks E) 3 clocks Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 48) Refer to Table 7.8. What is the opportunity cost to produce 1 hat in Belize? A) 1/2 of a clock B) 2/3 of a clock C) 1.5 clocks D) 2 clocks E) 3 clocks Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 49) Refer to Table 7.8. What is the opportunity cost to produce 1 clock in Denmark? A) 1/6 of a hat B) 1/2 of a hat C) 2 hats D) 3 hats E) 6 hats Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking

50) Refer to Table 7.8. What is the opportunity cost to produce 1 clock in Belize? A) 1/2 of a hat B) 2/3 of a hat C) 1.5 hats D) 2 hats E) 3 hats Answer: D Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 51) Refer to Table 7.8. With trade, what is the total gain in hat production? A) 150 hats B) 300 hats C) 400 hats D) 650 hats E) 700 hats Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 52) Refer to Table 7.8. With trade, what is the total gain in clock production? A) 150 clocks B) 300 clocks C) 2,100 clocks D) 2,250 clocks E) 3,500 clocks Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 53) Refer to Table 7.8. All of the following are terms of trade that could possibly benefit both countries except A) 1 hat : 3/5 of a clock B) 1 hat : 1 clock C) 1 hat : 1.5 clocks D) 1 hat : 2.5 clocks E) 1 hat: 3 clocks Answer: D Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 51 Copyright © 2024 Pearson Canada Inc.

54) Refer to Table 7.8. All of the following are terms of trade that could possibly benefit both countries except A) 4/5 of a hat : 1 clock. B) 1.2 hats : 1 clock. C) 1.5 hats : 1 clock. D) 2.25 hats : 1 clock. E) 3 hats: 1 clock. Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 55) Refer to Table 7.8. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many hats will Denmark consume? A) 150 B) 180 C) 270 D) 400 E) 500 Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 56) Refer to Table 7.8. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many hats will Belize consume? A) 100 B) 130 C) 250 D) 400 E) 450 Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking

57) Refer to Table 7.8. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many clocks will Denmark consume? A) 270 B) 900 C) 930 D) 950 E) 1,200 Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 58) Refer to Table 7.8. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many clocks will Belize consume? A) 150 B) 270 C) 930 D) 950 E) 1,200 Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 59) Refer to Table 7.8. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many hats will Denmark gain compared to the "without trade" numbers? A) -150 B) 0 C) 150 D) 950 E) 1,050 Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking

60) Refer to Table 7.8. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many hats will Belize gain compared to the "without trade" numbers? A) -100 B) 0 C) 150 D) 250 E) 300 Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 61) Refer to Table 7.8. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many clocks will Denmark gain compared to the "without trade" numbers? A) 30 B) 100 C) 150 D) 900 E) 950 Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 62) Refer to Table 7.8. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many clocks will Belize gain compared to the "without trade" numbers? A) -100 B) 100 C) 120 D) 250 E) 300 Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytical Thinking 63) One reason a country does not specialize completely in production is that production of most goods involves increasing opportunity costs. Answer: TRUE Diff: 1 Type: TF Topic: Opportunity Cost Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

64) One of the main sources of comparative advantage is natural resources. Answer: TRUE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 65) Examples of comparative advantage often begin with two countries that each produce the same two goods. Each country is then shown to have a comparative advantage in producing the good it can produce at a lower opportunity cost, and specializes in the production of the good for which it has a comparative advantage. How do these examples prove that both nations are made better off as a result of trade than they would be without trade? Answer: To show that both countries are better off it is necessary to demonstrate that total consumption, not just production, of both goods is greater after trade. If a country specializes completely in producing one good - apples, for example - it has given up the opportunity to produce another good that consumers value; let's say this other good is plums. Apple lovers now have more of the good they like, but the country as a whole cannot be better off unless the change in production benefits plum lovers too. This can be done by trading some of the additional apples that are produced for some of the plums the other country has produced. Trade may benefit apple lovers more than plum lovers (or vice versa) but if, after trade, more of both goods can be consumed then trade has unambiguously made all consumers better off than they were previously. Diff: 2 Type: ES Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking 66) What are terms of trade? Answer: Terms of trade refer to the ratio at which a country can trade its exports for imports from other countries. Diff: 3 Type: ES Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking

67) Suppose in Vietnam a worker can produce either 16 units of cloth or 2 bicycles while in China a worker can produce either 20 units of cloth or 5 bicycles. a. Which country has an absolute advantage in cloth production? In bicycle production? b. What is the opportunity cost of 1 unit of cloth in Vietnam? In China? c. What is the opportunity cost of 1 bicycle in Vietnam? In China? d. Which country has a comparative advantage in cloth production? In bicycle production? e. Suppose each country has 1,000 workers. Currently, each country devotes 40 percent of its labour force to cloth production and 60 percent to bicycle production. What is the output of cloth and bicycles for each country and what is the total output of cloth and bicycles between the two countries? f. Suppose each country specializes in the production of the good in which it has a comparative advantage. What is the total output of cloth and bicycles in the two countries? g. Provide a numerical example to show how Vietnam and China can both gain from trade. Assume that the terms of trade are established at 6 units of cloth for 1 bicycle.

Answer: a. China has an absolute advantage in the production of both goods. b. In Vietnam, the opportunity cost of 1 unit of cloth = 1/8 bicycle. In China, the opportunity cost of 1 unit of cloth = 1/4 bicycle. c. In Vietnam, the opportunity cost of 1 bicycle = 8 units of cloth. In China, the opportunity cost of 1 bicycle = 4 units of cloth. d. Vietnam has a comparative advantage in cloth production and China in bicycle production. e. Cloth Bicycles Vietnam 400 × 16 = 6,400 600 × 2 = 1,200 China 400 × 20 = 8,000 600 × 5 = 3,000 Total 14,400 4,200 f.

If each country specializes, output is: Cloth 1,000 × 16 = 16,000

Vietnam China Total

16,000

Bicycles 1,000 × 5 = 5,000 5,000

g. Vietnam Output Exports Consumes Imports

16,000 units of cloth 9,000 units of cloth 7,000 units of cloth 1,500 bicycles

China Output 5,000 bicycles Exports 1,500 bicycles Consumes 3,500 bicycles Imports 9,000 units of cloth Diff: 3 Type: ES Topic: Comparative Advantage Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Analytic Skills 68) How does the Canadian federal government assist workers who have lost their jobs due to international trade? Answer: The federal government uses a variety of programs to provide funds for workers who have lost their jobs due to international trade. Qualified unemployed workers can use these funds to pay for retraining, for searching for new jobs, or for relocating to areas where new jobs are available. Diff: 3 Type: ES Topic: Trade Learning Outcome: 7.3 Explain how countries gain from international trade AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Trade Creates Both Winners and Losers 57 Copyright © 2024 Pearson Canada Inc.

7.4

Analyze the economic effects of government policies that restrict international trade

1) Trade between countries that is without restrictions is called A) unobstructed commerce. B) unabated trade. C) free trade. D) unencumbered trade. E) autarky. Answer: C Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking Figure 7.1

Figure 7.1 shows Canadian demand and supply for leather footwear. 2) Refer to Figure 7.1. Under autarky, the consumer surplus is ________ and the producer surplus is ________. A) $195; $105 B) $300; $285 C) $260; $40 D) $555; $105 E) $260; $105 Answer: A Diff: 3 Type: MC Topic: Autarky Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 58 Copyright © 2024 Pearson Canada Inc.

3) Refer to Figure 7.1. Under autarky, the deadweight loss is A) $0. B) $15. C) $30. D) $40. E) $50. Answer: A Diff: 3 Type: MC Topic: Autarky Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 4) Refer to Figure 7.1. Suppose the government allows imports of leather footwear into the United States. What happens to the market price and what is the quantity of imports? A) The price equals $24 and imports equal 20 units. B) The price falls to $24 and imports equal 5 units. C) The price falls to $18 and imports equal 15 units. D) The price equals $18 and imports equal 10 units. E) The price equals $15 and imports equal 18 units. Answer: D Diff: 2 Type: MC Topic: Trade Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 5) Refer to Figure 7.1. Suppose the government allows imports of leather footwear into Canada. The market price falls to $18. What are the values of consumer surplus and domestic producer surplus? A) Consumer surplus = $270; producer surplus = $40. B) Consumer surplus = $360; producer surplus = $270. C) Consumer surplus = $320; producer surplus = $360. D) Consumer surplus = $305; producer surplus = $320. E) Consumer surplus = $320; producer surplus = $40. Answer: E Diff: 3 Type: MC Topic: Trade Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills

6) Which of the following is not an example of a trade restriction? A) tariffs B) quotas and voluntary export restraints C) legislation requiring that cars sold in a country have a 50 percent domestic content D) consumer preferences for goods produced domestically E) none of the above Answer: D Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 7) Under autarky, consumer surplus is represented by the area A) above the supply curve and below the equilibrium price. B) above the supply curve and below the demand curve. C) below the demand curve and above the equilibrium price. D) above the demand curve and below the supply curve. E) all of the above. Answer: C Diff: 1 Type: MC Topic: Autarky Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 8) A tariff is A) a limit placed on the quantity of goods that can be imported into a country. B) a tax imposed by a government on goods imported into a country. C) a subsidy granted to importers of a vital input. D) a health and safety restriction imposed on an imported product. E) a tax imposed on goods that you are exporting to another country. Answer: B Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

9) A numerical limit imposed by a government on the quantity of a good that can be imported into the country is called a A) tariff. B) quota. C) quantity floor. D) barricade. E) price floor. Answer: B Diff: 1 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 10) Which of the following is the best example of a tariff? A) a subsidy from the Canadian government to domestic manufacturers of residential air conditioners to enable them to compete more effectively with foreign producers B) a limit on the quantity of residential air conditioners that can be imported from a foreign country C) a $150 fee imposed on all imported residential air conditioners D) a tax placed on all residential air conditioners sold in the domestic market to help offset the impact of emissions on the environment E) a limit on the quantity of luxury items that consumers can purchase each year Answer: C Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 11) A tariff on imports A) makes domestic consumers worse off. B) makes both domestic producers and consumers worse off. C) makes everyone better off. D) makes domestic producers worse off. E) makes everyone worse off. Answer: A Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

Figure 7.2

Suppose the Canadian government imposes a $0.40 per pound tariff on rice imports. Figure 7.2 shows the impact of this tariff. 12) Refer to Figure 7.2. The tariff revenue collected by the government equals the area A) D + E + F. B) B + E. C) B + D + E + F. D) C + D + E + F. E) E. Answer: E Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 13) Refer to Figure 7.2. Without the tariff in place, Canadians consume A) 9 thousand kilograms of rice. B) 15 thousand kilograms of rice. C) 31 thousand kilograms of rice. D) 42 thousand kilograms of rice. E) 24 thousand kilograms of rice. Answer: D Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 62 Copyright © 2024 Pearson Canada Inc.

14) Refer to Figure 7.2. Without the tariff in place, Canadians produce A) 9 thousand kilograms of rice. B) 15 thousand kilograms of rice. C) 31 thousand kilograms of rice. D) 42 thousand kilograms of rice. E) 24 thousand kilograms of rice. Answer: A Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 15) Refer to Figure 7.2. With the tariff in place, Canada A) imports 16 thousand kilograms of rice. B) imports 9 thousand kilograms of rice. C) imports 15 thousand kilograms of rice. D) exports 31 thousand kilograms of rice. E) exports 24 thousand kilograms of rice. Answer: A Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 16) Refer to Figure 7.2. As a result of the tariff, domestic producers increase their quantity supplied by A) 31 thousand kilograms of rice. B) 22 thousand kilograms of rice. C) 15 thousand kilograms of rice. D) 6 thousand kilograms of rice. E) 24 thousand kilograms of rice. Answer: D Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills

17) Refer to Figure 7.2. The increase in domestic producer surplus as a result of the tariff is equal to the area A) C. B) C + G. C) A + C + G. D) C + D + G. E) C + D + G + H + I. Answer: A Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 18) Refer to Figure 7.2. The tariff causes domestic consumption of rice A) to fall by 27 thousand kilograms. B) to fall by 24 thousand kilograms. C) to rise by 6 thousand kilograms. D) to rise by 16 thousand kilograms. E) to fall by 11 thousand kilograms. Answer: E Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 19) Refer to Figure 7.2. The loss in domestic consumer surplus as a result of the tariff is equal to the area A) B + D + E + F. B) D + E + F. C) C + D + E + F. D) B. E) B + C + D. Answer: C Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills

20) Refer to Figure 7.2. If the tariff was replaced by a quota which limited rice imports to 16 thousand kilograms, the amount of revenue received by rice importers would equal A) $6.4 thousand. B) $9.6 thousand. C) $16 thousand. D) $19.8 thousand. E) $24 thousand. Answer: C Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 21) An agreement negotiated by two countries that places a numerical limit on the quantity of a good that can be imported by one country from another country is called A) a non-tariff trade barrier. B) an export quota. C) an import quota. D) a voluntary export restraint. E) protectionism. Answer: D Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 22) The main purpose of most tariffs and quotas is to A) raise revenue for the government. B) reduce the prices consumers pay for goods and services. C) reduce the foreign competition that domestic firms face. D) improve the quality of goods and services imported into the country. E) benefit local producers at the expense of consumers. Answer: C Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

23) Which of the following is the best example of a quota? A) a limit imposed on the number of kilograms of cheese Canadians can import from Europe B) a subsidy granted by the Canadian government to domestic dairy farmers so they can compete more effectively with foreign dairy farmers C) a tax placed on all cheese sold in the domestic market D) a $5,000 per-kilogram fee imposed on cheese imported into Canada E) a limit that local store impose on consumers to purchase at a time Answer: A Diff: 1 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 24) In order to avoid the imposition of other types of trade barriers, foreign producers will sometimes agree to voluntary export restraints. With voluntary export restraints, foreign producers A) agree to meet specific quality standards required by the importing country. B) limit their exports to a country. C) pay a tax on all products they export. D) must agree to import an equal quantity of products that they export. E) will only import from that country. Answer: B Diff: 1 Type: MC Topic: Non-Tariff Barriers Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 25) Why would President Trump choose not to continue with existing NAFTA? A) He places more weight on the lost producer surplus (jobs) than on the gained consumer surplus. B) Trade deals are well understood not to benefit wealthy countries. C) Canada and Mexico refused to protect American intellectual property rights. D) He believed it was unfair to all three countries involved. E) He believed Mexico and Canada were taking unfair advantage of NAFTA. Answer: A Diff: 2 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking Special Feature: Apply the Concept: USMCA - A New and Improved NAFTA?

Figure 7.3

Assume that the Canadian government limits the import of peanuts. 26) Refer to Figure 7.3. Without the quota, the domestic price of peanuts equals the world price, which is $2.00 per kilogram. What is the quantity of peanuts supplied by domestic producers in the absence of a quota? A) 10 thousand kilograms B) 28 thousand kilograms C) 30 thousand kilograms D) 34 thousand kilograms E) 40 thousand kilograms Answer: A Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 27) Refer to Figure 7.3. If there was no quota, how many kilograms of peanuts would domestic consumers purchase and what quantity would be imported? A) 28 thousand kilograms of which 18 thousand kilograms would be imported B) 40 thousand kilograms of which 12 thousand kilograms would be imported C) 40 thousand kilograms of which 30 thousand kilograms would be imported D) 40 thousand kilograms all of which would be imported E) 28 thousand kilograms all of which would be imported Answer: C Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 67 Copyright © 2024 Pearson Canada Inc.

28) Refer to Figure 7.3. What is the area of domestic producer surplus without a quota? A) C B) C + B C) A + B + C D) B + C + D E) A + B + C + D Answer: A Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 29) Refer to Figure 7.3. With a quota in place, what is the quantity consumed in the domestic market and how much of this is supplied by domestic producers? A) Domestic consumption equals 28 thousand kilograms of which 18 thousand kilograms are produced by domestic producers. B) Domestic consumption equals 40 thousand kilograms of which 22 thousand kilograms are produced by domestic producers. C) Domestic consumption equals 34 thousand kilograms of which 16 thousand kilograms are produced by domestic producers. D) Domestic consumption equals 34 thousand kilograms of which 18 thousand kilograms are produced by domestic producers. E) Domestic consumption equals 40 thousand kilograms of which 18 thousand kilograms are produced by domestic producers. Answer: D Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 30) Refer to Figure 7.3. What is the area of consumer surplus after the imposition of the quota? A) A + G + H B) G + H + E + I+ J + M C) G + H D) A E) G Answer: A Diff: 1 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota

31) Refer to Figure 7.3. What is the area of domestic producer surplus after the imposition of a quota? A) B B) B + C C) B + E + I + J + M D) E + I + J + M E) B + E + I Answer: B Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 32) Refer to Figure 7.3. What is the area that represents revenue to foreign producers who are granted permission to sell in the Canadian market when there is a quota? A) I + J B) E + I + J + M C) J + K+ L D) G + H + I + J E) I + J + K+ L Answer: E Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 33) Refer to Figure 7.3. What is the area that represents the deadweight loss as a result of the quota? A) G + H B) G + H + I + J C) E + I + J + M D) E + M E) G + H + I Answer: D Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota

34) Under many trade agreements signed between countries, countries are allowed to impose tariffs on imports if foreign firms are selling products below their production cost. This is exactly what occurred when the United States raised the tariff on wire hangers imported from China. This tariff A) increased wages in the Chinese wire hanger industry and increased imports of Chinese wire hangers to the United States. B) decreased imports of Chinese wire hangers to the United States and increased exports of U.S. wire hangers to China. C) saved some jobs in the U.S. wire hanger industry, but increased costs and possibly cost jobs in the U.S. dry cleaning industry. D) increased costs in the Chinese wire hanger industry and decreased costs in the U.S. wire hanger industry. E) made China to stop making wire hangers and the industry of wire hangers closed in China. Answer: C Diff: 2 Type: MC Topic: Dumping Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 35) The Canadian government campaigned against increasing protectionism in the wake of the 2007-2009 global recession in order A) to speed the economic recovery. B) solely to protect Canadian exporters. C) to prevent American firms from gaining a comparative advantage over Canadian firms. D) to limit the variety of goods and services available to Canadian consumers. E) to benefit domestic consumers. Answer: A Diff: 1 Type: MC Topic: Protectionism Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 36) When President Obama introduced a tariff on Chinese tires, he saved approximately 1,200 American jobs. Each one of these jobs cost American car owners A) $926,500. B) $1,376,435. C) $400. D) $3,813,000. E) $500,000. Answer: A Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

37) A tariff is a numerical limit on the quantity of a good that can be imported. Answer: FALSE Diff: 2 Type: TF Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 38) The Canadian economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas. Answer: TRUE Diff: 2 Type: TF Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 39) Distinguish between a voluntary export restraint and a quota. Answer: A voluntary export restraint is an agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country. A quota is a numerical limit imposed by the government on the quantity of a good that can be imported into a country. Diff: 3 Type: ES Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

Figure 7.4

Suppose the Canadian government imposes a $0.50 per pound tariff on sugar imports. Figure 7.4 shows the demand and supply curves for sugar and the impact of this tariff. 40) Use Figure 7.4 to answer questions a-i. a. Following the imposition of the tariff, what is the price that domestic consumers must now pay and what is the quantity purchased? b. Calculate the value of consumer surplus with the tariff in place. c. What is the quantity supplied by domestic sugar producers with the tariff in place? d. Calculate the value of producer surplus received by Canadian sugar producers with the tariff in place. e. What is the quantity of sugar imported with the tariff in place? f. What is the amount of tariff revenue collected by the government? g. The tariff has reduced consumer surplus. Calculate the loss in consumer surplus due to the tariff. h. What portion of the consumer surplus loss is redistributed to domestic producers? To the government? i. Calculate the deadweight loss due to the tariff.

Answer: a. Price = $2.00 per kilo; Quantity purchased = 15 thousand kilos b. Consumer surplus = 1/2 × 15 million × $3 = $22.5 thousand c. Quantity supplied by domestic producers = 10 thousand kilos d. Producer surplus to rice growers = 1/2 × 10 thousand × $1.25 = $6.25 thousand e. Quantity imported = 5 thousand kilos f. Tariff revenue collected by the government = $0.50 × 5 thousand = $2.5 thousand g. Loss in consumer surplus due to the tariff = 15 thousand × $0.50 + 1/2 × 5 thousand × $0.50 = $8.75 thousand h. Amount redistributed to domestic producers = 7 thousand × $0.50 + 1/2 × 3 thousand × $0.50 = $4.25 thousand Amount redistributed to the government = 5 thousand × $0.50 = $2.5 thousand i. Deadweight loss due to the tariff = 1/2 × 3 thousand × $0.50 + 1/2 × 5 thousand × $0.50 = $2 thousand Diff: 3 Type: ES Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills

Figure 7.5

Bragabong currently both produces and imports almonds. The government of Bragabong decides to restrict international trade in almonds by imposing a quota that allows imports of only 10 million kilos each year. Figure 7.5 shows the estimated demand and supply curves for almonds in Bragabong and the results of imposing the quota. 41) Use Figure 7.5 to answer questions a-j. a. If there is no quota, what is the domestic price of almonds and what is the quantity of almonds demanded by consumers? b. If there is no quota, how many kilos of almonds would domestic producers supply and what quantity would be imported? c. If there is no quota, what is the dollar value of consumer surplus? d. If there is no quota, what is the dollar value of producer surplus received by producers in Bragabong? e. If there is no quota, what is the revenue received by foreign producers who supply almonds to Bragabong? f. With a quota in place, what is the price that consumers of Bragabong must now pay and what is the quantity demanded? g. With a quota in place, what is the dollar value of consumer surplus? Are consumers better off? h. With a quota in place, what is the dollar value of producer surplus received by producers in Bragabong? Are domestic producers better off? i. Calculate the revenue to foreign producers who are granted permission to sell in Bragabong after the imposition of the quota. j. Calculate the deadweight loss as a result of the quota.

Answer: a. Price without a quota = $3 per kilo; quantity demanded = 36 million kilos b. Quantity supplied by domestic producers when there is no quota = 14 million kilos; quantity imported = 22 million kilos c. Consumer surplus without a quota = 1/2 × $6 × 36 million = $108 million d. Domestic producer surplus without a quota = 1/2 × 14 million × $2.40 = $16.8 million e. Revenue received by foreign producers when there is no quota =22 million × $3 = $66 million f. Price with a quota = $4.00 per kilo; quantity demanded = 30 million kilos g. Consumer surplus with a quota = 1/2 × $5 × 30 million = $75 million. No, consumers are worse off. h. Domestic producer surplus with a quota = 1/2 × $3.40 × 20 million = $34 million. Yes, domestic producers are better off. i. With a quota revenue to foreign producers = $4 × 10 million = $40 million j. Deadweight loss = 1/2 × $1 × 6 million + 1/2 × $1 × 6 million = $6 million Diff: 3 Type: ES Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 42) Free trade refers to trade between countries A) that is without shipping costs. B) that is licensed by both governments. C) that is without restrictions. D) of products which are free to low-income consumers. E) with autarky. Answer: C Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

Figure 7.6

Figure 7.6 shows the Canadian demand and supply for leather footwear. 43) Refer to Figure 7.6. Under autarky, the equilibrium price is ________, the consumer surplus is ________ and the producer surplus is ________. A) $30; area R; area S + V B) $30; area R + S + V; area T + W+ X C) $24; area R + S; area V D) $30; area R; area S + T + V + W + X E) $24; area R + S; area T + U + V Answer: A Diff: 2 Type: MC Topic: Imports Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 44) Refer to Figure 7.6. Suppose the government allows imports of leather footwear into Canada. What happens to the market price and what is the quantity of imports? A) The price equals $24 and imports equal Q2 units. B) The price falls to $24 and imports equal Q2 - Q1 units. C) The price falls to $24 and imports equal Q1 - Q0 units. D) The price equals $30 and imports equal Q2 - Q0 units. E) The price equals $24 and imports equal Q2 - Q0 units. Answer: E Diff: 2 Type: MC Topic: Trade Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 76 Copyright © 2024 Pearson Canada Inc.

45) Refer to Figure 7.6. Suppose the government allows imports of leather footwear into Canada. The market price falls to $24. What areas represent consumer surplus and domestic producer surplus? A) consumer surplus = R + S; producer surplus = V B) consumer surplus = R + S + T + U; producer surplus = V C) consumer surplus = R + S + T + U; producer surplus = V + W + X + Y D) consumer surplus = R + S + T; producer surplus = W + X + Y E) consumer surplus = R + T; producer surplus = X + Y Answer: B Diff: 2 Type: MC Topic: Trade Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 46) Which of the following is an example of a trade restriction? A) Japan places a tax on all Korean automobiles. B) Domestic wine is more expensive than wine imported from Chile. C) The United States, Canada, and Mexico sign the USMCA agreement. D) Consumers prefer German beer to domestic beer. E) Canada signed a trade deal with Pacific countries. Answer: A Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 47) International trade A) harms consumers but helps exporting firms. B) helps consumers but harms exporting firms and their workers. C) helps consumers but hurts firms that are less efficient than their foreign competitors. D) helps consumers and firms that compete with their foreign competitors. E) helps wealthy consumers and hurt poor consumers. Answer: C Diff: 1 Type: MC Topic: Trade Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

48) A quota is A) a limit placed on the quantity of goods that can be imported into a country. B) a tax imposed by a government on goods imported into a country. C) a subsidy granted to importers of a vital input. D) a health and safety restriction imposed on an imported product. E) a limit imposed on sale items by local stores. Answer: A Diff: 1 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 49) A tax imposed by a government on imports of a good into a country is called a(n) A) tariff. B) quota. C) value added tax. D) sales tax. E) import penalty. Answer: A Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 50) Which of the following is the best example of a quota? A) a subsidy from the Canadian government to domestic manufacturers of cheese to enable them to compete more effectively with foreign producers B) a limit on the quantity of cheese that can be imported from a foreign country C) a $1.50 per kilogram fee imposed on all cheeses D) a tax placed on all cheese sold in the domestic market to help offset the health impact of eating too much cheese E) all of the above Answer: B Diff: 1 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

51) A tariff A) makes domestic consumers better off. B) makes both domestic producers and consumers better off. C) makes everyone worse off. D) makes domestic consumers and the government better off. E) makes domestic producers better off. Answer: E Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking Figure 7.7

Suppose the Canadian government imposes a $0.75 per kilogram tariff on coffee imports. Figure 7.7 shows the impact of this tariff. 52) Refer to Figure 7.7. The tariff revenue collected by the government equals A) $10 million. B) $15 million. C) $19.875 million. D) $35 million. E) $45 million. Answer: B Diff: 3 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 79 Copyright © 2024 Pearson Canada Inc.

53) Refer to Figure 7.7. With the tariff in place, Canada A) imports 20 million kilograms of coffee. B) imports 12 million kilograms of coffee. C) imports 18 million kilograms of coffee. D) exports 38 million kilograms of coffee. E) exports 45 million kilograms of coffee. Answer: A Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 54) Refer to Figure 7.7. As a result of the tariff, domestic producers increase their quantity supplied by A) 6 million kilograms of coffee. B) 18 million kilograms of coffee. C) 26 million kilograms or coffee. D) 38 million kilograms of coffee. E) 45 million kilograms of coffee. Answer: A Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 55) Refer to Figure 7.7. The increase in domestic producer surplus as a result of the tariff is equal to A) $11.25 million. B) $18 million. C) $32.5 million. D) $38 million. E) $45 million. Answer: A Diff: 3 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills

56) Refer to Figure 7.7. The tariff causes domestic consumption of coffee A) to fall by 27 million kilograms. B) to fall by 7 million kilograms. C) to rise by 6 million kilograms. D) to rise by 20 million kilograms. E) to rise by 26 million kilograms. Answer: B Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 57) Refer to Figure 7.7. The loss in domestic consumer surplus as a result of the tariff is equal to A) $5 million. B) $19.875 million. C) $24.875 million. D) $31.125 million. E) $45 million. Answer: D Diff: 3 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 58) A voluntary export restraint is an agreement negotiated by two countries that places ________ that can be imported by one country from another country. A) a tax on goods B) a minimum quantity of a good C) quality standards on goods D) a numerical limit on the quantity of a good E) all of the above Answer: D Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

59) In the 1980s, Japan agreed to limit the quantity of automobiles it would export to the United States. Why did the Japanese government agree to this trade restriction? A) Japanese automobile producers lobbied for the restrictions in order to increase the price of their exports to the United States. B) The Japanese government wanted to limit sales to the United States in order to make more automobiles available for Japanese consumers. C) The Japanese government feared that the alternative would be a tariff or quota on imports of Japanese automobiles imposed by the U.S. government. D) The Japanese government wanted more automobiles to be available for export to countries other than the United States. E) Japan wanted to keep its relations good with the United States. Answer: C Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 60) Which of the following is the best example of a tariff? A) a limit imposed on the number of sports utility vehicles that Canadians can import from Japan B) a subsidy granted by the Canadian government to domestic garment manufacturers so they can compete more effectively with foreign garment manufacturers C) a tax placed on all sport-utility vehicles sold in the domestic market D) a $5,000 per-car fee imposed on all sport-utility vehicles imported into Canada E) a tax that is imposed on immigrants Answer: D Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 61) In order to avoid the imposition of other types of trade barriers, foreign producers will sometimes agree to limit their exports to a country. What are these types of agreements called? A) involuntary export restraints B) voluntary export restraints C) implicit quotas D) sanctions E) tariffs Answer: B Diff: 1 Type: MC Topic: Non-Tariff Barriers Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

Figure 7.8

Canada imposes quotas on the import of chicken. Figure 7.8 illustrates the possible impact of the quota. 62) Refer to Figure 7.8. Without the quota, the domestic price of chicken equals the world price, which is $2.00 per kilogram. What is the quantity of chicken demanded by domestic consumers in the absence of a quota? A) 10 thousand kilograms B) 18 thousand kilograms C) 28 thousand kilograms D) 34 thousand kilograms E) 40 thousand kilograms Answer: E Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 63) Refer to Figure 7.8. If there was no quota, how many kilograms of chicken would be imported? A) 16 thousand B) 28 thousand C) 30 thousand D) 40 thousand E) 50 thousand Answer: C Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 83 Copyright © 2024 Pearson Canada Inc.

64) Refer to Figure 7.8. What is the value of domestic producer surplus without a quota? A) $5 thousand B) $15.75 thousand C) $38.5 thousand D) $53.5 thousand E) $74 thousand Answer: A Diff: 3 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 65) Refer to Figure 7.8. With an import quota of 16 thousand kilograms in place, what is the quantity consumed in the domestic market and what portion of this is supplied by imports? A) Domestic consumption equals 28 thousand kilograms, of which 18 thousand kilograms are imports. B) Domestic consumption equals 40 thousand kilograms, of which 22 thousand kilograms are imports. C) Domestic consumption equals 34 thousand kilograms, of which 16 thousand kilograms are imports. D) Domestic consumption equals 34 thousand kilograms, of which 18 thousand kilograms are imports. E) Domestic consumption equals 28 thousand kilograms, of which 16 thousand kilograms are imports. Answer: C Diff: 2 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 66) Refer to Figure 7.8. What is the value of consumer surplus after the imposition of a quota of 16 thousand kilograms of imports? A) $8 thousand B) $26.25 thousand C) $45.5 thousand D) $72.25 thousand E) $74 thousand Answer: D Diff: 3 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota

67) Refer to Figure 7.8. What is the value of domestic producer surplus after the imposition of an import quota of 16 thousand kilograms? A) $10.75 thousand B) $15.75 thousand C) $17.25 thousand D) $27.75 thousand E) $30.75 thousand Answer: B Diff: 3 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 68) Refer to Figure 7.8. What is the value of revenue to foreign producers who are granted permission to sell in the Canadian market when there is an import quota of 16 thousand kilograms? A) $12 thousand B) $17.25 thousand C) $20 thousand D) $44 thousand E) $50 thousand Answer: D Diff: 3 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 69) Refer to Figure 7.8. What is the value of the deadweight loss as a result of an import quota of 16 thousand kilograms? A) $5.25 thousand B) $8 thousand C) $17.25 thousand D) $20 thousand E) $26 thousand Answer: A Diff: 3 Type: MC Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota

70) Which of the following is common to both tariffs and quotas? A) Tariffs and quotas are both used as a means to increase government revenue. B) Tariffs and quotas both increase economic efficiency. C) Tariffs and quotas are both designed to reduce foreign competition faced by domestic firms. D) Tariffs and quotas are both examples of voluntary export restraints. E) Tariffs and quotas are both examples of a tax. Answer: C Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 71) Trade restrictions are often motivated by a desire to save domestic jobs threatened by competition from imports. Which of the following counter-arguments is made by economists who oppose trade restrictions? A) Statistics show that trade restrictions actually do not save jobs. B) Consumers pay a high cost for jobs saved through trade restrictions. C) Trade restrictions have a limited impact because most Americans prefer domestic goods over imports. D) Trade restrictions benefit consumers in the short run but not in the long run. E) All of the above. Answer: B Diff: 2 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 72) Which of the following statements is true? A) Economic efficiency would be increased if Canada eliminated all of its trade restrictions, but only if all other countries eliminated their trade restrictions too. B) The Canadian economy would gain from the elimination of its tariffs but not from the elimination of its quotas. C) Eliminating its tariffs and quotas unilaterally would not benefit Canada because this would remove the leverage it would have to persuade other countries to eliminate their trade restrictions. D) The Canadian economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas. E) None of the above is true. Answer: D Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

73) Governments sometimes erect barriers to trade other than tariffs and quotas. Which of the following is not an example of this type of trade barrier? A) a requirement that the employees of domestic firms that engage in foreign trade pay income taxes B) a requirement that imports meet health and safety requirements C) restrictions on imports for national security reasons D) a requirement that the Canadian government buy military uniforms only from Canadian manufacturers E) all are examples of trade barriers Answer: A Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 74) If the Canadian government implements a tariff on Chinese tire imports, all of the following would be made worse off except A) Canadian consumers. B) Canadian tire retailers. C) Chinese tire manufacturers. D) Canadian tire manufacturers. E) All of the above will be worse off. Answer: D Diff: 1 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 75) If the Canadian government implements a tariff on Chinese tire imports, the price of Chinese-made tires will ________, the quantity demanded will ________, and consumer surplus will ________. A) increase; decrease; decrease B) increase; not change; increase C) decrease; increase; not change D) increase; decrease; increase E) fall; increase; increase Answer: A Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills

76) Changes in the trade restrictions for dairy products in the newly negotiated USMCA, ________ will suffer, whereas ________ will benefit. A) Canadian consumers; Canadian producers B) Canadian government; the U.S government C) the U.S government; the Canadian government D) U.S producers; Canadian producers E) Canadian producers; Canadian consumers. Answer: E Diff: 2 Type: MC Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking Special Feature: Apply the Concept: USMCA - A New and Improved NAFTA? 77) A quota is a numerical limit on the quantity of a good that can be imported. Answer: TRUE Diff: 2 Type: TF Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking 78) Canada would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas. Answer: TRUE Diff: 1 Type: TF Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

Figure 7.9

79) Refer to Figure 7.9. Suppose the Canadian government imposes a $0.25 per kilogram tariff on rice imports. Figure 7.9 shows the demand and supply curves for rice and the impact of this tariff. Use the figure to answer questions a-i. a. Following the imposition of the tariff, what is the price that domestic consumers must now pay and what is the quantity purchased? b. Calculate the value of consumer surplus with the tariff in place. c. What is the quantity supplied by domestic rice growers with the tariff in place? d. Calculate the value of producer surplus received by Canadian rice growers with the tariff in place. e. What is the quantity of rice imported with the tariff in place? f. What is the amount of tariff revenue collected by the government? g. The tariff has reduced consumer surplus. Calculate the loss in consumer surplus due to the tariff. h. What portion of the consumer surplus loss is redistributed to domestic producers? To the government? i. Calculate the deadweight loss due to the tariff. Answer: a. price = $1.00 per kilogram; quantity purchased = 16 thousand kilograms b. consumer surplus = 1/2 × 16 thousand × $1 = $8 thousand c. quantity supplied by domestic producers = 8 thousand kilograms d. producer surplus to rice growers = 1/2 × 8 thousand × $0.75 = $3 thousand e. quantity imported = 8 thousand kilograms f. tariff revenue collected by the government = $0.25 × 8 thousand = $2 thousand g. loss in consumer surplus due to the tariff = 16 thousand × $0.25 + 1/2 × 4 thousand × $0.25 = $4.5 thousand h. amount redistributed to domestic producers = 5 thousand × $0.25 + 1/2 × 3 thousand × $0.25 = $1.625 thousand amount redistributed to the government = 8 thousand × $0.25 = $2 thousand i. deadweight loss due to the tariff = 1/2 × 4 thousand × $0.25 + 1/2 × 3 thousand × $0.25 = $875,000 Diff: 3 Type: ES Topic: Tariffs Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills 89 Copyright © 2024 Pearson Canada Inc.

Figure 7.10

80) Refer to Figure 7.10. Fenwick currently both produces and imports pistachios. The government of Fenwick decides to restrict international trade in pistachios by imposing a quota that allows imports of only 5 thousand kilograms each year. Figure 7.10 shows the estimated demand and supply curves for pistachios in Fenwick and the results of imposing the quota. Answer questions a-j using the figure. a. If there is no quota, what is the domestic price of pistachios and what is the quantity of pistachios demanded by consumers? b. If there is no quota, how many kilograms of pistachios would domestic producers supply and what quantity would be imported? c. If there is no quota, what is the dollar value of consumer surplus? d. If there is no quota, what is the dollar value of producer surplus received by producers in Fenwick? e. If there is no quota, what is the revenue received by foreign producers who supply pistachios to Fenwick? f. With a quota in place, what is the price that consumers of Fenwick must now pay and what is the quantity demanded? g. With a quota in place, what is the dollar value of consumer surplus? Are consumers better off? h. With a quota in place, what is the dollar value of producer surplus received by producers in Fenwick? Are domestic producers better off? i. Calculate the revenue to foreign producers who are granted permission to sell in Fenwick after the imposition of the quota. j. Calculate the deadweight loss as a result of the quota.

Answer: a. price without a quota = $4 per kilogram; quantity demanded = 19 thousand kilograms b. quantity supplied by domestic producers when there is no quota = 9 thousand kilograms; quantity imported = 10 thousand kilograms c. consumer surplus without a quota = 1/2 × $6 × 19 thousand = $57 thousand d. domestic producer surplus without a quota = 1/2 × 9 thousand × $3 = $13.5 thousand e. revenue received by foreign producers when there is no quota =10 thousand × $4 = f. price with a quota = $5 per kilogram; quantity demanded = 17 thousand kilograms g. Consumer surplus with a quota = 1/2 × $5 × 17 thousand = $42.5 thousand. Consumers are worse off. h. Domestic producer surplus with a quota = 1/2 × $4 × 12 thousand = $24 thousand. Yes, domestic producers are better off. i. With a quota, revenue to foreign producers = $5 × 5 thousand = $25 thousand. j. deadweight loss = 1/2 × $1 × 3 thousand + 1/2 × $1 × 2 thousand = $2.5 thousand Diff: 3 Type: ES Topic: Quotas Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Analytic Skills Special Feature: Solved Problem: Measuring the Effect of a Quota 81) a. Distinguish between a tariff and a quota. b. In what ways are tariffs and quotas similar? c. In what ways are tariffs and quotas different? d. Why might a foreign producer prefer a quota rather than a tariff? Answer: a. A tariff is a tax imposed by a government on imports while a quota is a numerical limit imposed by the government on the quantity of a good that can be imported into a country. b. Compared to unrestricted trade, both a tariff and a quota result in: (1) a higher domestic price for the protected good; (2) a lower quantity consumed; (3) a decrease in consumer surplus; (4) an increase in producer surplus; and (5) an inefficient allocation of resources (a deadweight loss). c. One important difference between a tariff and a quota is that a tariff generates revenue for the government. Part of the decrease in consumer surplus is redistributed to the government in the form of tariff revenue. A quota generates no revenue for the government. Part of the decrease in consumer surplus is redistributed to the foreign producers who are allowed to sell the good in the domestic market. d. A foreign producer might prefer a quota to a tariff because the producer is able to sell the product at a higher price and also to capture part of the decrease in consumer surplus. Diff: 2 Type: ES Topic: Trade Restrictions Learning Outcome: 7.4 Analyze the economic effects of government policies that restrict international trade AACSB: Reflective Thinking

7.5

Evaluate the arguments over trade policies and globalization

1) Disagreements about whether the Canadian government should regulate international trade A) began during the Great Depression. B) began after World War I when government officials no longer believed in isolationism. C) date back to before Canada was a country. D) did not occur until the American War of Independence. E) began only recently. Answer: C Diff: 1 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 2) ________ raised average tariff rates by over 50 percent in the United States in 1930. A) The GATT B) The WTO C) NAFTA D) The Smoot-Hawley Act E) USMCA Answer: D Diff: 1 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 3) In 1930, the U.S. government attempted to help domestic firms that were harmed by the Great Depression by A) establishing the General Agreement on Tariffs and Trade (GATT). B) passing the Smoot-Hawley Act. C) establishing the World Trade Organization (WTO). D) passing the North American Free Trade Agreement (NAFTA). E) passing the USMCA. Answer: B Diff: 1 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

4) In 1995 ________, which was established in 1948, was replaced by ________. A) the GATT; the WTO B) the WTO; NAFTA C) the Smoot-Hawley Act; the GATT D) NAFTA; the Smoot-Hawley Act E) NAFTA; USMCA Answer: A Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 5) The World Trade Organization (WTO) promotes foreign trade and investment, or globalization. In recent years opposition to globalization has led to violent protests at meetings of the WTO. One reason for these anti-globalization protests is A) foreign trade and investment are examples of zero-sum games. B) protesters believe that globalization will result in a return to communism in developing countries. C) protesters believe that free trade destroys the distinctive cultures of many countries. D) protesters object to the loss of intellectual property (such as software programs and movies) that results from foreign trade and investment. E) protesters believe that trade will benefit only rich countries. Answer: C Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 6) Many people assume that if child workers in developing countries weren't working in factories, they would be in school. In fact, children in developing countries A) split their time evenly between work and school. B) usually have few good alternatives to work. C) are only allowed to work if they have attended school up to age 15. D) who work are relatively rare, as most do attend school full time. E) are not allowed to work until they finish school. Answer: B Diff: 1 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking Special Feature: Apply the Concept: The Unintended Consequences of Banning Goods Made with Child Labour

7) Protectionism A) is the use of cheap labour to protect firms from paying high wages. B) is the use of trade barriers to protect domestic firms from foreign competition. C) refers to reductions in tariffs and other barriers that protect consumers from paying high prices. D) refers to the use of copyright and trademark laws to protect inventors and artists from losing the rights to their creative efforts. E) is using all resources at any cost so that the country does not have to engage in trade. Answer: B Diff: 1 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 8) Free trade ________ living standards by ________ economic efficiency. A) raises; increasing B) lowers; decreasing C) raises; equalizing D) lowers; eliminating E) raises; changing Answer: A Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 9) Many economists criticize protectionism because it causes losses to consumers and eliminates jobs in domestic industries that use protected products. Why, then, do some people support protectionism? A) The criticisms of economists are based on theory. In fact, protectionism increases consumer and producer surplus as well as employment. B) Supporters of protectionism in high-income countries believe that wages will fall as a result of competition with firms from developing countries. C) Supporters of protectionism believe free trade will cause their countries to lose their comparative advantage. D) Supporters of protectionism believe that free trade will lead to inflation. E) Supporters of protectionism believe that trade only benefits developing countries. Answer: B Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

10) Which of the following statements is used to justify protectionism? A) Free trade leads to higher prices for imported goods. B) Free trade increases employment by protecting domestic firms. C) A country should not rely on other countries for goods that are critical to its national defense. D) Trade restrictions are not necessary to protect new firms since they can gain experience and become more productive without protection. E) Free trade reduces available jobs in the country and increases unemployment. Answer: C Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 11) Which of the following describes the infant industry argument for protectionism? A) An industry must be protected in its early stages of development so that firms can compete with government-subsidized foreign competition. B) Some strategic industries must be protected to ensure adequate supplies of resources needed for national defense in emergencies. C) Domestic producers in high-wage countries must be protected from foreign producers in low-wage countries to produce a level playing field. D) Domestic producers require time to gain experience and lower their unit costs; this will allow these producers to compete successfully in international markets. E) An industry that produces goods for infants should not rely on other countries. Answer: D Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 12) The process of countries becoming more open to foreign trade and investment is known as A) autarky. B) foreign exchange. C) globalization. D) protectionism. E) dumping. Answer: C Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

13) Economists believe the most persuasive argument for protectionism is to protect infant industries, but the argument has a drawback. What is this drawback? A) Governments always make the level of protection for infant industries too high. B) Governments are usually too impatient and do not allow protection to remain in place long enough to allow industries to be competitive in international markets. C) Governments usually use tariffs, rather than quotas, to protect infant industries in order to collect tariff revenue. (Quotas do not result in government revenue). D) Protection lessens the need for firms to become productive enough to compete with foreign firms; this often results in infant industries never "growing up." E) Governments usually do not take infant industries serious. Answer: D Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 14) Suppose that Canadian firms claim that protectionism in the U.S. is on the rise as the American government attempts to protect its infant industries. This protectionism will cause the greatest harm to A) American manufacturers. B) the American government. C) manufacturers who export to the U.S. D) U.S. consumers. E) the Canadian government. Answer: C Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 15) The "Buy American" provision in the 2009 U.S. stimulus bill, was seen as likely to cause A) importing countries to retaliate by placing trade barriers on American exports. B) American manufacturers to become more efficient. C) American companies to pay lower prices for protected products. D) most countries to reduce their own trade barriers to be able to better compete with American imports at home. E) exporting countries to retaliate by placing trade barriers on American imports. Answer: E Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

16) The selling of a product for a price below its cost of production is called A) fair competition. B) dumping. C) unfair competition. D) operating at a loss. E) subsidy. Answer: B Diff: 1 Type: MC Topic: Dumping Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 17) Imposing tariffs in cases of dumping A) is allowed under the WTO agreement. B) is not allowed under the WTO agreement. C) is not addressed by the WTO agreement. D) has never occurred, even though it is allowed under the WTO agreement. E) is necessary. Answer: A Diff: 1 Type: MC Topic: Dumping Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 18) Measuring the impact of a quota or tariff on the Canadian economy is an example of ________. Stating that a quota or tariff should be eliminated is an example of ________. A) statistical analysis; economic analysis B) positive analysis; normative analysis C) econometric analysis; protectionism D) trade analysis; an opinion E) normative analysis; positive analysis Answer: B Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

19) One reason for the success that firms have in getting the government to erect barriers to foreign competition is that jobs lost to foreign competition are easy to identify but jobs created by foreign trade are often hard to identify. Which of the following is a second reason? A) The costs that tariffs and quotas impose on consumers are large in total but relatively small per person. B) People who benefit from foreign trade tend not to vote in elections; people who are harmed by foreign trade are much more likely to vote. C) Firms that benefit from trade barriers have more money to lobby government officials to support the barriers than do firms that are harmed by trade barriers. D) The benefits from free trade are less than the costs. E) The benefits from free trade are equal to the costs. Answer: A Diff: 1 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking Special Feature: Economics in Your Life: Should Your Member of Parliament Support a Tariff on Running Shoes? 20) The "Buy American" provision in the 2009 stimulus package would require that stimulus money be spent only on U.S.-made goods. In the market for steel, the "Buy American" provision would ________ the price of steel in the United States and ________ the quantity of steel demanded in the United States. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) not change; not change Answer: B Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking Special Feature: Chapter Opener: Is "Buying Canadian" a Good Idea for Your Community? 21) Requiring all Canadians to buy only Canadian made goods would A) convert some consumer surplus to deadweight loss. B) transfer some deadweight loss to producer surplus. C) transfer some producer surplus to consumer surplus. D) reduce the producer surplus received by foreign manufacturers. E) reduce consumer surplus and increase government revenue. Answer: A Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Analytic Skills Special Feature: Chapter Opener: Is "Buying Canadian" a Good Idea for Your Community?

22) Selling a product at a price below its cost is known as dumping. Answer: TRUE Diff: 2 Type: TF Topic: Dumping Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 23) Protectionism refers to the use of trade barriers to shield domestic firms from foreign competition. Answer: TRUE Diff: 1 Type: TF Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 24) a. What is the World Trade Organization? b. When was it established? c. How many countries are members of the World Trade Organization? Answer: a. The World Trade Organization (WTO) is an international organization based in Geneva, Switzerland, that oversees international trade agreements. b. The WTO replaced the GATT in January, 1995. c. Currently, more than 150 countries are members of the WTO. Diff: 3 Type: ES Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 25) Prince Edward Island is a province with a population under 150 000. Paderno, based in PEI, has developed into a leading producer of cookware, despite the province's small size. Some government officials argue that the success achieved by Paderno in developing a comparative advantage in cookware making is because of external economies and can be used to justify trade barriers as a means to protect an "infant industry." After infant industry gains experience it can compete in international markets and the trade barriers can be removed. What objections do economists make to this argument in favour of trade barriers? Answer: Many economists believe that this is the most persuasive argument for protection but experience teaches us that tariffs and quotas can stifle the incentive firms have to become more efficient producers, which is the reason for imposing trade restrictions in the first place. Few firms volunteer to have trade restrictions removed once they have been established. Diff: 2 Type: ES Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

26) Anti-globalization and protectionism are both arguments against free trade. How do these two arguments differ? Answer: The anti-globalization argument against trade is relatively new. This argument includes the notion that free trade destroys the culture of many countries and that factories locating to low-income countries do not meet environmental or safety regulations that are imposed in high-income countries. The protectionism argument has been around for centuries. Protectionism is usually justified on the basis of one of the following four arguments: saving jobs, protecting high wages, protecting infant industries, and protecting national security. Diff: 2 Type: ES Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 27) In Canada during the Great Depression, tariffs were ________ than they were following World War II, and ________ than they are today. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: A Diff: 1 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 28) The Smoot-Hawley Act A) lowered U.S. tariffs by 50 percent following World War II. B) was passed by the U.S. Congress following the Civil War as a means of increasing government revenue. C) was passed by the U.S. Congress upon a recommendation made by the General Agreement on Tariffs and Trade (GATT) in 1948. D) raised average tariff rates by over 50 percent in the United States in 1930. E) was recently introduced in the U.S to increase tariff. Answer: D Diff: 1 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

29) In 1930, the U.S. government attempted to help domestic firms that were harmed by the Great Depression by passing the Smoot-Hawley Tariff. In response to this tariff, other countries ________ and international trade ________. A) lowered their tariffs; thrived B) raised their tariffs; collapsed C) eliminated tariffs; began to grow outside of the United States D) doubled their tariffs; became unrestricted E) removed; became restricted. Answer: B Diff: 1 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 30) In 1995, the General Agreement on Tariffs and Trade (GATT), which was established in 1948, was replaced by the World Trade Organization (WTO). Why did members of the GATT push for the establishment of the WTO? A) The GATT agreement only covered trade in goods. The WTO was created to cover trade in goods, services, and intellectual property. B) The charter of the GATT had run out and a new organization was needed to promote international trade. C) The creation of the European Union (EU) made the GATT obsolete. The WTO was formed to regulate trade between the EU and other nations. D) By 1995 tariffs had been eliminated. The WTO was created to reduce non-tariff trade barriers. E) The GATT was not able to handle trade issues in all the goods. Answer: A Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 31) The World Trade Organization (WTO) promotes foreign trade and investment, or globalization. In recent years opposition to globalization has led to violent protests at meetings of the WTO. All of the following are reasons for these anti-globalization protests except A) protestors believe the WTO favours the interests of high-income countries at the expense of lowerincome countries. B) protesters believe that tariffs are needed to protect domestic firms from foreign competition. C) protesters believe that free trade destroys the distinctive cultures of many countries. D) protesters object to the loss of intellectual property (such as software programs and movies) that results from foreign trade and investment. E) all of the above are reasons for anti-globalization protests. Answer: D Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

32) Prior to the 1998 World Cup, France banned the use of all soccer balls made by child workers. Several economists criticized the ban. Which of the following is an argument these economists used to justify the use of child labour in some countries? A) Soccer balls are easy to carry and workers were given soccer balls to play with. B) Child workers were allowed to attend school during the periods they worked. C) Child workers were given gloves to protect their hands while they stitched soccer balls. D) Some of the alternatives to stitching soccer balls include begging and prostitution. E) Child labour was helping families to provide for their living. Answer: D Diff: 1 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking Special Feature: Apply the Concept: The Unintended Consequences of Banning Goods Made with Child Labour 33) Protectionism is the use of ________ to protect domestic firms from foreign competition. A) military force B) trade barriers C) cheap labour D) dumping E) force Answer: B Diff: 1 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 34) Your roommate Hansen argues that Canadian producers cannot compete with foreign producers because wages are lower in foreign countries than in Canada, and that means that trade makes Canadians worse off. Hansen A) is incorrect. Free trade raises living standards by increasing economic efficiency. B) is right in asserting the need to protect high wages if Canada wishes to maintain its high standard of living. C) is correct in arguing that the high wages of Canadian workers make it impossible to compete with workers in low-wage countries. D) is advancing the anti-dumping argument for protectionism. E) is correct because trade hurts developed countries by lowering wages of workers. Answer: A Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

35) Many economists ________ protectionism because it ________ consumers and ________ jobs in domestic industries that use protected products. A) support; benefits; creates B) criticize; causes losses to; eliminates C) support; lowers prices for; raises wages for D) criticize; unfairly rewards; relocates E) oppose; increases prices for; lowers wages for Answer: B Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 36) All but one of the following statements is used to justify protectionism. Which statement is not used to justify protectionism? A) Free trade leads to higher prices for imported goods. B) Free trade reduces employment by driving domestic firms out of business. C) A country should not rely on other countries for goods that are critical to its national defense. D) Trade restrictions are necessary to protect new firms until they can gain experience and become more productive. E) All of the above are used to justify protectionism. Answer: A Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 37) Domestic producers require time to gain experience and lower their unit costs; this will allow these producers to compete successfully in international markets. This statement describes the ________ argument for protectionism. A) diseconomies of scale B) protecting national security C) anti-dumping D) infant industry E) threat to retaliation Answer: D Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

38) Economists believe the most persuasive argument for protectionism is to A) save jobs. B) protect high wages. C) protect national security. D) protect infant industries. E) benefit domestic consumers. Answer: D Diff: 2 Type: MC Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 39) Dumping refers to A) selling inferior products to unsuspecting consumers. B) selling a product for a price below its cost of production. C) exporting products that do not meet domestic safety standards. D) illegally avoiding tariffs by selling products on the black market. E) throwing surplus goods in the garbage instead of selling. Answer: B Diff: 1 Type: MC Topic: Dumping Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 40) It is difficult to determine if foreign companies are selling their products for prices below their costs of production because A) the true costs of production are difficult to calculate. B) the firms have no legal obligation to reveal this information. C) costs are calculated in the firms' local currencies. D) domestic taxes increase the firms' costs but it is difficult to determine the incidence of these taxes. E) none of the above reasons is correct. Answer: A Diff: 1 Type: MC Topic: Dumping Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 41) In general, the costs tariffs and quotas impose on consumers are A) large in total but relatively small per person. B) small in total but relatively large per person. C) large in total and large per person. D) small in total and small per person. E) very high. Answer: A Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 104 Copyright © 2024 Pearson Canada Inc.

42) The quota on imported cheese costs Canadian consumers millions of dollars annually and protects relatively few jobs. Why does Canada maintain a cheese quota that protects relatively few workers while forcing millions of people to pay higher prices for cheese products? A) Most Canadians do not buy cheese products and want to help workers in the cheese industry. B) Voters fear that if they oppose the cheese lobby, the lobby may oppose issues that they want Parliament to support. C) Citizens are not as involved in social and political issues as they used to be. D) The per person cost of the cheese quota is too small for many people to lobby their members of parliament to make their views known. E) Producers are helpless, it is government's decision to impose quotas. Answer: D Diff: 1 Type: MC Topic: Trade Restrictions Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking Special Feature: Economics in Your Life: Should Your Member of Parliament Support a Tariff on Running Shoes? 43) An increase in protectionism would ________ Canadian consumer surplus and ________ producer surplus for protected Canadian producers. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) not change; change Answer: C Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 44) Protecting Canadian construction firms from competing with American firms in bidding for government projects would benefit everyone except A) Canadian construction companies. B) Canadian construction workers. C) foreign construction companies still able to bid for projects in Canada. D) Canadian taxpayers. E) It will benefit all of the above. Answer: D Diff: 2 Type: MC Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Analytic Skills

45) The General Agreement on Tariffs and Trade (GATT) was formed to replace the World Trade Organization (WTO) because the WTO was empowered only to reduce barriers to trade in goods. The GATT is an agreement to reduce barriers to trade in goods, services, and intellectual property. Answer: TRUE Diff: 2 Type: TF Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 46) In 1995, the General Agreement on Tariffs and Trade (GATT) was replaced by the World Trade Organization (WTO). Answer: TRUE Diff: 1 Type: TF Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 47) a. Define the term "globalization." b. Describe the benefits of globalization. c. Who is likely to oppose globalization and why? Answer: a. Globalization refers to the process of countries becoming more open to foreign trade and investment. b. The benefits of globalization include: (1) consumers have access to a wider array of goods and services at lower prices than under autarky; (2) trade permits a far more efficient allocation of resources than is possible under autarky; (3) specialization in production leads to productivity gains, which raise a nation's standard of living. c. Opposition to globalization comes from three sources: (1) firms and workers harmed by globalization. The revenues and profits of domestic firms that produce the same goods and services that are imported will fall and some workers may lose their jobs; (2) those who fear that low-income countries are at risk of losing their cultural identity as multinational corporations sell western goods in the markets of these countries; (3) those who are concerned that multinational corporations will relocate factories in low income countries to take advantage of low-cost labour while disregarding the interests of these countries (e.g., noncompliance with environmental standards) and its citizens (e.g. hiring child labour). Diff: 3 Type: ES Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking

48) Protectionism is usually justified on the basis of one of four arguments. What are those four arguments? Answer: 1. saving jobs 2. protecting higher wages 3. protecting infant industries 4. protecting national security Diff: 2 Type: ES Topic: Protectionism Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 49) It is common to hear people argue that; "Trade is a win-win situation for all countries that participate." But many firms and workers oppose free trade policies, and protests against globalization have become a regular occurrence at meetings of the World Trade Organization. If trade is a "win-win" situation, why is there strong opposition to free trade and globalization? Answer: Free trade between any two countries can be shown to make both countries better off by increasing the amount of goods and services available to consumers. Free trade gives incentives to countries to produce goods and services for which they have a comparative advantage. This allows for an efficient allocation of scarce resources. But devoting more resources to the production of one product means fewer resources are devoted to producing another product. Firms that produce these products experience a loss in revenue and profits and some workers are likely to lose their jobs. Even if other opportunities are available for workers, they often require acquiring new skills and movement to another area of the country. There are net gains from free trade—gains exceed losses—but it is not surprising that those who are harmed oppose free trade policies. Diff: 2 Type: ES Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking 50) In 2017, President Donald Trump insisted to renegotiate NAFTA in part to reflect changes that have occurred since its inception in 1992. What happened as a result of renegotiations among the three partners of NAFTA? Has NAFTA been completely revamped? Answer: As a result of almost 2 years of negotiations, a new agreement was formally reached among Mexico, Canada and the U.S. The new agreement has been dubbed as USMCA (the United States-MexicoCanada Agreement) by the American government. While most of the provisions of older NAFTA remain in place, there are some important changes. The protection of intellectual property rights, limiting Canadian and Mexican automotive production to North American markets and stricter environmental and labour standards are few important changes to mention. Diff: 2 Type: SA Topic: Trade Restrictions Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Reflective Thinking Special Feature: Apply the Concept: USMCA - A New and Improved NAFTA?

51) What was the GATT, why was it established, and why and with what was it replaced? Answer: By the end of World War II in 1945, government officials in the United States and Europe were looking for a way to reduce tariffs and revive international trade. To help achieve this goal, they set up the General Agreement on Tariffs and Trade (GATT) in 1948. Countries that joined GATT agreed not to impose new tariffs or import quotas. In the 1940s, most international trade was in goods, and the GATT agreement covered only goods. In the following decades, trade in services and products incorporating intellectual property, such as software programs and movies, grew in importance. Many GATT members pressed for a new agreement that would cover services and intellectual property, as well as goods. A new agreement was negotiated, and in January 1995, the GATT was replaced by the World Trade Organization (WTO). Diff: 2 Type: ES Topic: Trade Policies and Globalization Learning Outcome: 7.5 Evaluate the arguments over trade policies and globalization AACSB: Analytical Thinking

Microeconomics, 4Ce (Hubbard) Chapter 8 Consumer Choice and Behavioural Economics 8.1 Define utility and explain how consumers choose goods and services to maximize their utility 1) Economists assume that the goal of consumers is to A) do as little work as possible to survive. B) make themselves as well off as possible. C) expend all their income. D) consume as much as possible. E) consume more than others. Answer: B Diff: 1 Type: MC Topic: Rational Decision Making Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 2) As a result of carbon taxes across the country, many transportation companies implement surcharges to pass on the cost of taxes to consumers. As a result A) consumers stop buying from these companies. B) consumers still purchase the product because they don't have any substitutes. C) only supply curve shifts to the left because of taxes, no harm to consumers. D) consumers think it is fair because there is high demand for the product so price can go up. E) consumers think that it increase in price is fair because it is due to higher input cost. Answer: E Diff: 1 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills Special Feature: Chapter Opener: Environmental Surcharge? 3) Utility is A) easily measured in units called utils. B) subjective and difficult to measure. C) the consumption of a quasi-public good like electricity or natural gas. D) the production of a quasi-public good like electricity or natural gas. E) measured by the level of income. Answer: B Diff: 1 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

4) Marginal utility is the A) total satisfaction received from consuming a given number of units of a product. B) average satisfaction received from consuming a product. C) extra satisfaction received from consuming one more unit of a product. D) satisfaction achieved when a consumer has had enough of a product. E) satisfaction achieved when a consumer is able to purchase something on sale. Answer: C Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 5) As a consumer consumes more and more of a product in a particular time period, eventually marginal utility A) rises. B) is constant. C) declines. D) fluctuates. E) goes to infinity. Answer: C Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 6) If a consumer receives 22 units of marginal utility for consuming the first can of pop, 20 units from consuming the second, and 15 from the third, the total utility of consuming the three units is A) 57 utility units. B) 35 utility units. C) 15 utility units. D) 12 utility units. E) unknown as more information is needed to determine the answer. Answer: A Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

7) If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of utility from consuming three candy bars, the marginal utility of the third candy bar is A) 25 utility units. B) 20 utility units. C) 5 utility units. D) 0 utility units. E) unknown as more information is needed to determine the answer. Answer: C Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 8) If a consumer receives 20 units of utility from consuming two donuts, and 25 units of utility from consuming three donuts, the marginal utility of the second donut is A) 25 utility units. B) 20 utility units. C) 5 utility units. D) 2 utility units. E) unknown as more information is needed to determine the answer. Answer: E Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 9) Total utility A) cannot decrease as a person consumes more and more of a good. B) has a constant rate of increase as a person consumes more and more of a good. C) is equal to the sum of the marginal utilities of all units consumed. D) is negative when marginal utility is declining. E) is measured by the level of income. Answer: C Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

10) If, as a person consumes more and more of a good, each additional unit adds less satisfaction than the previous unit consumed, we are seeing the workings of A) the law of demand. B) the law of supply. C) the law of increasing marginal opportunity cost. D) the law of diminishing marginal utility. E) the law of decreasing opportunity cost. Answer: D Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 11) The law of diminishing marginal utility states that A) eventually total utility falls as more of a good is consumed, other things constant. B) the extra satisfaction from consuming a good decreases as more of a good is consumed, other things constant. C) the extra satisfaction from consuming a good increases slowly as more of a good is consumed, other things constant. D) when the extra satisfaction from consuming a good becomes negative, total utility starts falling, other things constant. E) the extra satisfaction from consuming a good always increase. Answer: B Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 12) Marginal utility can be A) negative. B) zero. C) positive. D) positive, negative or zero. E) none of the above. Answer: D Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

13) Which of the following is likely to occur as the result of the law of diminishing marginal utility? A) Petra's utility from her second apple was less than her satisfaction from her first orange. B) Hudson enjoyed his second slice of pizza more than his first. C) Sabine's utility from her first granola bar is greater than Rachel's utility from her second granola bar. D) Wesley enjoyed his second bottle of iced tea less than his first bottle, other things constant. E) none of the above. Answer: D Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 14) If, when you consume another piece of candy, your marginal utility is zero, then A) you want more candy. B) you have maximized your total utility from consuming candy. C) you have not yet reached the point of diminishing marginal utility. D) you should consume less candy. E) you can still have more candy, marginal utility will stay at zero. Answer: B Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 15) Consumers have to make trade-offs in deciding what to consume because A) not all goods give them the same amount of satisfaction. B) the prices of goods vary. C) they are limited by a budget constraint. D) there are not enough of all goods produced. E) they have different tastes. Answer: C Diff: 1 Type: MC Topic: Budget Constraint Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

16) If your total satisfaction increases when you consume another unit, your marginal utility must be A) increasing. B) decreasing. C) negative. D) positive. E) zero. Answer: D Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 17) If total utility increases at a decreasing rate as a consumer consumes more coffee, then marginal utility must A) remain constant. B) increase also. C) decrease. D) be negative. E) zero. Answer: C Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 18) An item has utility for a consumer if it A) is scarce. B) has a high price. C) is something everyone else wants. D) generates enjoyment or satisfaction. E) generates income. Answer: D Diff: 1 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

19) Suppose your marginal utility from consuming the 3rd slice of cake is zero, then your total utility from consuming cake is A) maximized. B) decreasing. C) negative. D) increasing. E) zero. Answer: A Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 20) Consumers maximize total utility within their budget constraint by A) buying the cheapest goods they can find. B) buying whatever they like the best. C) buying the goods with the largest marginal utility per dollar spent. D) spending the same dollar amount for each good. E) spending the entire income. Answer: C Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 21) If a consumer always buys goods rationally, then A) the total utilities of the different goods consumed will be equal. B) the average utilities of the different goods consumed will be equal. C) the marginal utilities per dollar spent on all goods will be equal. D) the marginal utilities of the different goods consumed will be equal. E) no income will be saved. Answer: C Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

Table 8.1 Quantity of Pita Wraps 1 2 3 4 5 6 7

Total Utility 60 102 132 144 144 138 128

Quantity of Bubble Tea 1 2 3 4 5 6 7

Total Utility 40 70 91 106 112 115 115

Keegan has $30 to spend on Pita Wraps and Bubble Tea. The price of a Pita Wrap is $6 and the price of a glass of Bubble Tea is $3. Table 8.1 shows his total utility from different quantities of the two items. 22) Refer to Table 8.1. What is Keegan's optimal consumption bundle? A) 3 pita wraps and 3 bubble teas B) 3 pita wraps and 4 bubble teas C) 4 pita wraps and 2 bubble teas D) 5 pita wraps and 0 bubble teas E) 3 pita wraps and 0 bubble teas Answer: B Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking Special Feature: Solved Problem: Finding the Optimal Level of Consumption 23) Refer to Table 8.1. If Keegan can drink all the bubble tea he wants for free, how many glasses will he consume? A) 2 glasses B) 3 glasses C) 4 glasses D) 5 glasses E) 6 glasses Answer: E Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking Special Feature: Solved Problem: Finding the Optimal Level of Consumption

24) Carolyn spends her income on popular magazines and games for her smart phone. If the price of a magazine is four times the price of a game and if Carolyn is maximizing her utility, she buys A) both goods until the marginal utility of the magazine purchased is four times the marginal utility of the last game purchased. B) both goods until the marginal utility of the last game purchased is four times the marginal utility of the last magazine purchased. C) four times as many magazines as games. D) four times as many games as magazines. E) equal quantity of magazines and games. Answer: A Diff: 3 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 25) Suppose Joe is maximizing total utility within his budget constraint. If the price of the last pair of jeans purchased is $25 and it yields 100 units of extra satisfaction and the price of the last shirt purchased is $20, then, using the rule of equal marginal utility per dollar spent, the extra satisfaction received from the last shirt must be A) 2,000 units of utility. B) 500 units of utility. C) 100 units of utility. D) 90 units of utility. E) 80 units of utility. Answer: E Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 26) Avner is maximizing total utility by buying sports magazines and protein supplements. For him to buy more sports magazines, A) the price of protein supplements has to fall. B) the price of sports magazines has to fall. C) the price of sports magazines has to rise. D) Since Avner is maximizing his utility, nothing can change the consumption of sports magazines. E) he will need to buy more of the protein supplement too. Answer: B Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

27) Most people would prefer to drive a luxury car that has all the options, but more people buy less expensive cars even though they could afford the luxury car because A) car buyers are irrational. B) the total utility of less expensive cars is greater than that of luxury cars. C) the marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars. D) luxury cars cost a lot more than non-luxury cars. E) they don't like people to know they have a lot of money. Answer: C Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 28) If Valerie purchases ankle socks at $5 and gets 25 units of marginal utility from the last unit, and bandanas at $3 and gets 12 units of marginal utility from the last bandana purchased, she A) is maximizing total utility and does not want to change their consumption of ankle socks or bandanas. B) wants to consume more ankle socks and fewer bandanas. C) wants to consume more of bandanas and fewer ankle socks. D) wants to consume less of both ankle sock and bandanas. E) wants to consume more of both ankle sock and bandanas. Answer: B Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 29) If Marlowe obtains 9 units of utility per dollar spent on apples and 6 units of utility per dollar spent on oranges, then Marlowe A) is maximizing total utility. B) should buy more apples and fewer oranges. C) should buy more oranges and fewer apples. D) should buy fewer oranges and fewer apples. E) should buy more oranges and more apples. Answer: B Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

30) If Callum is consuming his utility maximizing bundle and the price of one good rises, what happens to the marginal utility per dollar spent on this good (MU/P), and what should Callum do? A) MU/P has increased, and Callum should buy more of this good. B) MU/P has increased, and Callum should buy less of this good. C) MU/P has decreased, and Callum should buy more of this good. D) MU/P has decreased, and Callum should buy less of this good. E) We need more information to determine what Callum should do. Answer: D Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 31) If Ewan is consuming his utility maximizing bundle and the price of one good falls, what happens to the marginal utility per dollar spent on this good (MU/P), and what should Ewan do? A) MU/P has increased, and Ewan should buy more of this good. B) MU/P has increased, and Ewan should buy less of this good. C) MU/P has decreased, and Ewan should buy more of this good. D) MU/P has decreased, and Ewan should buy less of this good. E) We need more information to determine what Ewan should do. Answer: A Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 32) When the price of audio books, a normal good, falls, causing your purchasing power to rise, you buy more of them due to A) the substitution effect. B) the income effect. C) the deadweight loss effect. D) the elasticity effect. E) your preference for audio books. Answer: B Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

33) When the price of summer tank tops falls and you buy more of them because they are relatively less expensive, this is called A) the substitution effect. B) the income effect. C) the deadweight loss effect. D) the elasticity effect. E) seasonal effect. Answer: A Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 34) The substitution effect of an increase in the price of Raisin Bran refers to A) the decrease in the demand for Raisin Bran when its price rises. B) the result that consumers will now switch to a substitute good such as Cheerios, and the demand curve for Raisin Bran shifts to the left. C) the fact that the higher price of Raisin Bran lowers consumer's purchasing power, holding money income constant. D) the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, cause consumers to buy less Raisin Bran. E) none of the above. Answer: D Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 35) The income effect of an increase in the price of salmon A) is the change in the demand for salmon when income increases. B) refers to the relative price effect—salmon is more expensive compared to other types of fish—which causes the consumer to buy less salmon. C) refers to the effect on a consumer's purchasing power which causes the consumer to buy less salmon, holding all other factors constant. D) is the change in the demand for other types of fish, say trout, that result from a decrease in purchasing power. E) all of the above. Answer: C Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

36) If the price of lattes, a normal good you enjoy, falls, A) the income and substitution effects offset each other, but the price effect leads you to buy more lattes. B) both the income and substitution effects lead you to buy more lattes. C) the income effect which causes you to increase your latte consumption outweighs the substitution effect which causes you to reduce your latte consumption, resulting in more lattes purchased. D) the substitution effect which causes you to increase your latte consumption outweighs the income effect which causes you to reduce your latte consumption, resulting in more lattes purchased. E) the income and substitution effects both lead you to buy less lattes. Answer: B Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 37) If the price of muffins, a normal good you enjoy, rises, A) the income and substitution effects offset each other, but the price effect leads you to buy fewer muffins. B) both the income and substitution effects lead you to buy more muffins. C) the substitution effect which causes you to decrease your muffin consumption outweighs the income effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased. D) the income effect which causes you to decrease your muffin consumption outweighs the substitution effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased. E) both the income and substitution effects lead you to buy fewer muffins. Answer: E Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 38) The demand curve for corn is downward sloping. If the price of corn, an inferior good, falls, A) the income effect which causes you to reduce your corn purchases is smaller than the substitution effect which causes you to increase your corn purchases, resulting in a net increase in quantity demanded. B) the income effect which causes you to increase your corn purchases is larger than the substitution effect which causes you to reduce your corn purchases, resulting in a net increase in quantity demanded. C) both the income and substitution effects reinforce each other to increase the quantity demanded. D) the income and substitution effects offset each other, but the price effect of an inferior good leads you to buy less corn. E) both the income and substitution effect makes you buy more corn because it is cheaper. Answer: A Diff: 3 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills

39) The demand curve for canned peas is downward sloping. If the price of canned peas, an inferior good, rises, A) the income effect which causes you to reduce your canned peas purchases is smaller than the substitution effect which causes you to increase your purchases, resulting in a net increase in quantity demanded. B) the income effect which causes you to increase your canned peas purchases is smaller than the substitution effect which causes you to reduce your purchases, resulting in a net decrease in quantity demanded. C) both the income and substitution effects reinforce each other to decrease the quantity demanded. D) the income and substitution effects offset each other, but the price effect of an inferior good leads you to buy more canned peas. E) both the income and substitution effects lead you to buy less canned peas. Answer: B Diff: 3 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 40) Consider a downward-sloping demand curve. When the price of an inferior good increases, the income and substitution effects A) work in the same direction to increase quantity demanded. B) work in the same direction to decrease quantity demanded. C) work in opposite directions, and quantity demanded increases. D) work in opposite directions, and quantity demanded decreases. E) work in the same direction and demand decreases. Answer: D Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 41) Consider a downward-sloping demand curve. When the price of an inferior good decreases, the income and substitution effects A) work in the same direction to increase quantity demanded. B) work in the same direction to decrease quantity demanded. C) work in opposite directions, and quantity demanded increases. D) work in opposite directions, and quantity demanded decreases. E) work in the same direction and demand decreases. Answer: C Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills

42) Consider a downward-sloping demand curve. When the price of a normal good increases, the income and substitution effects A) work in the same direction to increase quantity demanded. B) work in the same direction to decrease quantity demanded. C) work in opposite directions, and quantity demanded increases. D) work in opposite directions, and quantity demanded decreases. E) work in the same direction and demand decreases. Answer: B Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 43) Consider a downward-sloping demand curve. When the price of a normal good decreases, the income and substitution effects A) work in the same direction to increase quantity demanded. B) work in the same direction to decrease quantity demanded. C) work in opposite directions, and quantity demanded increases. D) work in opposite directions, and quantity demanded decreases. E) work in the same direction and demand decreases. Answer: A Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills

Table 8.2 Quantity of Soup (cups) 1 2 3 4 5 6

Total Utility 40 60 72 82 88 90

Quantity of Sandwiches 1 2 3 4 5 6

Total Utility 45 75 102 120 135 145

Table 8.2 above shows Keira's utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods. 44) Refer to Table 8.2. What is Keira's marginal utility per dollar spent on the third cup of soup? A) 72 units of utility B) 36 units of utility C) 12 units of utility D) 6 units of utility E) 5 units of utility Answer: D Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Optimal Level of Consumption 45) Refer to Table 8.2. If Keira maximizes her utility, how many units of each good should she buy? A) 1 cup of soup and 5 sandwiches B) 3 cups of soup and 4 sandwiches C) 6 cups of soup and 2 sandwiches D) 4 cups of soup and 3.5 sandwiches E) 6 cups of soup and 4 sandwiches Answer: B Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Optimal Level of Consumption

46) Refer to Table 8.2. Suppose Keira's income increases from $18 to $23 but prices have not changed. What is her utility maximizing bundle now? A) 6 cups of soup and 5 sandwiches B) 6 cups of soup and 4 sandwiches C) 5 cups of soup and 4 sandwiches D) 5 cups of soup and 5 sandwiches E) 4 cups of soup and 5 sandwiches Answer: E Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Optimal Level of Consumption 47) Refer to Table 8.2. Holding prices constant, when Keira's income changed from $18 to $23, her utility maximizing bundle changed. Based on your answers to her optimal choices at the two income levels, what type of goods are soup and sandwiches? A) Soup is an inferior good and sandwiches are a normal good. B) Soup is a normal good and sandwiches are an inferior good. C) Both soup and sandwiches are normal goods. D) Both soup and sandwiches are inferior goods. E) More information is required to determine this. Answer: C Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Optimal Level of Consumption

48) Refer to Table 8.2. Holding prices constant, when Keira's income changed from $18 to $23, what happens to her total utility and to the marginal utilities of the last cup of soup and the last sandwich purchased? A) Her total utility increases, but the marginal utilities of the last cup of soup and the last sandwich consumed decrease. B) Her total utility, the marginal utility of the last cup of soup consumed, and the marginal utility of the last sandwich consumed all increase. C) Her total utility decreases, but the marginal utilities of the last cup of soup and the last sandwich consumed increase. D) Her total utility and the marginal utility of the last cup of soup consumed increase, but marginal utility of the last sandwich consumed decreases. E) Her total utility and the marginal utility of the last sandwich consumed increase, but marginal utility of the last cup of soup consumed decreases. Answer: A Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Optimal Level of Consumption 49) Adhira buys chocolates and almonds. She has 3 bars of chocolates and 4 bags of almonds. The marginal utility of the third chocolate bar is 18 units of utility and the marginal utility from the fourth bag of almonds is also 18. Is Adhira maximizing her utility? A) Yes, the marginal utility from the last unit of each good is equal. B) No, she must buy 1 more chocolate bar to equate her quantities of the two goods. C) No, she must buy cut back to 3 bags of almonds to equate her quantities of the two goods. D) Perhaps; without information on her income and the prices of the two goods, we cannot answer the question. E) Yes, the marginal utility from each extra unit is higher. Answer: D Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking Special Feature: Solved Problem: Finding the Optimal Level of Consumption

50) If we know demand for a good is highly own price elastic, we would expect A) the substitution effect to be large. B) the income effect to be large. C) the substitution effect to be small. D) the income effect to be small. E) the income and substitution effect are equal. Answer: A Diff: 3 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 51) If you received negative marginal utility from consuming the 4th slice of pizza, then your total utility from 4 slices of pizza must be less than your total utility from 3 slices of pizza. Answer: TRUE Diff: 2 Type: TF Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 52) When diminishing marginal utility sets in, total utility must be negative. Answer: FALSE Diff: 2 Type: TF Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 53) A consumer maximizes her total utility from a bundle of goods when her marginal utility from each good is equal. Answer: FALSE Diff: 1 Type: TF Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 54) The economic model of consumer behaviour explains how consumers' tastes and preferences are formed. Answer: FALSE Diff: 1 Type: TF Topic: Consumer Behaviour Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

55) The income effect of a price increase causes a decrease in the quantity demanded of a normal good. Answer: TRUE Diff: 2 Type: TF Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 56) The substitution effect of a price increase causes a decrease in the quantity demanded of an inferior good. Answer: TRUE Diff: 2 Type: TF Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 57) What is marginal utility and what is the law of diminishing marginal utility? Answer: Marginal utility is the change in total satisfaction a person receives from consuming one additional unit of a good or service. The law of diminishing marginal utility is the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time. Diff: 2 Type: SA Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

58) Eliza consumes 12 cappuccinos and 8 apple turnovers per week. The price of cappuccino is $4 each and apple turnovers are $1 each. a. What is the amount of income allocated to cappuccino and apple turnover consumption? b. What is the price ratio (the price of cappuccino relative to the price of apple turnovers)? c. Explain the meaning of the price ratio you computed. d. If Eliza maximizes utility, what is the ratio of the marginal utility of cappuccino to the marginal utility of apple turnovers? e. If the price of apple turnovers falls, will Eliza consume more apple turnovers, fewer apple turnovers or the same amount of apple turnovers? Explain your answer using the rule of equal marginal utility per dollar. Answer: a. Income = $56 b. Price of cappuccino / price of apple turnovers = $4 / $1 = 4 c. To buy a cappuccino, Eliza has to give up 4 apple turnovers. d. MUcappuccino / MUapple turnovers = Price of cappuccino / Price of apple turnovers = e. If the price of apple turnovers falls, the marginal utilities per dollar will not be equal. Specifically, MUcappuccino / Price cappuccino < MUapple turnovers / Price apple turnovers. Eliza can raise her total utility by buying more apple turnovers and less cappuccino. Diff: 3 Type: SA Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 59) After getting an A on your economics exam, you decide to go to your favourite Mexican restaurant to celebrate. You are having trouble deciding whether to order the chipotle chicken chimichanga or the cilantro seafood enchiladas. Use the rule of equal marginal utility per dollar to determine which one to purchase: (a) the chimichanga for $8 which gives you 120 units of utility, or (b) the enchiladas for $15 which gives you 195 units of utility? Answer: You should buy the chimichanga because the MU per dollar is 15 while MU per dollar for the enchiladas is only 13. Diff: 2 Type: SA Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills

60) Arnie Ziffel has $20 per week to spend on any combination of pineapples and green tea. The price of a pineapple is $4 and the price of a bottle of green tea is $2. The table below shows Arnie's utility values. Use the table to answer the questions that follow the table.

Quantity of Pineapples 1 2 3 4 5 6 7

Total Utility 32 52 64 68 70 71 71

Marginal Marginal Utility per Quantity of Total Utility Dollar Green Tea Utility 1 28 2 46 3 54 4 60 5 64 6 66 7 67

Marginal Marginal Utility per Utility Doll

a. Complete the table by filling in the blank spaces. b. Suppose Arnold purchases 4 pineapples and 2 bottles of green tea. Is he consuming the optimal consumption bundle? If so, explain why. If not, what combination should he buy and why? Answer: a. Marginal Quantity Marginal Quantity of Total Marginal Utility per of Green Total Marginal Utility per Pineapples Utility Utility Dollar Tea Utility Utility Dollar 1 32 32 8 1 28 28 14 2 52 20 5 2 46 18 9 3 64 12 3 3 54 8 4 4 68 4 1 4 60 6 3 5 70 2 0.5 5 64 4 2 6 71 1 0.25 6 66 2 1 7 71 0 0 7 67 1 0.5 b. If Arnold purchases 4 pineapples and 2 bottles of green tea, he is not maximizing his utility. The marginal utility per dollar spent on pineapples = 1 and the marginal utility per dollar spent on green tea = 9. His total utility from this bundle is 114 utils. If he buys 3 pineapples and 4 bottles of green tea, he will equate his marginal utilities per dollar and the total utility from this bundle = 124. Diff: 2 Type: SA Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills

61) Economists usually assume that people act in a rational, self-interested way. In explaining how consumers make choices, this means that economists believe A) consumers will always buy goods and services at the lowest possible prices. B) consumers spend their incomes in order to accumulate the most goods and services. C) consumers make choices that will leave them as satisfied as possible given their incomes, tastes, and the prices of goods and services available to them. D) consumers will spend their incomes and time on activities that benefit themselves as much as possible, without regard to the welfare of others. E) all of the above. Answer: C Diff: 1 Type: MC Topic: Rational Decision Making Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 62) The satisfaction a person receives from consuming goods and services is called A) contentment. B) psychic income. C) wealth. D) utility. E) ownership. Answer: D Diff: 1 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 63) The economic model of consumer behaviour predicts that A) consumers will try to earn as much income as they can over their lifetimes. B) consumers will choose to buy the combination of goods and services that can let them spend all the income they earn. C) consumers will try to accumulate as many goods and services as they can before they die. D) consumers divide their time between consumption and leisure activities in order to maximize social welfare. E) consumers will choose to buy the combination of goods and services that makes them as well off as possible from those combinations that their budgets allow them to buy. Answer: E Diff: 1 Type: MC Topic: Consumer Behaviour Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

64) An economist observes two consumers in a supermarket. One of the consumers buys a case of CocaCola and the other buys a case of Pepsi-Cola. Both colas sell for the same price and the ages and incomes of the consumers are also the same. Based on this information, how would the economist explain the consumers' choices? A) One of the consumers made the wrong choice, but it is impossible to say which one. B) Both consumers should have considered buying other colas that had lower prices. C) Both consumers should have purchased less than a case because they would be able to buy more later. D) Apparently, the consumers had different tastes. E) This tells nothing about consumers' choice. Answer: D Diff: 1 Type: MC Topic: Consumer Behaviour Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 65) The word "util" has been used by economists in the past as an objective measure of utility. Today economists believe that A) utility cannot be measured objectively. B) utility can be measured objectively because people can use prices of different goods to measure utility. C) all of the important conclusions of the economic model of consumer behaviour depend on utility being measured objectively. D) the util truly is an objective, rather than a subjective, measure of utility. E) utility can be measured using income of consumers only. Answer: A Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 66) Suppose the marginal utilities for the first three cans of soda are 100, 80, and 60, respectively. The total utility received from consuming 2 cans is A) 20. B) 80. C) 90. D) 180. E) 240. Answer: D Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

67) The additional utility that George receives from consuming one more slice of pizza is called A) average utility. B) marginal utility. C) total utility. D) diminishing utility. E) satisfaction. Answer: B Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 68) Marginal utility is A) the change in total utility divided by the price of the last unit of a good or service consumed. B) the change in total utility a person receives from consuming an additional unit of a good or service. C) the utility from consuming a given quantity of a good or service. D) the decrease in total utility from consuming more and more units of a good or service. E) the least known concept in consumer behaviour. Answer: B Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 69) If marginal utility of apples is diminishing and is a positive amount, consuming one more apple will cause A) total utility to decrease. B) a consumer to get no satisfaction from consuming apples. C) a consumer's total utility to increase. D) a consumer to go beyond her optimal consumption of apples. E) total utility will become zero. Answer: C Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

70) If Paul decides to buy a $60 ticket to a Cirque du Soleil show rather than a $45 ticket for a Blue Man Group performance, we can conclude that A) the marginal utility per dollar spent on Cirque du Soleil is lower than the marginal utility per dollar spent on Blue Man Group. B) Paul's demand for a ticket to see Cirque du Soleil is more elastic than his demand for a ticket to see Blue Man Group. C) Paul is not making a rational choice. D) the marginal utility per dollar spent on Cirque du Soleil is higher than the marginal utility per dollar spent on Blue Man Group. E) Paul is a rational decision maker. Answer: D Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 71) If the marginal utility Ida Mae receives from eating chicken wings is negative, then A) her total utility will fall if she eats more chicken wings. B) her total utility from eating chicken wings is negative as well. C) Ida Mae definitely does not like chicken wings. D) her total utility has risen, but by less from the last chicken wing than from the next to last chicken wing. E) her marginal utility will increase if she keeps on consuming chicken wings. Answer: A Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 72) If Joey Kobayashi experiences diminishing marginal utility from eating hot dogs, then A) Joey's total utility from eating hot dogs is negative. B) the marginal utility from the next hot dog Joey eats will be negative. C) the additional satisfaction Joey receives from eating another hot dog will be less than the satisfaction Joey received from eating the last hot dog. D) Joey is maximizing the marginal utility per dollar Joey receives from eating hot dogs. E) Joey should never eat hot dogs again. Answer: C Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

73) Optimal decisions are made A) in the marketplace. B) if information about prices and marginal utilities is known. C) when marginal utility is minimized. D) at the margin. E) by consumers only. Answer: D Diff: 1 Type: MC Topic: Rational Decision Making Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 74) Total utility is maximized in the consumption of two goods by A) equating the marginal utility for each good consumed. B) equating the marginal utility per dollar for each good consumed. C) equating the total utility of each good divided by its price. D) maximizing expenditure on each good. E) increasing the consumption of both goods. Answer: B Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 75) In making decisions about what to consume, a person's goal is to A) allocate her limited income among all the products she wishes to buy so that she receives the highest total utility. B) buy low-priced goods rather than high-priced goods. C) maximize her marginal utility from the goods and services she wishes to buy using her limited income. D) consume as many necessities as possible and then, if there is money left over, buy luxuries. E) spend as much as possible to purchase the most goods. Answer: A Diff: 2 Type: MC Topic: Rational Decision Making Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

76) The amount of income a consumer has to spend on goods and services is known as A) purchasing power. B) effective demand. C) a budget constraint. D) wealth. E) personal saving. Answer: C Diff: 1 Type: MC Topic: Budget Constraint Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 77) A budget constraint A) represents the bundles of consumption that make a consumer equally happy. B) refers to the limited amount of income available to consumers to spend on goods and services. C) reflects the desire by consumers to increase their income. D) shows the prices that a consumer chooses to pay for products he consumes. E) limited stock of goods available to consume each month. Answer: B Diff: 1 Type: MC Topic: Budget Constraint Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 78) The restriction that a consumer's total expenditure on goods and services purchased cannot exceed the income available is referred to as A) maximizing behaviour. B) economizing behaviour. C) the price constraint. D) the budget constraint. E) effective demand. Answer: D Diff: 1 Type: MC Topic: Budget Constraint Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

79) Which of the following is explained by the law of diminishing marginal utility? A) The marginal utility of Isabel's second bottle of Coca-Cola is greater than the marginal utility of her third bottle of Coca-Cola. B) The marginal utility of Isabel's second bottle of Coca-Cola is greater than the marginal utility of her third pretzel. C) The marginal utility of Isabel's second bottle of Coca-Cola is greater than the marginal utility of her friend Margie's third pretzel. D) The total utility of one bottle of Coca-Cola is greater than the total utility of two bottles of Coca-Cola. E) All of the above are explained by the law of diminishing marginal utility. Answer: A Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 80) Marv Pilson has $50 worth of groceries in a shopping cart at his local Sobeys. Assume that the marginal utility per dollar of the litre bottles of soft drink in Marv's cart equals 50. The marginal utility per dollar of the boxes of cereal in Marv's cart equals 20. Marv has only $50 to spend, but has not yet paid for his groceries. How can Marv increase his total utility without spending more than $50? A) Marv should substitute his favourite soft drink or the cereal in his cart for generic brands that have lower prices. B) Marv should buy more boxes of cereal and fewer bottles of soft drink. C) Marv should buy fewer boxes of cereal and more bottles of soft drink. D) Marv should buy fewer boxes of cereal and fewer bottles of soft drink. He can then spend more on other items. E) Marv should buy other goods that are cheaper to increase utility. Answer: C Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 81) If pizza slices and hamburgers sell for the same price, a rational consumer would A) receive the same marginal utility from the last slice of pizza and the last hamburger they ate. B) eat the same number of pizza slices and hamburgers. C) receive the same total utility from pizza and hamburgers. D) choose any combination of pizza and hamburgers they can afford. E) turn to something better because these two choices have become inferior to the consumer. Answer: A Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking, Ethical Reasoning

Table 8.3 Quantity 1 2 3 4 5 6

Ice Cream Cones MU/P 15 12.5 10 7.5 5 2.5

Lime Fizz Soda MU/P 40 35 26 18 15 7

82) Refer to Table 8.3. The table above shows Lee's marginal utility per dollar from consuming ice cream cones and cans of Lime Fizz Soda. The price of an ice cream cone is $2 and the price of Lime Fizz Soda is $1. Use this information to select the correct statement. A) Lee should buy twice as much of Lime Fizz Soda as ice cream. B) To maximize his utility Lee should consume 1 ice cream cone and 5 cans of Lime Fizz Soda. C) We cannot determine how many ice cream cones and cans of Lime Fizz Soda will maximize Lee's utility because we are given only the marginal utility per dollar values. We also need to know the marginal utility for each quantity. D) If Lee has an unlimited budget he will maximize his utility by buying only Lime Fizz Soda. E) We cannot determine how many ice cream cones and cans of Lime Fizz Soda Lee will consume without knowing what his income is. Answer: E Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Optimal Level of Consumption

Table 8.4 Quantity 1 2 3 4 5 6

Ice Cream Cones MU 30 25 20 15 10 5

Lime Fizz Soda MU 40 35 26 18 15 7

83) Refer to Table 8.4. The table above shows Lee's marginal utility from consuming ice cream cones and cans of Lime Fizz Soda. Select the phrase that completes the following statement. "We can determine the number of ice cream cones and cans of Lime Fizz Soda Lee should consume to maximize his utility A) if we know what Lee's income is." B) if we know what Lee's income is and the price of an ice cream cone and the price of a can Lime Fizz Soda." C) by adding up the marginal utilities for ice cream cones and Lime Fizz Soda." D) if we know the values of the marginal utility per dollar for ice cream cones and Lime Fizz Soda." E) if we know what her taste is." Answer: B Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Optimal Level of Consumption 84) During a study session for an economics exam with three other students, Peter Daltry commented on an example of a consumer who had to decide the on number of slices of pizza and cups of Coca-Cola he would consume. Peter explained that "To maximize his utility, this consumer must equate the marginal utility per dollar for pizza and Coca-Cola." Was Peter's analysis correct? A) Peter describes one of the conditions necessary for utility maximization. The consumer also must equate the marginal utility of pizza and the marginal utility of cups of Coca-Cola. B) Peter's statement is correct. C) Peter's statement is correct, but we must also assume that the consumer is rational. D) Peter describes one of the conditions necessary for utility maximization. The second condition is that total spending on both goods must equal the amount available to be spent. E) More information is required to determine whether Peter's analysis was correct. Answer: D Diff: 2 Type: MC Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

Table 8.5 Quantity 1 2 3 4 5 6

Steak & Cheese MU 40 32 20 12 6 2

Steak & Cheese MU/P 10 8 5 3 1.5 0.5

Grilled Chicken MU 30 24 16 12 8 4

Grilled Chicken MU/P 15 12 8 6 4 2

85) Refer to Table 8.5. For steak and cheese and grilled chicken sandwiches, the table contains the values of the marginal utility (MU) and marginal utility per dollar (MU/P) for Mabel Jarvis. Mabel has $14 to spend on steak and cheese and grilled chicken sandwiches. Which of the following statements is false? A) The price of steak and cheese sandwiches is $4. The price of grilled chicken sandwiches is $2. B) If Mabel maximizes her utility she will buy three grilled chicken sandwiches. C) If Mable maximizes her utility she will buy two steak and cheese sandwiches. D) We do not have enough information to determine how many sandwiches Mabel will buy to maximize her utility. E) All of the above statements are correct. Answer: D Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 86) Refer to Table 8.5. For steak and cheese and grilled chicken sandwiches, the table contains the values of the marginal utility (MU) and marginal utility per dollar (MU/P) for Mabel Jarvis. Mabel has $14 to spend on steak and cheese and grilled chicken sandwiches. Which of the following statements is true? A) If Mabel maximizes her utility, she will buy three steak and cheese sandwiches and two grilled chicken sandwiches. B) If Mabel was maximizing her utility when spending $14 and then received an additional $4, she would receive the most marginal utility per dollar if her next purchase was another grilled chicken sandwich. C) Mabel will first buy two steak and cheese sandwiches; then with her remaining $6 she will buy three grilled chicken sandwiches. D) To maximize her utility, Mabel will need a total of $36, the income needed to buy 6 steak and cheese sandwiches and 6 grilled chicken sandwiches. E) None of the statements is true. Answer: B Diff: 3 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills

87) The marginal utility per dollar that Harold Stratton receives from oranges is greater than the marginal utility per dollar Harold receives from pears. To maximize his utility, what should Harold do? A) He should acquire more income so that he can afford to buy more oranges and pears. B) He should reduce his consumption of both oranges and pears so that he can buy a greater variety of goods. C) He should buy fewer pears and more oranges. D) He should buy fewer oranges and more pears. E) He should buy equal quantity of both to maximize utility. Answer: C Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 88) There are two conditions necessary for a consumer to maximize her utility. One is that the marginal utilities per dollar spent on each good and service consumed are equal. What is the other condition? A) Total spending on all goods and services must equal the amount available to be spent. B) The consumer must be satisfied with the choices she makes. C) The total spent on each good and service is the same. D) The prices of each good and service consumed must not be too high. E) She should have enough income to purchase the good. Answer: A Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

Table 8.6 Quantity 1 2 3 4 5 6

Italian Sub MU 40 32 20 12 6 2

Italian Sub MU/$4 10 8 5 3 1.5 0.5

Taco MU 30 24 16 12 8 4

Taco MU/$2 15 12 8 6 4 2

Taco MU/$1 30 24 16 12 8 4

89) Refer to Table 8.6, which lists the values of Harry Taber's marginal utility and marginal utility per dollar for Italian submarine (sub) sandwiches and tacos. Assume that the price of the sub sandwiches is $4 and the price of tacos is $2. When Harry's income is $14 he buys two Italian sub sandwiches and three tacos. The last column lists the values of the marginal utility per dollar for tacos when the price of tacos decreases to $1. Complete this statement: As a result of the change in price, A) Harry's purchasing power has increased. He will reduce his consumption of tacos so he can buy one more sub. This is an example of the substitution effect of a price change. B) Harry's purchasing power has increased. If tacos are a normal good for Harry, he will buy fewer tacos. This is an example of the income effect of a price change. C) Harry's purchasing power has increased. If tacos are a normal good for Harry, he will buy more tacos. This is an example of the income effect of a price change. D) Harry's purchasing power has increased. Harry will buy fewer tacos. This is an example of the substitution effect of a price change. E) Harry's purchasing power stays the same. He will stop buying tacos because they are cheaper in price so he does not want to eat them any more. Answer: C Diff: 3 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills

90) Refer to Table 8.6, which lists the values of Harry Taber's marginal utility and marginal utility per dollar for Italian submarine (sub) sandwiches and tacos. Assume that the price of the sub sandwiches is $4 and the price of tacos is $2. When Harry's income is $14 he buys two Italian sub sandwiches and three tacos. The last column lists the values of the marginal utility per dollar for tacos when the price of tacos decreases to $1. Complete this statement: As a result of the change in price, the marginal utility of each taco Harry consumes increases, and A) the substitution effect of the price change will cause Harry to buy more tacos and fewer subs. B) the substitution effect of the price change will cause Harry to buy more tacos if they are a normal good, and fewer tacos if they are an inferior good. C) the substitution effect will cause Harry to buy another sub because his purchasing power has increased. D) the substitution effect will cause Harry to buy fewer tacos. E) the substitution effect will cause Harry to same amount of tacos with less money. Answer: A Diff: 3 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 91) Marge buys 5 songs and 7 Blu-ray movies. The marginal utility of the 5th song and the marginal utility of the 7th Blu-ray are both equal to 30 utils. Can we say that this is the optimal combination of songs and Blu-ray movies for Marge? A) No. We need to know her preferences for songs and Blu-ray movies. B) Yes. C) No. We need to know the prices of the songs and Blu-ray movies. D) No. If this was the optimal combination, the marginal utility per dollar of the 5th song and the 7th Bluray would be equal. E) No. We need to know her income to decide about the combination. Answer: D Diff: 3 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Equalize Marginal Utilities per Dollar

Table 8.7 Quantity of Burgers 1 2 3 4 5 6 7

Marginal Utility 20 14 10 3 1 -5 10

Quantity of Pepsi 1 2 3 4 5 6 7

Marginal Utility 30 10 7 5 1 0 -4

Table 8.7 lists Jay's marginal utilities for burgers and Pepsi. Jay has $7 to spend on these two goods. The price of a burger is $2 and the price of a can of Pepsi is $1. 92) Refer to Table 8.7. What is Jay's optimal consumption bundle? A) 1 burger and 2 Pepsis B) 2 burgers and 3 Pepsis C) 3 burgers and 1 Pepsi D) 3 burgers and 2 Pepsis E) 1 burger and 3 Pepsis Answer: B Diff: 3 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 93) Refer to Table 8.7. If Jay can eat all the burgers he wants for free, how many burgers will he consume? A) 7 burgers B) 6 burgers C) 5 burgers D) 3 burgers E) 2 burgers Answer: C Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills

94) Suppose Barry is maximizing his utility from consuming used paperback novels and audio books. The price of a used novel is $4 and the price of an audio book is $8. If the marginal utility of the last novel was 32 units of utility (utils), what was the marginal utility of the last audio book purchased? A) 2 utils B) 12 utils C) 16 utils D) 32 utils E) 64 utils Answer: E Diff: 3 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 95) Terence has $50 per week to spend on Subway sandwiches and milkshakes. The price of a Subway sandwich is $5 and the price of a milkshake is $4. He buys 6 sandwiches and 5 milkshakes. The marginal utility of the 6th sandwich is 25 and the marginal utility of the 5th milkshake is 24. Which of the following is true? A) He is not maximizing his utility and should buy more milkshakes. B) He is maximizing his utility. C) He is not maximizing his utility and should buy more Subway sandwiches. D) He is not maximizing his utility because he is not spending all of his income. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 96) Suppose Renee can increase her total utility from consuming game downloads and vintage books by buying one more book and downloading one fewer game. Which of the following is true? A) The marginal utility of game downloads is negative. B) The marginal utility per dollar spent on books exceeds that of game downloads. C) The marginal utility of the last book consumed exceeds the marginal utility of the last game downloaded consumed. D) The marginal utility of the last game download consumed exceeds the marginal utility of the last book consumed. E) None of the above. Answer: B Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

Table 8.8 Quantity of Beer (glasses) 1 2 3 4 5 6

Total Utility 25 45 60 65 69 70

Quantity of Pizza (slices) 1 2 3 4 5 6

Total Utility 20 35 45 50 52 52

Table 8.8 shows Antonio's utility from beer and pizza. 97) Refer to Table 8.8. What is Antonio's marginal utility from consuming the fifth beer? A) 4 utils B) 13.6 utils C) 52 utils D) 69 utils E) 70 utils Answer: A Diff: 1 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 98) Refer to Table 8.8. Suppose Antonio has $10 to spend and the price of beer = $2 per glass and the price of pizza = $2 per slice. How many of each good will he consume when he maximizes his utility? A) 2 glasses of beer, 1 slice of pizza B) 2 glasses of beer, 3 slices of pizza C) 3 glasses of beer, 2 slices of pizza D) 4 glasses of beer, 5 slices of pizza E) 2 glasses of beer, 5 slices of pizza Answer: C Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

99) If Lisa spends her income on veggie burgers and pints of soy milk and the price of veggie burgers is three times the price of a pint of soy milk, then when Lisa maximizes her utility she will buy A) both goods until the marginal utility of veggie burgers is three times the marginal utility of soy milk. B) three times as many veggie burgers as pints of soy milk. C) three times as many pints of soy milk as veggie burgers. D) both goods until the marginal utility of a pint of soy milk is three times the marginal utility of veggie burgers. E) both goods but she will buy a lot more of soy milk than burgers because it is cheaper. Answer: A Diff: 2 Type: MC Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 100) The income effect of a price change refers to A) the change in demand that occurs when consumer income changes. B) the change in the quantity demanded that results from a change in price, making the good more or less expensive relative to other goods, holding everything else constant. C) the change in demand that occurs when both income and price change. D) the change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding everything else constant. E) the change in the purchase of luxury goods as income increases. Answer: D Diff: 1 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 101) Which of the following describes the substitution effect of a price change? A) the change in demand that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power B) the change in quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding everything else constant C) the change in quantity demanded of a good that results from the change in the price of a substitute for the good D) the change in quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power E) All of the above. Answer: D Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

102) Which of the following correctly describes the result of a price increase for an inferior good? A) Both the substitution effect and the income effect cause the consumer to buy less of the good. B) The substitution effect causes the consumer to buy less of the good, and the income effect causes the consumer to buy more of the good. C) The substitution effect causes the demand for the good to decrease; the income effect causes the demand for the good to increase. D) The substitution effect causes the demand for the good to increase; the income effect causes the demand for the good to decrease. E) None of the above. Answer: B Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 103) The substitution effect of a decrease in the price of movie tickets results in A) an increase in the quantity demanded of movie tickets. B) a decrease in the quantity demanded of movie tickets. C) an increase in the demand for movie tickets. D) a decrease in the demand for movie tickets. E) keeping the amount of movie tickets demanded at the same level. Answer: A Diff: 1 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 104) The income effect of a decrease in the price of macaroni and cheese (assume this is an inferior good) results in A) a decrease in the demand for macaroni and cheese. B) an increase in the quantity demanded of macaroni and cheese. C) stocking up the macaroni and cheese for the whole month. D) an increase in the demand for macaroni and cheese. E) a decrease in the quantity demanded of macaroni and cheese. Answer: E Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

105) The income effect of an increase in the price of peaches is A) the change in the quantity demanded of peaches that results from the price increase making peaches more expensive than other fruit, holding constant the effect of the price change on consumer purchasing power. B) the change in the demand for peaches as a result of the change in the price of peaches, holding all other factors constant. C) the change in the quantity demanded of other fruit that results from the impact of the price change on purchasing power, holding all other factors constant. D) the change in the quantity demanded of peaches that results from the effect of the change in price on consumer purchasing power, holding all other factors constant. E) a decrease in the demand of peaches because they are more expensive. Answer: D Diff: 3 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 106) The substitution effect of an increase in the price of peaches is A) the change in the quantity demanded that results from a change in the price of peaches making peaches more expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power. B) the change in the demand for nectarines (a substitute good) that results when peaches become more expensive relative to nectarines, holding constant the effect of the price change on consumer purchasing power. C) the change in the quantity demanded of peaches that results from the effect of the change in the price of peaches on the consumer's purchasing power. D) the change in the demand for peaches that results when the price of peaches increases. E) a decrease in the demand for peaches that happens because pears are cheaper than peaches. Answer: A Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

107) The French Bakery ran a special that decreased the price of its croissants from $1.50 to $1.00. Although her money income had not changed, Toni decided to buy 2 croissants instead of her usual 1 bagel and 1 croissant. Toni's actions are explained by which of the following? A) income effect only B) income and substitution effects C) price effect D) consumption effect E) substitution effect only Answer: B Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 108) The income effect of a decrease in the price of legal services, a normal good, results in A) a decrease in the demand for legal services. B) a decrease in the quantity demanded of legal services. C) an increase in the quantity demanded of legal services. D) an increase in the demand for legal services. E) a decrease in the supply of legal services. Answer: C Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 109) A change in the price of a good has two effects on the quantity consumed. What are these effects? A) the income effect and the substitution effect B) the utility effect and the budget effect C) the total utility effect and marginal utility effect D) the consumption effect and expenditure effect E) marginal effect and average effect Answer: A Diff: 1 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

110) The substitution effect of a change in the price of cauliflower is the portion of the change in the quantity of cauliflower demanded that can be attributed to the change in the price of a substitute vegetable such as asparagus. Answer: FALSE Diff: 2 Type: TF Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 111) To maximize utility, consumers should buy goods and services to the point where the marginal utility of each item consumed is equal. Answer: FALSE Diff: 2 Type: TF Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 112) In explaining consumer behaviour, economists explain how consumer tastes and preferences are formed. Answer: FALSE Diff: 1 Type: TF Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 113) If by purchasing more apples and fewer oranges you increase your total utility, then apples must be cheaper than oranges. Answer: FALSE Diff: 1 Type: TF Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 114) Economists assume people's tastes are identical. Answer: FALSE Diff: 1 Type: TF Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

115) Economists do not think it is possible to compare the relative utility that two people get from consuming an additional unit of a particular good. Answer: TRUE Diff: 1 Type: TF Topic: Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 116) The Wong family consumes 3 pounds of fish and 5 pounds of chicken per month. The price of fish is $8 per pound and chicken is $4 per pound. a. What is the amount of income allocated to fish and chicken consumption? b. What is the price ratio (the price of fish relative to the price of chicken)? c. Explain the meaning of the price ratio you computed. d. If the Wongs maximize utility, what is the ratio of the marginal utility of fish to the marginal utility of chicken? e. If the price of chicken rises, will the Wong family consume more chicken, less chicken, or the same amount of chicken? Explain your answer using the rule of equal marginal utility per dollar. Answer: a. Income = $44 b. Price of fish / price of chicken = $8 / $4 = 2 c. To buy a pound of fish, the family has to give up 2 pounds of chicken. d. MUfish / MUchicken = Price of fish / Price of chicken = $8 / $4 = 2 e. If the price of chicken rises, the marginal utilities per dollar will not be equal. Specifically, MUfish / Price fish > MUchicken / Price chicken. The family can raise its total utility by buying less chicken and more fish. Diff: 3 Type: SA Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills 117) You participate in a taste test for a new protein supplement called "Boost." You are given five consecutive one ounce vials of the supplement and after consuming each vial you are asked to note your reaction. You consume the first vial and your response is: "Hmmm, quite good!" After the second, you say, "Not bad at all." After the third, you note, "It's alright." and after the fourth you wince, "No more, the after-taste is getting to me. I need water." What economic principle does this scenario illustrate? Define the principle. Answer: It illustrates the law of diminishing marginal utility, which states that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time. Diff: 2 Type: SA Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

118) The increase in consumption of a good when its price falls is caused by two effects. What are these two effects? Explain the difference between these effects. Answer: The two effects are the substitution and income effects. According to the substitution effect, more is consumed when the price of a good falls because the price of the good in question is now lower relative to the prices of other goods. In addition, the fall in price increases the consumer's purchasing power, causing the quantity demanded to increase for a normal good and decrease for an inferior good. This is the income effect. For most goods, the income effect is small relative to the substitution effect, which is why the overall effect of a price decrease is an increase in quantity demanded. Diff: 2 Type: SA Topic: Income and Substitution Effects Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking 119) You wish to buy only one music album for your parents. Use the rule of equal marginal utility per dollar to determine which one to purchase: (a) The latest Electronica album for $15, which gives them 75 units of utility, or (b) Tom Petty and the Heartbreakers' Greatest Hits for $10, which gives them 100 units of utility. Assume you want to maximize their utility. Answer: You should buy the Tom Petty album because the MU per dollar is 10 while MU per dollar for the Electronica album is only 5. Diff: 1 Type: SA Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Reflective Thinking

120) Lilly Davis has $5 per week to spend on any combination of ice cream and candy. The price of an ice cream cone is $2 and the price of a candy bar is $1. The table below shows Lilly's utility values. Use the table to answer the questions that follow the table. Quantity of Marginal Ice Cream Total Utility Utility Cones 1 20 2 38 3 52 4 62

Marginal Quantity of Marginal Utility per Total Utility Candy Utility Dollar 1 20 2 38 3 48 4 54

a. Complete the table by filling in the blank spaces. b. Suppose Lilly purchases 2 ice cream cones and 1 candy bar. Is she consuming the optimal consumption bundle? If so, explain why. If not, what combination should she buy and why? Answer: a. Quantity of Marginal Total Marginal Quantity of Total Marginal Ice Cream Utility per Utility Utility Candy Utility Utility Cones Dollar 1 20 20 10 1 20 20 2 38 18 9 2 38 18 3 52 14 7 3 48 10 4 62 10 5 4 54 6 b. If Lilly purchases 2 ice cream cones and 1 candy bar she is not maximizing her utility. The marginal utility per dollar spent on ice cream cones is 9 and marginal utility per dollar spent on candy bars is 20. Her total utility from this bundle is 58 utils. If she buys 1 ice cream cone and 3 candy bars, she will equate her marginal utilities per dollar and the total utility from this bundle would be 68. Diff: 2 Type: SA Topic: Marginal Utility Learning Outcome: 8.1 Define utility and explain how consumers choose goods and services to maximize their utility AACSB: Analytic Skills

8.2

Use the concept of utility to explain the law of demand

Figure 8.1

Note: a hoagie is essentially a submarine sandwich. 1) Refer to Figure 8.1. When the price of hoagies (sandwiches) increases from $5.00 to $5.75, quantity demanded decreases from Q1 to Q0. This change in quantity demanded is due to A) the price and output effects. B) the income and substitution effects. C) the fact that marginal willingness to pay falls. D) the law of diminishing marginal utility. E) the income effect only. Answer: B Diff: 1 Type: MC Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking 2) Refer to Figure 8.1. Which of the following statements is true? A) Quantities Q0 and Q1 are the utility-maximizing quantities of hoagies at two different prices of hoagies. B) Quantities Q0 and Q1 may not necessarily be the utility-maximizing quantities of hoagies at two different prices because we have no information on the consumer's budget or the price of other goods. C) Quantity Q0 could be a utility-maximizing choice if the price is $5.75, but quantity Q1 may not be because we have no information on the marginal utility per dollar when price changes. D) Quantities Q0 and Q1 are derived independently of the utility-maximizing model. E) None of the above statements is true. Answer: A Diff: 1 Type: MC Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking 47 Copyright © 2024 Pearson Canada Inc.

3) In order to derive an individual's demand curve for salmon, we would observe what happens to the utility-maximizing bundle when we change A) income and hold everything else constant. B) tastes and preferences and hold everything else constant. C) the price of the product and hold everything else constant. D) the price of a close substitute and hold everything else constant. E) the price and income of a good. Answer: C Diff: 2 Type: MC Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking 4) The more quickly marginal utility of bananas decreases A) the steeper the demand curve for bananas. B) the flatter the demand curve for bananas. C) the more likely it is that bananas are an inferior good. D) the greater the income elasticity of demand for bananas. E) the more likely you will be purchasing bananas because they are likely more cheaper. Answer: A Diff: 2 Type: MC Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking 5) Along a downward-sloping linear demand curve, A) the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities increase. B) the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities remain constant. C) the total utility from the consumption of each unit of the good rises as the quantity consumed increases. D) the marginal utility from the consumption of each unit of the good rises and the total utility from consuming larger quantities remains constant. E) the marginal utility from the consumption of each unit of the good falls and the total utility from consuming larger quantities increases. Answer: E Diff: 2 Type: MC Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking

6) Economists Robert Jensen and Nolan Miller reasoned that to be a Giffen good, with an income effect larger than its substitution effect, a good must be ________ and make up a ________ portion of a consumer's budget. A) a normal good; very small B) an inferior good; very small C) a normal good; very large D) an inferior good; very large E) very expensive; very large Answer: D Diff: 2 Type: MC Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 7) The demand curve for a Giffen good is A) non-linear but downward-sloping. B) vertical. C) upward-sloping. D) non-existent. E) a usual downward sloping demand curve with a constant slope. Answer: C Diff: 2 Type: MC Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 8) Giffen goods A) are theoretical and have never been discovered in the real world. B) have not existed since prior to the Industrial Revolution. C) were proven to exist in the 1890s by Sir Robert Giffen. D) were not shown to actually exist until 2006. E) is another name for cheap goods. Answer: D Diff: 3 Type: MC Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World?

9) Each price-quantity combination on a consumer's demand curve shows the utility-maximizing quantity at the given price. Answer: TRUE Diff: 2 Type: TF Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking 10) A Giffen good could be either a normal good or an inferior good. Answer: FALSE Diff: 2 Type: TF Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 11) The income effect of a price increase for a Giffen good outweighs the substitution effect. Answer: TRUE Diff: 2 Type: TF Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 12) The demand curve for an inferior good can never be downward-sloping. Answer: FALSE Diff: 1 Type: TF Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Analytic Skills 13) The demand curve for a luxury good is upward-sloping. Answer: FALSE Diff: 2 Type: TF Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking

14) What is a Giffen good? Answer: A Giffen good is something consumers buy more of when its price rises and buy less of when its price falls. Diff: 1 Type: SA Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 15) What must be true in terms of the income effect, the substitution effect, and the type of good for the good's demand curve to be upward sloping? Answer: The income effect would have to be larger than the substitution effect, and the good would have to be an inferior good. Diff: 2 Type: SA Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 16) We can derive the market demand curve for gold earrings A) only if the tastes of all gold earring consumers are similar. B) by adding horizontally the individual demand curves of each gold earring consumer. C) by adding vertically the quantity demanded of each gold earring consumed at each price. D) by adding the prices each gold earring consumer is willing to pay for each quantity. E) only if we know all the consumers who are interested in purchasing gold earrings. Answer: B Diff: 1 Type: MC Topic: Market Demand Curve Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking 17) The income effect due to a price decrease will result in an increase in the quantity demanded for A) a Giffen good. B) an inferior good. C) a public good. D) a normal good. E) any good. Answer: D Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking

Figure 8.2

Figure 8.2 represents the demand for ice cream cones. 18) Refer to Figure 8.2. Which of the following statements is true? A) Points a and b are the utility-maximizing quantities of ice cream cones at two different prices of . B) Points a and b may not necessarily be the utility-maximizing quantities of ice cream cones at two different prices because we have no information on the consumer's budget or the price of other goods. C) Point a could be a utility-maximizing choice if the price is $3 but point b may not be because we have no information on the marginal utility per dollar when price changes. D) Points a and b are derived independently of the utility-maximizing model. E) Points a and b are utility maximizing quantities at two different levels of incomes. Answer: A Diff: 1 Type: MC Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking 19) Refer to Figure 8.2. When the price of ice cream cones increases from $2 to $3, quantity demanded decreases from 4 ice cream cones to 3 ice cream cones. This change in quantity demanded is due to A) the price and output effects. B) the income and substitution effects. C) the law of diminishing marginal utility. D) the fact that marginal willingness to pay falls. E) hot weather. Answer: B Diff: 1 Type: MC Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking

20) Goods with upward-sloping demand curves are referred to as A) Marshall goods. B) Giffen goods. C) substitute goods. D) luxury goods. E) normal goods. Answer: B Diff: 2 Type: MC Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 21) For a demand curve to be upward sloping, the good would have to be an inferior good, and A) the income effect would have to be larger than the substitution effect. B) the income effect would have to be smaller than the substitution effect. C) the income effect would have to be equal to the substitution effect. D) the income effect and the substitution effect would have to be nonexistent. E) there should be no income effect involved. Answer: A Diff: 2 Type: MC Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 22) The income effect results in consumers increasing the quantity of normal goods demanded when the price falls. Answer: TRUE Diff: 1 Type: TF Topic: Where Demand Curves Come From Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking 23) The demand for a Giffen good slopes upward. Answer: TRUE Diff: 1 Type: TF Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World?

24) The only Giffen goods that have been identified so far in the real world are luxury goods. Answer: FALSE Diff: 1 Type: TF Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 25) Describe the demand curve for a Giffen good. Answer: The demand curve for a Giffen good slopes upward, indicating that the quantity demanded increases when the price increases, and the quantity demanded falls when the price decreases. Diff: 1 Type: SA Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World? 26) What did economists Robert Jensen and Nolan Miller determine must be true for a good to be a Giffen good, where the income effect is larger than its substitution effect? Answer: The good must be an inferior good and it must make up a very large portion of consumers' budgets. Diff: 2 Type: SA Topic: Giffen Goods Learning Outcome: 8.2 Use the concept of utility to explain the law of demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Are There Any Upward-Sloping Demand Curves in the Real World?

8.3

Explain how social influences can affect consumption choices

1) Consider the following factors: a. culture b. religion c. customs d. prices e. income Which of the factors above are likely to influence the choices consumers make? A) a, d, and e only B) all the factors except b C) all the factors except c D) d and e only E) all the factors listed Answer: E Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 2) What is the common feature displayed by the following items? a. eating in a newly opened "fusion" cuisine restaurant b. attending a Toronto Maple Leafs game at Air Canada Centre c. wearing Lucky Brand designer jeans A) They are all highly inelastic goods. B) The consumption of these goods takes place privately. C) The consumption of these goods takes place publicly. D) They tend to be consumed by better educated people. E) All are related to rich people only. Answer: C Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 3) Consider a good whose consumption takes place publicly. Your decision to buy that good depends A) both on the characteristics of the product and on how many other people are buying the good. B) only on the characteristics of the good. C) only on how many other people buy the good. D) only on the price of the good. E) on income. Answer: A Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 55 Copyright © 2024 Pearson Canada Inc.

4) Which of the following does not explain why consumers buy products that many other consumers are already buying? A) technology B) the satisfaction people derive by being viewed as "fashionable" C) cost-effective way to gather information about a product D) differences in tastes and preferences E) to look trendy Answer: D Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 5) Identify the one statement that does not demonstrate how social effects influence consumer choice. A) Students in an Economics class are required to purchase a textbook assigned by the professor. B) There is utility gained from consuming goods or services that others are consuming. C) Some products that people consume are determined by the social popularity of the products. D) Companies such as Zappos.com and Netflix invite their consumers to write reviews about their experience with their products which are then posted on the Internet for others to see. E) All the above statements demonstrate the effect of social influence on consumer choice. Answer: A Diff: 2 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 6) Firms pay famous individuals to endorse their products because A) apparently demand is affected not just by the number of people who use a product but also by the type of person that uses the product. B) the firms are irrational and are wasting advertising expenditures. C) famous people obviously know what the best goods and services are. D) famous people only consume high quality products. E) they can convey the message to a larger audience. Answer: A Diff: 2 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Analytic Skills Special Feature: Apply the Concept: Why Do Firms Pay Connor McDavid to Endorse Their Products?

7) By hiring Drake for Apple Music, Apple is hoping to reach a new market for its music streaming services. By using celebrities such as Drake to endorse products, companies are hoping that its customers will respond positively and business will increase. All of the following are reasons why celebrity endorsements may increase sales for advertised products except A) consumers may believe that celebrities have more information than they do about the advertised product. B) consumers may feel closer to celebrities if they purchase the products being endorsed. C) consumers just like to wear what they see celebrities wearing. D) consumers may believe they will appear more fashionable if they purchase products endorsed by certain celebrities. E) consumers can be sure that a company would not pay a large sum for a celebrity to endorse its product unless the product is the best available in the market. Answer: E Diff: 2 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Are Oil Prices So Unstable? 8) A network externality occurs when A) there is production cost savings from being networked with suppliers. B) there is production cost savings from being networked with buyers. C) the usefulness of a good is affected by how many others use the good. D) the usefulness of a good is affected by celebrities who use the good. E) people use social media for promoting the good. Answer: C Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 9) Once a product becomes established, network externalities may create ________ costs that make consumers reluctant to buy a new product with better technology. A) external B) implicit C) switching D) marginal E) advertising Answer: C Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

10) A significant downside to network externalities is that A) there may be large switching costs to consumers of changing products so that consumers end up using products with inferior technologies. B) firms may network with unethical suppliers or distributors. C) the costs of hiring celebrity endorsements may be very high. D) there may be large switching costs to firms changing technologies. E) there may be large advertising cost. Answer: A Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 11) All of the following products are most likely to have significant network externalities except A) cat food. B) cell phones. C) popular board games. D) fax machines. E) big screen TVs. Answer: A Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 12) Which of the following is used to explain why a consumer's willingness to use Facebook Messenger increases as the number of other people who use Facebook Messenger increases? A) network externalities B) market failure C) diminishing marginal utility D) the income effect of a price change E) positive externalities Answer: A Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

13) A good is path dependent when A) consumers get utility from consuming goods that others are consuming, such as restaurants. B) the first technology that was adopted has an advantage over a better technology that came later. C) people who move location follow the path of people who moved before them. D) it can only be used in one way. E) it uses the same production method regardless of provision of new technology. Answer: B Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 14) A standard which came to the market first, such as the QWERTY letter layout in typewriters, can become entrenched (this layout is still used in computer keyboards today). What is this phenomenon called? A) network externalities B) path dependency C) sunk cost D) comparative advantage E) absolute advantage Answer: B Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 15) Many economists do not believe that network externalities lock consumers into the use of products that have technology inferior to other similar products. These economists believe that A) consumers are always rational. B) in practice, the gains from using a superior technology exceed the losses consumers incur from switching costs. C) there is no good evidence that switching costs exist. D) the government will prevent products with inferior technology from being sold to consumers. E) in practice, many producers cover these costs for consumers. Answer: B Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

16) Economists would refer to the increase in product sales because of celebrity endorsements as being the result of A) network externalities. B) the endowment effect. C) social influence. D) the ultimatum game. E) comparative advantage. Answer: C Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 17) One explanation for the increase in product sales because of celebrity endorsements is that people seem to receive ________ from goods they believe are popular. A) more utility B) diminishing utility C) greater network externalities D) increased path dependency E) fame Answer: A Diff: 2 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 18) While taxi companies use queuing (making people wait) as a way of dealing large increases in demand, Uber uses "surge pricing". The price of an Uber ride will increase dramatically when demand is high or supply is low. One risk of this approach is that A) too many Uber drivers will respond to the higher price by working longer. B) the increased price will reduce quantity demand for Uber rides. C) Uber users will still use the service because it is cheaper than other services. D) too many people will want to become Uber drivers. E) Uber users will view the price rises as unfair and switch to another service. Answer: E Diff: 2 Type: MC Topic: Business Implications of Fairness Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Analytic Skills

19) For which of the following products is social influence likely to have the greatest impact? A) toothpaste B) restaurants C) high-blood pressure medication D) school textbooks E) pain killers Answer: B Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 20) Jamal, Lawson and Kyle have been standing in line for almost an hour waiting to be served at Kirala, a popular new Japanese restaurant. It is possible that some of the people in line won't be served at all before the restaurant closes. Which of the following could explain why the restaurant does not simply raise prices high enough to eliminate the lines? a. In situations where consumption takes place publicly, demand for the product is also influenced by how many other people are buying the product. Consequently, a popular restaurant that increased its prices enough to eliminate lines might find that it had also eliminated its popularity. b. Firms may sometimes not raise their prices for fear that it violates people's sense of fairness and might alienate customers. c. The demand for restaurant meals is relatively elastic and if the firm raise prices it will lower its profits. A) a only B) a and b only C) a and c only D) b and c only E) a, b, and c Answer: B Diff: 2 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 21) Which of the following is an experiment which tests whether fairness is important in consumer decision making? A) the fair trade principle B) the ultimatum game C) the preferential treatment game D) the behavioural experiment E) the network externality Answer: B Diff: 1 Type: MC Topic: Fairness Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

22) In the ultimatum game, allocators usually offer recipients at least a 40 percent share of the money, and recipients almost always reject offers of less than a 10 percent share. Which of the following does not explain why allocators offer recipients a relatively generous share and why recipients reject meager offers? A) Fear of arousing outrage and abhorrence could influence economic decisions. B) People can and often do reject offers that offend their sense of fairness even if doing so means taking a monetary loss. C) Some people are careful not to engage in economic behaviour that might offend and alienate others. D) Allocators can count on recipients to ignore all considerations except financial benefit. E) None of the above explains why recipients reject the offers. Answer: D Diff: 2 Type: MC Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Analytic Skills 23) Economists have used ________ and ________ in experiments designed to determine whether consumers care about fairness when they make decisions. A) Giffen goods; luxury goods B) the income effect; the substitution effect C) the ultimatum game; the dictator game D) network externalities; the endowment effect E) the dictator game; the endowment effect Answer: C Diff: 2 Type: MC Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 24) A network externality refers to a situation in which the usefulness of a product decreases with the number of consumers who use it. Answer: FALSE Diff: 1 Type: TF Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 25) Economists have shown that when the ultimatum game experiment is carried out, both allocators and recipients act as if fairness is important. Answer: TRUE Diff: 1 Type: TF Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

26) The iPod is a product without any significant network externalities. Answer: FALSE Diff: 1 Type: TF Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 27) Why might network externalities result in products that contain inferior technologies? Answer: Network externalities can create significant switching costs related to changing products. When a product becomes established, consumers may find it too costly to switch to a new product that contains a better technology. Diff: 2 Type: SA Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Analytic Skills 28) List three reasons why demand for a product will often increase if the product is endorsed by a celebrity. Answer: 1. Consumers may believe that the celebrity is particularly knowledgeable about the product. 2. Buying the product may make people feel closer to the celebrity. 3. Buying the product may make people feel fashionable. Diff: 2 Type: SA Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Analytic Skills 29) Professor Parallax chooses two students in his economics class, Jasmine and Cassandra, to participate in the ultimatum game. He chooses Jasmine to be the allocator and Cassandra to be the recipient. He gives Jasmine $50 and as the allocator, she gets to decide how to split the money with Cassandra. If Cassandra decides to accept the amount allocated to her by Jasmine, both students get to keep the money. If Cassandra decides to reject her allocation, neither student gets to keep the money. How much will each student end up with if each student acts as if fairness is the most important consideration? How much will each student end up with if only Cassandra acts as if fairness is the most important consideration? How much will each student end up with if neither student cares about fairness? Answer: If both students care about fairness, each will end up with $25. If only Cassandra, the recipient, cares about fairness, each student will end up with nothing since she would reject any split of the money other than $25 and $25. If neither student cares about fairness, Jasmine will give up as little as possible without leaving Cassandra with nothing. The split in this case will be $49.99 to Jasmine and $0.01 to Cassandra. Diff: 2 Type: SA Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Analytic Skills

30) In 2012 Bon Jovi announced its "Because We Can" tour would make 1,000 tickets available at the "fan friendly" price of 19.95 before service fees at all of their shows. The band has made tickets priced below $20 a feature of all their recent concerts. These tickets sold quickly indicating demand was larger than supply at the price of $19.95. Why might this pricing strategy not mean lower profits for the band? Answer: Tickets to Bon Jovi's concerts consistently sell at prices lower than tickets to concerts by other well-known rock bands. This means that the band earn lower profits in the short run but his actions ensure the loyalty of concert goers, and profits, in the long run. Diff: 2 Type: SA Topic: Business Implications of Fairness Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Analytic Skills 31) Traditionally, economists have considered culture, customs, and religion as A) very important influences on the choices consumers make. B) relatively unimportant factors in explaining the choices consumers make. C) important influences in explaining consumer choices in command economies but less important in market economies. D) subject to normative economic analysis rather than positive economic analysis. Answer: B Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking, Multicultural and Diversity 32) Which of the following statements describes economists' attitudes regarding the influence of social factors on the choices consumers make? A) Economists formerly believed they were very important but now they believe they are not important. B) Economists believe social factors affect consumer choice in markets for public goods but not in markets for private goods. C) Liberal economists believe social factors are very important; conservative economists do not believe social factors have any influence on consumers. D) Economists traditionally believed they were unimportant, but many economists now believe social factors are important. Answer: D Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

33) Economists Gary Becker and Kevin Murphy are associated with which of the following? A) They discovered the first example of a Giffen good. B) They have argued that social factors are not important in explaining the choices consumers make. C) Consumers appear to receive utility from consuming goods they believe are popular. D) They discovered that price changes have both income and substitution effects. Answer: C Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 34) Bars and night clubs are known to pay celebrities to be seen in their establishments, this is an example of ________ on decision making. A) the income effect B) a social influence C) the substitution effect D) a scientific influence E) a cultural influence Answer: B Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 35) Which of the following is not a reason why companies such as Reebok and Tim Hortons pay Sidney Crosby to endorse their products? A) Many consumers feel more fashionable if they use the same products that Sidney Crosby uses. B) Some consumers will buy a product endorsed by Sidney Crosby because they believe he is particularly knowledgeable about the product. C) Some consumers want to feel closer to a celebrity who endorses a product. D) Consumers general feel more satisfied using a product that a celebrity is endorsing. E) Some consumers believe that Sidney Crosby is more rational than the average consumer. Answer: E Diff: 2 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Do Firms Pay Connor McDavid to Endorse Their Products?

36) Why would CIBC pay Connor McDavid to endorse their products? A) CIBC believes it will make people feel positively toward the bank. B) CIBC believes better hockey players make Canada a better place to do business. C) CIBC is performing court ordered community service. D) CIBC thinks potential customers will turn to Connor McDavid for financial advice. E) CIBC thinks Connor McDavid can give financial advice to his fans as well as to his fellow players. Answer: A Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Do Firms Pay Connor McDavid to Endorse Their Products? 37) Which of the following refers to the increase in the usefulness of a product as the number of consumers who use it increases? A) positive externality B) network externality C) external marginal utility D) the impact of celebrity endorsements E) shortage effect Answer: B Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 38) Sidney Crosby endorses Tim Hortons and Reebok athletic wear. One reason Reebok pays Sidney Crosby for his endorsement is that consumers believe he is more knowledgeable about athletic wear than they are. Why would Tim Hortons pay Sidney Crosby to endorse its products? A) Many consumers believe Sidney Crosby is more knowledgeable about coffee and donuts than they are. B) More people watch hockey than any other sport. C) Some consumers believe that buying products endorsed by Sidney Crosby makes them appear to be more fashionable. D) Tim Hortons receives free publicity whenever Sidney Crosby scores in a hockey game. E) Tim Hortons believe that hockey fans will buy more coffee and donuts if they see Sidney Crosby consuming them. Answer: C Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Do Firms Pay Connor McDavid to Endorse Their Products?

39) Which of the following is used to explain why a consumer's willingness to buy a cell phone increases as the number of other people who own and use cell phones increases? A) network externalities B) market failure C) diminishing marginal utility D) the income effect of a price change E) substitution effect Answer: A Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 40) The order of the letters along the rows of computer keyboards could be changed to allow users to type faster, but this would inconvenience the vast majority of people who learned to type with the current keyboard layout. The costs of switching to a new layout make this change unlikely. This is an example of A) path dependency. B) how social influences overwhelm the substitution effect of a price change. C) how the elasticity of demand for typewriters has been affected by externalities. D) how consumers sometimes do not behave rationally. E) network externality. Answer: A Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 41) An advantage of Microsoft Windows is its compatibility with the widest range of hardware and software. The dominance of Windows is self-reinforcing: hardware and software manufacturers ensure that their products are compatible with Windows in order to have access to the large number of Windows users. Which principle best describes this scenario? A) endowment effects B) endorsement effects C) economies of scale D) network externalities E) path dependency Answer: D Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

42) Some economists have argued that path dependence and switching costs can lead to market failure. Which of the following is an example of this argument? A) Costly celebrity endorsements lead many consumers to buy a product even though it is more expensive or less effective than a product that is not endorsed by a celebrity. B) A consumer who won a lottery for a Super Bowl ticket refuses to sell it for $3,000, even though he would not have paid $3,000 for a ticket if he had not won the lottery. C) While playing the ultimatum game, an allocator decides to share $20 equally with a recipient rather than keep the $20 for herself. D) VHS video recorders became more popular with consumers than Sony Betamax recorders, even though the Betamax recorders embodied a superior technology. E) All of the above. Answer: D Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 43) All but one of the following have been suggested by some economists as possible consequences of path dependency and switching costs. Which of the following is not a possible consequence of path dependency and switching costs? A) Consumers may get locked into using products with inferior technology. B) market failure C) diseconomies of scale D) Government intervention may be necessary in affected markets in order to improve economic efficiency. E) economies of scale Answer: C Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 44) Some economists have suggested that network externalities result in consumers being locked into the use of products with inferior technologies. Economists Stan Leibowitz and Stephen Margolis have studied cases that have been cited as examples of this and found A) there is no convincing evidence that the alternative technologies were superior. B) consumers sometimes do become locked into the use of products with inferior technologies. C) that in all of these cases, network externalities resulted in market failure. D) that consumers use products with inferior technologies when their prices are lower than products with superior technologies. E) consumers have their own preferences and tastes to choose one product over another. Answer: A Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

45) Maurice Allais, Reinhard Selten, and Vernon Smith all were awarded the Nobel Prize in Economics, in part because A) of their work with experimental economics. B) they discovered the first example of a Giffen good. C) of their work on the substitution and income effects of price changes. D) they proved that external economies would lead to market failure. E) they proved consumers are rational. Answer: A Diff: 2 Type: MC Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 46) ________ is an experiment that tests the significance of fairness in consumer decision making. A) The fairness challenge B) The consumer choice paradigm C) The ultimatum game D) The Giffen paradox E) The path dependency Answer: C Diff: 2 Type: MC Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 47) The quantity demanded of tickets to the Super Bowl is always greater than the than the quantity supplied. Which of the following in the best explanation why the National Football League does not raise the price of tickets to the level where the quantity demanded equals the quantity supplied? A) Raising the price would reduce the demand for tickets; there would then be a surplus and the game would not sell out. B) The cost of raising the price and printing new tickets would exceed the revenue the NFL would receive from higher ticket prices. C) The demand for Super Bowl tickets is elastic; raising the price would reduce total revenue. D) The NFL is concerned that raising ticket prices would be considered unfair. E) All of the above. Answer: D Diff: 2 Type: MC Topic: Business Implications of Fairness Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Analytic Skills

48) Many airlines have not reduced or eliminated fuel surcharges despite the price of oil dropping. A logical reason for this is that the decline in fuel prices ________ the supply of airline tickets while at the same time the demand for airline tickets ________, so airline ticket prices still increased. A) decreased; increased B) decreased; decreased C) increased; increased D) increased; decreased Answer: C Diff: 2 Type: MC Topic: Business Implications of Fairness Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Analytic Skills Special Feature: Chapter Opener: Environmental Surcharge? 49) During its initial run in New York, the musical Hamilton regularly sold out all available tickets. The theater could have raised ticket prices and still sold all available tickets but chose not to do so. The best explanation for this decision is that A) theater owners were unaware of the elasticity of demand for musicals. B) theater owners did not want to raise their tickets on weekends, when demand was high, and then lower prices during the week, when demand was lower. C) firms sometimes give up profits in the short run to keep their customers happy and increase their profits in the long run. D) theater owners are not motivated to maximize their profits. E) theater owners care for their customers more than their own profits. Answer: C Diff: 1 Type: MC Topic: Business Implications of Fairness Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 50) All but one of the following economists were awarded a Nobel Prize for their contributions to experimental economics and their explorations of the influence fairness has on consumer decision making. Which economist did not receive a Nobel Prize for this work? A) Vernon Smith B) Alan Krueger C) Daniel Kahneman D) Maurice Allais E) All of the above received the Noble Prize for this work. Answer: B Diff: 1 Type: MC Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

51) In an experiment that employed the dictator game, economists at Cornell University gave student "allocators" the option of dividing $20 in only two ways (a) $18 for themselves and $2 to another student, or (b) $10 for themselves and $10 to another student. What was one result from this experiment? A) Most allocators chose to give themselves $18 and $2 to the other students. B) Most of the students who were not allocators did not like having someone else make decisions for them. C) A majority of the female allocators chose option (a); a majority of the male allocators chose option (b). D) Most of the allocators apparently valued acting fairly. E) All male allocators chose option (a) all female allocators chose option (b). Answer: D Diff: 2 Type: MC Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 52) Economists have used the ultimatum game and the dictator game in experiments designed to determine A) whether consumers care about externalities when they make decisions. B) whether consumers believe it is fair for producers to raise the price of a product for which there is excess demand. C) whether consumers understand the difference between implicit costs and explicit costs. D) whether consumers understand the rule of equal marginal utility per dollar spent. E) whether consumers care about fairness when they make decisions. Answer: E Diff: 2 Type: MC Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 53) Many people leave their servers tips in restaurants, even when they are not likely to visit the restaurant again. This is evidence that A) people would rather pay for good service at an inexpensive restaurant than pay higher prices and receive poor service at an expensive restaurant. B) people enjoy eating at restaurants more than eating at home. C) people treat others fairly even if doing so makes them worse off financially. D) there has been an improvement in the service people receive in restaurants over time, partly because the restaurant industry has become more competitive. E) people like to show generosity outside the house even if they don't have enough money. Answer: C Diff: 1 Type: MC Topic: Social Influences on Decision Making Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

54) In their surveys of consumers, Daniel Kahneman, Jack Knetsch, and Richard Thaler found that A) most people considered it unfair for firms to raise their prices because of an increase in their costs, but fair to raise their prices after an increase in demand. B) most people considered any increase in price to be unfair, as it led to an increase in profits. C) most people believed that people with low incomes were hurt most by increases in prices. D) most people considered an increase in price by firms following an increase in their costs to be fair, but believed it was unfair for firms to raise their prices because of an increase in demand. E) nobody ever likes the rise in prices, consumers are always looking forward to a fall in prices. Answer: D Diff: 2 Type: MC Topic: Business Implications of Fairness Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking, Ethical Reasoning 55) In a survey of consumers, Daniel Kahneman, Jack Knetsch, and Richard Thaler asked consumers their opinion of a hardware store's decision to A) go out of business because a larger hardware store opened in the same city; 82 percent of those surveyed believed it was unfair for the larger store to compete with the smaller store. B) raise the price of snow shovels the day following a snowstorm; 82 percent of those surveyed believed this was unfair. C) sell tickets to sporting and cultural events at prices higher than prices paid at the ticket windows for the same events; 82 percent of those surveyed believed this was unfair. D) remain in business even though the store was not making an economic profit; 82 percent of those surveyed believed it would be unfair for the store to go out of business if there were no other hardware stores in the same area. E) pay a celebrity to endorse their products; 82 percent of those surveyed believed it will be unfair because this way they will raise the price to pay the celebrity. Answer: B Diff: 2 Type: MC Topic: Business Implications of Fairness Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking, Ethical Reasoning 56) The ultimatum game and the dictator game are used in economic experiments to test whether fairness is an important influence on consumer decision making. Answer: TRUE Diff: 1 Type: TF Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 57) Results of the ultimatum game indicate that most people value fairness enough that they will refuse to participate in a transaction they consider unfair, even if they are worse off financially as a result. Answer: TRUE Diff: 1 Type: TF Topic: Experimental Economics Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 72 Copyright © 2024 Pearson Canada Inc.

58) A network externality causes firms to sacrifice profits in the short run in order to satisfy their customers and increase their long-run profits. Answer: FALSE Diff: 1 Type: TF Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 59) Explain the concept of network externalities. Answer: A network externality is a situation in which the usefulness of a product increases with the number of consumers who use it. Diff: 1 Type: SA Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 60) Studies on consumer behaviour have found that most people value fairness enough that they will refuse to participate in transactions they consider unfair, even if they are worse off as a result. How does this affect a firm's decision to raise prices in the event of a temporary increase in demand? Answer: If the firm chooses to raise prices, consumers will consider this price increase unfair and might choose to buy elsewhere. This loss of consumer goodwill could lead to lower profits in the long run. It is rational for firms to forego raising prices in the short run to keep customers happy. This can lead to increased profits in the long run. Diff: 2 Type: SA Topic: Business Implications of Fairness Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking 61) Economists have noted that businesses of a certain type tend to congregate geographically, attracting workers with skills in those fields. This, in turn, lures more firms seeking employees with those skills. Some examples include commercial banking, software development, and the automobile industry. What mechanism is at work here? Briefly explain how the mechanism works to the advantage of employers and employees. Answer: The mechanism at work is a network externality. Employers will have access to a larger pool of skilled employees. At the same time, the efficiency of the job search for employees will be enhanced. In addition, industries are likely to draw ancillary services, which could yield further efficiency gains for producers. Diff: 2 Type: SA Topic: Network Externalities Learning Outcome: 8.3 Explain how social influences can affect consumption choices AACSB: Reflective Thinking

8.4

Describe the behavioural economics approach to understanding decision making

1) What is behavioural economics? A) the study of how people make wealth-maximizing decisions B) the study of how people behave in the face of scarcity C) the study of situations in which people act in ways that are not economically rational D) the study of how people make decisions at the margin E) the study of how people make rational decisions Answer: C Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 2) The observation that people tend to value something more highly when they own it than when they don't is called the A) wealth effect. B) endowment effect. C) path dependent effect. D) endorsement effect. E) substitution effect. Answer: B Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 3) What is the endowment effect? A) the phenomenon that economic agents are endowed with different qualities and abilities so that trade among individuals increase efficiency B) the tendency for economic agents with abundant resources to consume a proportionately greater quantity of goods and services C) the tendency of people to be unwilling to sell something they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it D) the tendency of firms to use celebrities endowed with good looks to promote their products E) the tendency that different people are endowed with different amount of resources Answer: C Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking

4) The endowment effect suggests that people A) have a strong attachment to their entitlement, regardless of whether they paid to acquire them. B) have a strong sense of fairness. C) are concerned about the welfare of others. D) act in ways to distort market prices. E) spend all the income they have inherited on goods and services they like. Answer: A Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 5) If you exhibit the endowment effect as a decision maker, then you are A) deciding on the basis of sunk costs. B) buying something you can't really afford because you expect to save in the future. C) a rational decision maker. D) consuming based on celebrity endorsements. E) ignoring opportunity costs. Answer: E Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking Special Feature: Economics in Your Life: How Should You Price Tickets for a Hit Show? 6) Which of the following demonstrates the endowment effect? A) Whelan inherits a cottage in Cape Breton from his grandfather and is unwilling to sell it for sentimental reasons. B) Benedict Cumberbatch commands a premium in the movie industry because he is endowed with dashing looks. C) Isabella was not willing to part with her "Benedict Cumberbatch" poster although she was offered $100 for it, a sum greater than what it costs to purchase another such poster. D) If you received a good as a gift, you are less likely to attach a monetary value to the good. E) All of the above statements demonstrate the endowment effect. Answer: C Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking Special Feature: Economics in Your Life: How Should You Price Tickets for a Hit Show?

7) The average price of gasoline in your neighbourhood is $1.30 per litre. Your neighbour, Diana tells you that you can "save a lot" by frequenting a gas station 30 kilometers outside your neighbourhood where the price of gasoline is $1.15 per litre. However, she cautions you that there are usually long lines at that station. Is her suggestion beneficial to you? A) Yes, since gasoline is a necessity for car owners, the total cost savings would be relatively substantial. B) No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station. C) Yes, the lower price of gasoline at the rival station increases my purchasing power and enables me to consume more of other goods. D) No, my friend is misled; clearly, the lower priced gasoline must be of inferior quality and could damage vehicles. E) Yes, she is right because I use a lot of gasoline and it is important for me to find an affordable place. Answer: B Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills 8) Consider the following hypothetical scenarios: Scenario A: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45. The sales attendant at the store tells you that the pair of jeans you wish to buy is on sale for $160 at another store, located about a 20-minute drive away. Scenario B: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45. The sales attendant at the store tells you that the t-shirt you wish to buy is on sale for $30 at another store, located about a 20-minute drive away. Based on standard economic theory, under which scenario would you make the 20-minute trip to the other store? A) Scenario A because the pair of jeans is a very expensive item and $15 saving is quite substantial B) Scenario B because a $15 saving amounts to a substantial discount (about 33 percent) C) in either scenario if I think a $15 savings is worth the 20-minute trip D) in none of these scenarios if I think the $15 saving is not worth the 20-minute trip E) C and D are correct answers. Answer: E Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills

9) Psychologists Daniel Kahneman and Amos Tversky conducted the following experiments by asking a sample of people the following questions: Scenario A: "Imagine that you have decided to see a play and paid the admission price of $10 per ticket. As you enter the theater you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay $10 for another ticket?" Scenario B: "Imagine that you have decided to see a play where admission is $10 per ticket. As you enter the theater you discover that you have lost a $10 bill. Would you still pay $10 for a ticket for the play?" As long as additional tickets are available, there's no meaningful difference between losing $10 in cash before buying a ticket, and losing the $10 ticket after buying it. In both cases, you are out $10. Yet, far more subjects (88 percent) in Scenario B say they would pay $10 for another ticket and see the play while in Scenario A, only 46 percent of the subjects say they would be willing to spend another $10 to see the play. Which of the following is the best explanation for the results of the experiment? A) The endowment effect applies in Scenario A since people already own the ticket and therefore it is more valuable but this is not so in Scenario B. B) In Scenario B, people had not anticipated spending an additional $10 so in effect the price of the ticket is $20 and not $10 whereas in Scenario A, the price of the ticket is still $10. C) In Scenario A, people make an immediate connection between the lost ticket and the play and feel poorer by incorrectly assigning a greater value to the value of the ticket whereas in Scenario B, they do not make the connection between the lost $10 bill and the play. D) The net benefit derived from watching the play is lower in Scenario A, where the effective cost is $20, compared to the net benefit in Scenario B. E) All of the above are equally good explanations. Answer: C Diff: 3 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills 10) Most film processing companies have a policy of printing every picture on a roll of film and allowing customers to request a refund for pictures that were not clearly developed. The companies do this knowing that most customers do not ask for refunds. This is an example of consumers A) failing to ignore sunk costs. B) being overly optimistic about their future behaviour. C) not taking nonmonetary opportunity costs into account. D) not making themselves aware of the policy regarding refunds. E) not taking monetary benefits into account when making decisions. Answer: C Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills

11) Sunk costs A) are costs associated with repairing something you already own. B) are important for optimal decision making. C) are costs that have already been paid and cannot be recaptured in any significant way. D) are costs that firms sink into marketing. E) are costs that everyone has to pay to start a new venture. Answer: C Diff: 1 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 12) Which of the following is a common mistake consumers commit when they make decisions? A) They take into account nonmonetary opportunity costs but ignore monetary costs. B) They are overly pessimistic about their future behaviour. C) They fail to ignore sunk costs. D) They sometimes value fairness too much. E) They do not save anything for their future. Answer: C Diff: 1 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 13) Which of the following is not a common mistake made by consumers? A) the failure to take into account the implicit costs of an activity B) the failure to ignore sunk costs C) being overly optimistic about their future behaviour D) being overly pessimistic about their future behaviour E) being extravagant in their spendings Answer: D Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking

14) The pair of handmade green leather Italian shoes Michael ordered online finally arrives after waiting for 2 months. After wearing them for less than a week he discovered that the shoes are very uncomfortable. Michael went back to wearing an old pair with his green suits and stashed the new pair in the back of his closet. When asked by his boss why he doesn't simply give away the new pair, he said: "But I paid so much for them." Michael's behaviour A) is rational: he should not discard a valuable item. B) ignores the fact that the purchase price is now a sunk cost and has no bearing on whether he should give them away or not. C) supports the endowment effect, which states that ownership of an item makes it more valuable. D) is rational because the more you pay for an item the more valuable it is. E) is rational because expensive goods are status symbol. Answer: B Diff: 2 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills 15) Standard economic theory asserts that sunk costs are irrelevant in making economic decisions, yet studies conducted by behavioural economists reveal that sunk costs often affect economic decisions. Which of the following could explain this observation? A) People measure the value of a good in terms of its purchase price. B) Even though sunk costs cannot be recovered, it has been incurred and therefore should be treated as part of the product's value. C) If consumers maximize their utility, it makes sense to consider the full purchase price of a product in their consumption decisions. D) Sunk costs have a higher opportunity cost than costs that can be recovered. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills

16) Many celebrities are paid to endorse products, but celebrity endorsements do come with risks. Once a firm is associated with a celebrity, consumers associate the product with the celebrity. This association can turn negative if the celebrity gets arrested or becomes associated with an embarrassing scandal. Should a company whose celebrity endorser was just arrested be guided by the amount it has already poured into making ads featuring the celebrity in its decision about whether or not to cancel the ad campaign? A) Yes, even in the case of negative publicity, celebrity endorsements really do have a significant effect on consumer choice so the amount already spent to purchase this endorsement is relevant. B) Yes, because the firm has spent a lot of money on the celebrity. C) Yes, a firm must take in all costs in deciding whether or not to yank the campaign. If the revenue loss (due to the negative publicity) is small compared to the cost of the campaign, then it makes sense to continue the campaign. D) No, although the amount spent to launch the campaign cannot be recovered, the firm can still reap some benefit by taking out another ad in support of the celebrity. E) No, the amount spent to launch the campaign is a sunk cost; the firm's primary concern at this point is the effect of the negative publicity on the product's image. Answer: E Diff: 2 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills Special Feature: Apply the Concept: Sunk Costs and Sports Teams 17) Arnold Kim began blogging about Apple products during his fourth year of medical school. Kim's Website, MacRumors.com, became so successful that he decided to give up his medical career and work full time on his Website, despite the nearly $200,000 he had invested in his education. In making his decision, Kim decided to ignore the money and time he spent on his education. Economists would say that Kim made a A) rational decision to ignore these sunk costs. B) poor decision since he had already invested his time and money on his medical career. C) poor decision since doctors are in greater demand than bloggers. D) hasty decision by not waiting to recoup his financial investment before giving up his medical career. E) bad decision to quit the medical profession. Answer: A Diff: 2 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking Special Feature: Apply the Concept: Sunk Costs and Sports Teams

18) Mandatory pension plans sometimes result in workers total savings for retirement actually being lower than without a pension plan. What does this suggest about how people save for their retirement? A) Planning for one's retirement is complex and emotional and most people deliberately avoid confronting these financial decisions. B) People are overly pessimistic about their future financial prospects; many fear that the Canada Pension Plan may be non-existent by the time they retire. C) Many people need to be "tricked" into saving because they are unrealistic about their future behaviour. They spend money today that they should be saving for retirement, partly because they overestimate their ability to save in the future. D) Most people are not capable making good decisions about their future. E) Most people do not like to save for future because they like to live in the present. Answer: C Diff: 3 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills Special Feature: Solved Problem: How Do You Get People to Save More of Their Income? 19) A fair number of people buy expensive gym memberships to commit themselves to exercising. Yet, data from health clubs show that many do not follow through with their intentions and end up losing money on their membership contracts. Which of the following could explain this behaviour? A) "People have a tendency to pursue immediate gratification in a way that their 'long-run selves' do not appreciate." (quoted from Ted O'Donoghue and Matthew Rabin, "Choice and Procrastination," Quarterly Journal of Economics, February 2001, pp. 125-26.) B) People tend to be overly optimistic about their future behaviour so much so that after making an expensive investment in the membership, they overate the dividends they expect to reap. C) People fail to ignore the sunk cost of a gym membership when making the purchase. D) People realize after the fact that they have made a mistake but unfortunately memberships are often not transferable and not refundable. E) All of the above explain this behaviour. Answer: B Diff: 3 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills Special Feature: Apply the Concept: Why Don't Students Study More? 20) A common mistake made by consumers is the failure to take into account the sunk costs of their actions. Answer: TRUE Diff: 1 Type: TF Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking

21) The endowment effect is the tendency of people to be unwilling to sell a good they already own even if they are offered a price greater than they would be willing to pay to buy the good if they did not already own it. Answer: TRUE Diff: 1 Type: TF Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 22) Behavioural economics is the study of situations in which people make rational choices. Answer: FALSE Diff: 1 Type: TF Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 23) Molly received an autographed poster of Nazem Kadri for her 21st birthday. Her friend Helga offered her $50 for the poster, but Molly refused to sell the poster even though she knows she would never pay that much to replace it if it was ever damaged or destroyed. Explain this inconsistency in Molly's behaviour. Answer: The inconsistency comes from Molly's failure to take into account nonmonetary opportunity costs. By keeping the poster instead of selling it, Molly incurs an opportunity cost of $50, so there is a $50 cost involved in keeping the poster even though she did not pay $50 for the poster. Behavioural economists believe this inconsistency is caused by the endowment effect, which is the tendency of people to be unwilling to sell something they already own even if they are offered a price greater than they would be willing to pay for the item if they did not already own it. Diff: 2 Type: ES Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills 24) A construction project in Member of Parliament Slick's district is unfinished. Slick has asked that the next budget include funds to complete the project, despite a report by an independent agency that the project is a waste of taxpayer money. Slick's project is a bridge that crosses a river between two cities in his riding. The press has criticized Slick and dubbed the project "a bridge too far" since another bridge, located closer to the same two cities Slick's bridge will connect, already exists and can accommodate all traffic between the two cities. Slick argues that if the bridge project is not completed, the $50 million already spent will have been wasted. Is Slick's argument economically rational? Explain your answer. Answer: Slick's argument is not rational. The $50 million that has been spent on bridge construction is a sunk cost that should be ignored when deciding whether to spend additional tax revenue on the bridge. Slick should argue that the additional, or marginal, cost of finishing the project is less than the additional benefits that would be provided by the second bridge. If the estimated additional benefits are less than the additional cost the bridge should not be finished. Diff: 3 Type: ES Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills

25) A new area of economics studies situations in which people appear to be making choices that do not appear to be economically rational. This area is called A) welfare economics. B) irrational economics. C) social economics. D) new wave economics. E) behavioural economics. Answer: E Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 26) Behavioural economics refers to the study of situations where consumers and firms A) appear to make choices that are appropriate to reach their goals. B) appear to value fairness when they make choices. C) obey the laws of demand and supply. D) always make rational choices. E) do not appear to be making choices that are economically rational. Answer: E Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 27) One reason that consumers and businesses might not act rationally is because A) it is difficult to obtain enough information about the elasticities of demand and supply. B) they may not realize their actions are inconsistent with their goals. C) consumer tastes change constantly. D) they do not always value fairness when they make choices. E) they prefer to do what they see other people doing even if they do not have enough resources. Answer: B Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 28) The highest-valued alternative that must be given up to engage in an activity is the definition of A) utility. B) implicit cost. C) opportunity cost. D) economic sacrifice. E) external cost. Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 83 Copyright © 2024 Pearson Canada Inc.

29) Which of the following is a common mistake made by consumers? A) taking into account the implicit costs of an activity B) ignoring sunk costs C) being overly optimistic about their future behaviour D) being overly pessimistic about their future behaviour E) none of the above Answer: C Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 30) Alan Krueger conducted a survey of NFL fans who had won the right to purchase tickets to the 2011 Super Bowl. He found that (a) 94 percent of those surveyed would not have paid $1,500 for their tickets, and (b) 92 percent of those surveyed would not have sold their tickets for $1,500. These results are evidence of A) the high value fans place on watching the Super Bowl in person, rather than on television. B) the failure of consumers to take into account nonmonetary opportunity costs. C) the failure of consumers to ignore sunk costs. D) consumers being overly optimistic about their future behaviour. E) consumers being overly pessimistic about their behaviour. Answer: B Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 31) Alan Krueger conducted a survey of fans who won the right to purchase tickets to the 2011 Super Bowl. Krueger found that (a) 94 percent of those surveyed would not have paid $1,500 for their tickets, and (b) 92 percent of those surveyed would not have sold their tickets for $1,500. These results are an example of A) the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay if they did not already own it. B) the tendency for consumers to account for monetary costs but to ignore sunk costs. C) consumers placing a high value on a product because it makes them appear to be fashionable. D) the law of demand. E) a surplus in the market. Answer: A Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking

32) Alan Krueger conducted a survey of fans who had won the opportunity to purchase tickets to the 2011 Super Bowl. Krueger found that (a) 94 percent of those surveyed would not have paid $1,500 for their tickets, and (b) 92 percent of those surveyed would not have sold their tickets for $1,500. These results are an example of A) rational consumer behaviour. B) the endowment effect. C) the fallacy of composition. D) the failure to ignore sunk costs. E) ignoring the opportunity cost. Answer: B Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 33) What is the endowment effect? A) the tendency of people to be unwilling to sell something they already own even if they are offered a price that is greater than what they would be willing to pay to buy the good if they did not already own it B) the tendency of people to be unwilling to sell something they already own because of its sentimental value C) the tendency of people to overstate the value of a good they already own even though similar items can be purchased at a lower price D) the sum total of assets that a person has acquired over the years E) the total wealth that a person has inherited Answer: A Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 34) Costs that have already been incurred, and which cannot be recovered, are known as A) short-run fixed costs. B) implicit costs. C) unavoidable costs. D) sunk costs. E) opportunity costs. Answer: D Diff: 1 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking

35) A sunk cost is A) another term that means opportunity cost. B) a term used to describe the cost of capital that the owners of a firm sink into their business. C) the highest valued alternative that must be given up to engage in an activity. D) a cost that has already been paid and cannot be recovered. E) a negative externality. Answer: D Diff: 1 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 36) Suppose you pre-ordered a non-refundable ticket to Fan Expo Canada. On the weekend of the convention you decide that you would rather not go. According to economists, what is the rational thing to do? A) Since the cost of the ticket is a sunk cost, it should not influence your decision. Your decision should be based solely on whether you want to go to the expo or not. B) You should not waste resources. Since you have paid for the ticket, you should go to the expo. C) You should go to the expo to minimize your losses. D) You should go to the expo to maximize your utility. E) You should make your decision to attend or not to attend before buying the ticket. Now you can optimize only by attending the Expo. Answer: A Diff: 1 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 37) Harvey Miller owns a baseball that was hit for a home run by Ted Williams. Harvey, a long-time Boston Red Sox fan, recently refused to sell his baseball for $75,000, even though he would not have paid someone more than $10,000 for the baseball if he did not already own it. Harvey explained his decision not to sell the baseball by noting that: "Ted Williams was my hero. This baseball has a great deal of sentimental value for me." Which of the following can explain Harvey's behaviour? A) the difference between implicit and explicit costs B) the scarcity of home run baseballs hit by Ted Williams C) the endowment effect D) how social influences can affect consumption choices E) the network externality Answer: C Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking

38) Arnold Kim began blogging about Apple products during his fourth year of medical school. Kim's website, MacRumors.com, became so successful that he decided to give up his medical career and work full time on his website, despite the nearly $200,000 he had invested in his education. In making his decision, the $200,000 he spent on his education A) should be ignored since it represents a sunk cost. B) should be considered since it is money he has spent and needs to recoup. C) should be ignored only if Kim can earn more than $200,000 by running his website. D) should be considered since it is money he could have used to invest in his website. E) is irrelevant. Answer: A Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking Special Feature: Apply the Concept: Sunk Costs and Sports Teams 39) Health clubs and gyms typically experience an increase in one-year memberships in January, but many new customers cancel their memberships before the end of the year. Which of the following is the best explanation for this behaviour? A) Some health club members suffer minor injuries that prevent them from working out. B) Some people are overly optimistic about their future behaviour. C) Some people fail to treat their membership fees as sunk costs. D) Some members receive utility from activities they believe are popular. E) None of the above. Answer: B Diff: 3 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 40) Studies have shown that students who earn high grades in college will have earned much more over a 40 year period than students who receive low grades. Despite this, surveys show that many students fail to study enough hours outside of the classroom to earn high grades. Which of the following is the best explanation for this? A) Some students can earn high grades by studying fewer hours than other students. B) The surveys used to make this observation were based on a non-random sample of students. C) Because of new technology developed in the 1990s, students can make more efficient use of their study time today than students who attended college before the 1990s. D) Students do not value the utility they receive from activities other than studying. E) Students overvalue the utility they receive from activities other than studying. Answer: D Diff: 1 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Don't Students Study More?

41) Which of the following is an example of consumers being unrealistic about their future behaviour? A) People forgo saving for retirement because they plan to save in the future when they expect to earn higher salaries. B) College students who can afford to attend a private university attend a public university in order to spend less on tuition. C) Parents contribute to a tuition fund for their children soon after they are born. D) A college student works part-time to earn income to pay for a used car, even though she is a full-time student. E) All of the above. Answer: A Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking Special Feature: Solved Problem: How Do You Get People to Save More of Their Income? 42) Wilbur Rickhiser, a financial advisor, recently told one of his clients: "The biggest mistake you can make is to hold onto a stock for too long in order to avoid a loss. Let's say you bought a stock for $50 per share but six months later the price fell to $40 after a poor earnings report. Many of my clients in this situation will hold the stock, hoping the price will later rise above $50. In most cases like this, the price does not rise and may even fall. You must know when to cut your losses." Which of the following is the best explanation for Rickhiser's advice? A) People sometimes buy stocks because other people are buying them or they want to appear to be fashionable. B) People sometimes make mistakes when they buy stocks because of the endowment effect. C) People sometimes make mistakes when they buy stocks or when they buy goods and services: they ignore the monetary opportunity costs of their choices. D) People often fail to ignore the sunk costs of their decisions. The cost of the stock bought at $50 per share is a sunk cost. E) People always take the sunk costs very seriously and make decisions on the basis of these. Answer: D Diff: 3 Type: MC Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking

43) Suppose Adam Einberg pays $100 for a ticket to a new Mirvish production of Cats, and $100 was the maximum price he was willing to pay. On the day of the performance of the play, Adam refuses to sell the ticket for $150. How would behavioural economists explain Adam's refusal to sell his ticket? A) Adam's tastes had changed from the time he bought the ticket to the time of the performance of the play. B) When Adam bought the ticket he was being unrealistic about his future behaviour. C) The endowment effect explains Adam's actions. People like Adam seem to value things that they have more than the things they do not have. D) Adam's income probably increased between the time he bought the ticket and the day of the play's performance. E) Adam is being irrational. Answer: C Diff: 2 Type: MC Topic: Consumer Behaviour Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 44) Assume that you had a ticket for a basketball playoff game that you bought for $50, the maximum price you were willing to pay. If a friend of yours offers to buy the ticket for $100 but you decide not to sell it, how can your decision be explained? A) You expect to receive greater utility from attending the playoff game than you received from buying the ticket. B) by the endowment effect C) by the law of diminishing marginal utility D) The income effect from the increase in the price of the ticket from $50 to $100 was greater than the substitution effect. E) by network externality Answer: B Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking Special Feature: Economics in Your Life: How Should You Price Tickets for a Hit Show? 45) Anchoring A) explains how if a person is uncertain about the value of a good, relate it to some other know value even if that value is irrelevant. B) explains how people form expectations. C) describes whether the price of a good is high or low. D) has nothing to do with consumers' decisions. E) is a term used in psychology, has nothing to do with consumers' decisions to purchase goods or services. Answer: A Diff: 2 Type: MC Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Communication

46) A common mistake made by consumers is the failure to take into account the monetary costs of their actions. Answer: FALSE Diff: 1 Type: TF Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 47) One reason college students do not study enough to get high grades is that they are unrealistic about their future behaviour. Answer: TRUE Diff: 1 Type: TF Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Don't Students Study More? 48) A sunk cost is a cost that has already been paid and cannot be recovered. Answer: TRUE Diff: 1 Type: TF Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 49) Explain the endowment effect. Answer: The endowment effect refers to the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they did not already own it. Diff: 2 Type: ES Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 50) Why do many film processing companies have a policy of printing every picture on a roll of film or a memory card, even if the picture is very fuzzy and customers are allowed to ask for refunds on any pictures they do not like? Answer: The processing companies are taking advantage of the tendency of consumers to ignore nonmonetary costs. They are relying on the fact that passing up a refund once the picture has already been paid for is a nonmonetary opportunity cost rather than a direct monetary cost, and as a rule, customers rarely ask for refunds. Diff: 2 Type: ES Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking

51) Behavioural economists examine choices that consumers make that are not economically rational. Economists generally assume that people are rational; that is, they weigh the benefits and costs of an action and choose an action only if the benefits outweigh the costs. Why do consumers not act rationally when the result is that they make themselves worse off? Answer: Most people who do not act rationally do not realize that their actions are inconsistent with their goals. Another way to explain this is that they do not weigh the benefits and costs of their decisions correctly. Three mistakes are commonly made. First, while people usually account for the monetary costs of their choices, they often ignore the nonmonetary opportunity costs. Monetary costs are easier to recognize because they call for payments of money, but nonmonetary opportunity costs do not. Second, people fail to ignore sunk costs. Although people may regret spending money for an activity, if the money cannot be recovered it should not factor into making current or future decisions. Finally, people often overvalue the benefit or utility they receive from current choices (for example, smoking) and undervalue the utility they expect to receive in the future (for example, not contracting lung cancer). Diff: 3 Type: ES Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 52) Some online penny auctions charge a fee, such as $1, for every bid placed. Why should these costs of $1 per bid be considered sunk costs? Would it be smart for someone who has "already invested $5 in bidding costs" to keep bidding to "protect his or her sunk investments"? Why or why not? Answer: The $1 charge per bid should be considered a sunk cost because this is a cost that has already been paid and cannot be recovered. Even if a person has the winning bid for an auction, each bid he or she placed will cost an extra $1 on top of the winning bid, so whether a person wins or loses, all bids must be paid for. Since sunk costs cannot be recovered, someone who has "invested" $5 in bidding costs would not be smart to keep bidding to protect this investment. Diff: 2 Type: SA Topic: Sunk Cost Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Reflective Thinking 53) Behavioural economists argue that consumers usually do not make optimal consumption choices in the sense of equating the marginal utilities of all the goods and services purchased. Why do economists believe that? Give an example of such a decision on the part of consumers. Answer: Economists are of the view that people often make decisions on the basis of limited information only and without the time or capacity to calculate their optimal choices. As a result, they often use the rules of thumb to make decisions and those are often not optimal. For example, once a consumers decide to shop continuously at the particular supermarket considering it has lowest prices without continually checking whether the lowest price assumption is correct. If a new supermarket opens, at least for a period, they may continue shopping at the old supermarket even though doing so is no longer optimal. Diff: 2 Type: SA Topic: Behavioural Economics Learning Outcome: 8.4 Describe the behavioural economics approach to understanding decision making AACSB: Analytic Skills

Microeconomics, 4Ce (Hubbard) Chapter 9 Technology, Production, and Costs 9.1

Define technology and give examples of technological change

1) A firm has successfully adopted a positive technological change when A) it can produce more output using the same inputs. B) it produces less pollution in its production process. C) it can pay its workers less yet increase its output. D) it sees an increase in worker productivity. E) it can do more trainings for other firms. Answer: A Diff: 2 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 2) Which of the following is not a source of technological advancement for a producer? A) better trained workers B) more efficient physical capital C) higher skill level of managers D) outsourcing some aspect of production E) purchasing faster computers Answer: D Diff: 2 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 3) Which of the following is an example of market "production," as used by economists? A) Garvey takes out a low-cost government loan to start his pet-sitting business. B) Heidi makes a pizza for her family's dinner. C) Katrina works as a cashier at the local produce stand. D) The theatre and film students in a Fine Arts program stages a play at the local theatre. E) Shaine works as a teacher at a community college. Answer: D Diff: 1 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking

4) A firm's cost of production is determined by all of the following except A) the technology used to produce its output. B) the productivity of its workers. C) the cost of raw material used in production. D) the amount of corporate taxes it must pay on its profit. E) All of the above are a firm's cost of production. Answer: D Diff: 2 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 5) A firm increased its production and sales because the firm's manager rearranged the layout of his factory floor. This is an example of A) investment in human capital. B) economies of scale. C) positive technological change. D) inspired management. E) interior designing. Answer: C Diff: 1 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 6) The difference between technology and technological change is that A) technology refers to the processes used by a firm to transform inputs into output while technological change is a change in a firm's ability to produce a given level of output with a given quantity of inputs. B) technology is carried out by firms producing physical goods but technological change is an intellectual exercise into seeking ways to improve production. C) technology is product-centered, that is, developing new products with our limited resources while technological change is process-centered in that it focuses on developing new production techniques. D) technology involves the use of capital equipment while technological change requires the use of brain power. E) Both are same. Answer: A Diff: 2 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking

7) Which of the following is an example of positive technological change? A) A firm offers workers a higher wage to work on weekends and at night. As a result, the firm is able to increase its weekly production of surf boards. B) A firm buys an additional machine that it uses to make surf boards. As a result, the firm is able to increase its weekly production of surf boards. C) A firm conducts a new advertising campaign. As a result, the demand for the firm's surf boards increases. D) A firm's workers participate in a training program designed to increase the number of surf boards they can produce per day. E) All of the above. Answer: D Diff: 2 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 8) Suppose a chain of grocery stores reorganized its system of supplying its stores with dairy products. This led to a sharp reduction in the number of trucks that the company had to use and increased the amount of fresh dairy products on store shelves. Which of the following statements best describes the grocery stores' actions? A) The change implemented is not an example of technological change because it did not require the use of new machinery of equipment. B) Technological change refers only to the introduction of new products or improvements to existing product. As such, the scenario described in the question is not technological change. C) The firm is able to produce more output (increase its sales) using fewer inputs (less trucks). Therefore, the chain of grocery stores has implemented a positive technological change. D) The scenario described is an example of management efficiency and not technological change. Essentially, the chain changes its way of operating its business. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Analytic Skills

9) A simple rearrangement of workplace of different departments within a software company, Segment.com, improved the output without hiring new workers or purchasing new computers as it allowed engineers to work in a more focused environment without interruption. This reorganization of workplace is an example of A) first-in-first-out. B) building better offices. C) just-in-time. D) buy-now-pay-later. E) a positive technological change. Answer: E Diff: 2 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Analytic Skills 10) The process a firm uses to turn inputs into outputs of goods and services is called technology. Answer: TRUE Diff: 1 Type: TF Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 11) If a firm experiences positive technological change, it is able to produce more output using the same inputs. Answer: TRUE Diff: 1 Type: TF Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 12) Is it possible for technological change to be negative? If so, give an example. Answer: Technological change could be negative, for instance, when a natural disaster hits, or when a firm hires less-experienced workers. In these cases, the firm would produce a lower level of output with the same inputs. Diff: 2 Type: SA Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking

13) Describe how oil companies could produce more oil with fewer workers. Answer: Advances in information technology allowed oil companies to use sensors linked to computers and smartphones to monitor conditions in wells that can be drilled thousands of feet underground. The new technology allows one worker to remotely monitor multiple wells. Other technological advances, such as robots that drill wells and drones that remotely monitor wells, also reduced the number of workers oil firms need to hire. Diff: 2 Type: SA Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking Special Feature: Apply the Concept: Oil Roughnecks Encounter Robots and Drones 14) Improvements in technology used in wireless communication networks allow firms such as TELUS, Rogers, and Bell to produce A) more output using the same inputs, thereby reducing average total cost. B) the same output using more inputs, thereby reducing average total cost. C) more output using more inputs, thereby reducing total fixed cost. D) the same output using fewer inputs, thereby reducing total fixed cost. E) more output using new technology, thereby increasing total fixed cost. Answer: A Diff: 1 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Analytic Skills 15) The basic activity of a firm is A) to set the prices of its products as high as possible. B) to compete with other firms that produce similar products. C) to provide jobs for its employees. D) to use inputs to produce outputs of goods and services. E) to find ways to maximize its profit. Answer: D Diff: 1 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 16) The processes a firm uses to turn inputs into outputs of goods and services is called A) technology. B) technological change. C) marginal analysis. D) positive economic analysis. E) production. Answer: A Diff: 1 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 5 Copyright © 2024 Pearson Canada Inc.

17) When a firm produces more output using the same inputs or the same output using fewer inputs, we say that the firm A) experiences an increase in demand. B) experiences positive technological change. C) will hire more workers in order to produce more output. D) is operating in the short run. E) is forcing workers to do overtime. Answer: B Diff: 1 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 18) When a firm experiences a positive technological change, A) the price of a share of the firm's stock rises. B) the firm is able to produce more output using the same inputs, or the same output using fewer inputs. C) the value of the firm's assets rises. D) the firm will hire additional workers in order to increase production. E) the firm is able to sell the good at much higher price to increase profit. Answer: B Diff: 2 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 19) A "stockout" occurs when A) brokers run out of shares of stock to sell of a particular company. B) a disruption due to a power outage, etc., causes a temporary production shutdown. C) a company holds too many goods in inventories. D) a firm loses sales because goods consumers want are not available. E) a firm stop making a particular product. Answer: D Diff: 1 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking

20) Walmart Canada consistently had fully stocked shelves, while Target Canada consistently suffered stock-outs — until it closed. This suggests that A) Walmart Canada had better technology than Target Canada. B) Walmart Canada had higher costs than Target Canada. C) Target Canada attempted to carry a wider range of products than Walmart Canada. D) Target Canada had more sales than Walmart Canada. E) Target was selling it at a much lower price than Walmart Canada. Answer: A Diff: 3 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 21) Which of the following statements correctly describes the distinction between technology and technological change? A) Technology refers to the processes used by a firm to transform inputs into output of goods and services, while technological change is a change in a firm's ability to produce a given level of output with a given quantity of inputs. B) Technology refers to the ability of a firm to increase its maximum output from a given quantity of inputs, and technological change is the process by which the firm achieves this productivity gain. C) Technology is product-centred; it refers to developing new products with limited resources while technological change is process-centered in that it focuses on developing new production techniques. D) Technology involves research and development while technological change involves the use of more efficient machinery. E) None of the above because it is the same concept. Answer: A Diff: 2 Type: MC Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 22) When a firm experiences negative technological change, it can produce the same output with fewer inputs. Answer: FALSE Diff: 1 Type: TF Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 23) In economics, technology only refers to the development of new products. Answer: FALSE Diff: 1 Type: TF Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking

24) Describe the difference between technology and positive technological change. Answer: A firm's technology refers to the processes it uses to turn its land, labour, capital, and entrepreneurial inputs into outputs of goods and services. When a firm experiences positive technological change it is able to produce more output using the same inputs or the same output using fewer inputs. Technological change can result from rearranging the layout of a store or manufacturing plant, the installation of faster or more durable equipment, or other factors. Diff: 2 Type: SA Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking 25) Which of the following are examples of a firm experiencing positive technological change? Explain your reasoning for each example. a. A firm is able to reduce its inputs by 15 percent and still produce the same level of output. b. A seminar attended by the firm's workers makes them more productive. c. A firm adds 5 percent to its workforce and is able to maintain its initial level of output. d. A firm restructures its distribution system and is able to save on its shipping times. e. A firm rearranges its warehouse and finds that it can use fewer workers to maintain its productivity level. Answer: Examples a, b, d, and e are examples of positive technological change. Examples a and e involve change that results in the firm being able to produce the same output with a smaller quantity of inputs. Examples b and d involve change that results in the firm being able to produce more output with the same amount of inputs. Example c is not an example of technological change because an increase in inputs is used to produce the same quantity of output. Diff: 2 Type: SA Topic: Technology Learning Outcome: 9.1 Define technology and give examples of technological change AACSB: Reflective Thinking

9.2

Distinguish between the economic short run and the economic long run

1) A characteristic of the long run is A) there are fixed inputs. B) all inputs can be varied. C) plant capacity cannot be increased or decreased. D) there are both fixed and variable inputs. E) there are fixed costs. Answer: B Diff: 1 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 2) Which of the following is a factor of production that generally is fixed in the short run? A) raw materials B) labour C) a factory building D) water E) loan Answer: C Diff: 1 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 3) Which of the following is an example of a long-run adjustment? A) Your university offers Saturday morning classes next fall. B) Ford Motor Company of Canada lays off 2,000 assembly line workers. C) A soybean farmer turns on the irrigation system after a month long dry spell. D) Rona builds another store. E) General Motors fire hundreds of its workers. Answer: D Diff: 2 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

4) Which of the following is the best example of a short-run adjustment? A) A local bakery purchases another commercial oven as part of its capacity expansion. B) Your local Rona hires two more associates. C) Smith University completed negotiations to acquire a large piece of land to build its new library. D) Toyota builds a new assembly plant in Ontario. E) General Motor closes its plant in Ontario. Answer: B Diff: 2 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 5) If a producer is not able to expand its plant capacity immediately, it is A) bankrupt. B) operating in the long run. C) operating in the short run. D) losing money. E) variable input. Answer: C Diff: 1 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 6) Which of the following is a fixed cost? A) payment to hire a security worker to guard the gate to the factory around the clock B) wages to hire assembly line workers C) payments to an electric utility D) costs of raw materials E) none of the above Answer: A Diff: 2 Type: MC Topic: Fixed Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

7) Academic book publishers hire editors, designers, and production and marketing managers who help prepare books for publication. Because these employees work on several books simultaneously, the number of people the company hires will not go up and down with the quantity of books the company publishes during any particular year. The salaries and benefits of people in these job categories will be included in A) fixed cost and marginal cost but not variable cost. B) fixed cost but not variable cost and total cost. C) marginal cost and total cost but not fixed cost. D) fixed cost and total cost but not variable cost. E) variable cost. Answer: D Diff: 2 Type: MC Topic: Fixed Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking Special Feature: Apply the Concept: Fixed Costs in the Publishing Industry 8) When deciding on how much oil to pump from a well, oil companies look at the extra cost of producing an additional barrel of oil. This extra cost is known as A) marginal cost. B) opportunity cost. C) fixed cost. D) total cost. E) average cost. Answer: A Diff: 1 Type: MC Topic: Marginal Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Analytical Thinking Special Feature: Chapter Opener: Fracking Lowers the Cost of Oil and Revolutionizes the World Market 9) Economic costs of production differ from accounting costs in that A) economic costs include expenditures for hired resources while accounting costs do not. B) economic costs add the opportunity costs of a firm using its own resources while accounting costs do not. C) accounting costs include expenditures for hired resources while economic costs do not. D) accounting costs are always larger than economic cost. E) economic cost includes the cost of production while accounting cost does not. Answer: B Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

10) Implicit costs can be defined as A) accounting profit minus explicit cost. B) the opportunity costs of using a firms existing resource despite not having to transfer money to pay for them. C) the actual financial cost of producing something, including all deferred payments. D) total cost minus fixed costs. E) the average cost of production. Answer: B Diff: 1 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 11) Which of the following is an implicit cost of production? A) interest paid on a loan to a bank B) wages paid to labour plus the cost of carrying benefits for workers C) the utility bill paid to water, electricity, and natural gas companies D) rent paid on the factory building E) rent that could have been earned on a building owned and used by the firm Answer: E Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 12) Which of the following is an implicit cost of production? A) the loss in the value of capital equipment due to wear and tear B) the salary you pay yourself for running your business C) the utility bill paid to water, electricity, and natural gas companies D) the interest you pay your mother for the money she loaned you to start your business E) rent you pay on the office you use for your business Answer: A Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 13) The explicit cost of production is also called A) variable cost. B) accounting cost. C) direct cost. D) overhead cost. E) fixed cost. Answer: B Diff: 1 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 12 Copyright © 2024 Pearson Canada Inc.

14) Which of the following are implicit costs for a typical firm? A) opportunity costs of capital owned and used by the firm B) the cost of labour hired by the firm C) utilities cost D) a business licensing fee E) All of the above are implicit costs. Answer: A Diff: 1 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 15) Which of the following is an implicit cost of a Massive Open Online Courses (MOOC) for a university? A) the research that doesn't get done while a professor is developing on-line appropriate teaching tools B) the cost of hiring a course designer to make the course materials work properly C) the increased likelihood that a given student will not finish the course D) the additional software the university must purchase to host and run the system MOOC students will use to pay their tuition E) the license fee for the online system Answer: A Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 16) Jayanthi moves her yoga studio from her home to a space she rents in Woodstock, Ontario. Holding everything else constant, as a result of this move, A) her explicit cost falls and her implicit cost rises. B) her implicit cost falls and her explicit cost rises. C) her economic cost rises. D) her opportunity cost rises. E) her accounting cost falls. Answer: B Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

17) Which of the following would be categorized as an opportunity cost? a. not being able to spend your $10,000 savings if you sink the money in your business b. the cost of purchasing supplies for your house-cleaning business c. the cost of purchasing auto insurance for your dry-cleaning delivery business A) a only B) a and c only C) b and c only D) a, and b only E) a, b and c Answer: A Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 18) Golda Rush quit her job as a manager for Rona to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her explicit costs? A) $45,000 B) $45,500 C) $47,000 D) $87,000 E) $87,500 Answer: B Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Analytic Skills 19) Golda Rush quit her job as a manager for Rona to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her implicit costs? A) $80,000 B) $70,000 C) $42,500 D) $42,000 E) $41,500 Answer: E Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Analytic Skills 14 Copyright © 2024 Pearson Canada Inc.

20) The production function shows A) the total cost of producing a given quantity of output. B) the maximum output that can be produced from each possible quantity of inputs. C) the technology used to produce output. D) the incremental output gained by improving the production process. E) the quantity of output produced regardless of inputs. Answer: B Diff: 1 Type: MC Topic: The Production Function Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 21) The average total cost of production A) is the extra cost required to produce one more unit. B) equals the explicit cost of production. C) equals total cost of production divided by the level of output. D) equals total cost of production multiplied times the level of output. E) equals variable cost of production divided by output. Answer: C Diff: 1 Type: MC Topic: Total Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 22) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's variable cost per day when she produces 50 gyros using two workers. A) $100 B) $124. C) $220 D) $240 E) $320 Answer: C Diff: 2 Type: MC Topic: Variable Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Analytic Skills

23) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's total cost per day when she produces 50 gyros using two workers. A) $100 B) $124.40 C) $220 D) $340 E) $380 Answer: D Diff: 2 Type: MC Topic: Total Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Analytic Skills 24) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's average fixed cost per day when she produces 50 gyros using two workers. A) $2.00 B) $2.40 C) $4.40 D) $6.80 E) $7.00 Answer: B Diff: 2 Type: MC Topic: Fixed Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Analytic Skills 25) Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. What is Vipsana's total cost per day when she does not produce any gyros and does not hire any workers? A) $0 B) $2 C) $60 D) $90 E) $120 Answer: E Diff: 2 Type: MC Topic: Total Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Analytic Skills 26) The short run is the time period during which a firm has at least one input constraint. Answer: TRUE Diff: 1 Type: TF Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 16 Copyright © 2024 Pearson Canada Inc.

27) A characteristic of the long run that is not available in the short run is that a firm is free to vary its output. Answer: FALSE Diff: 1 Type: TF Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 28) Consider a manufacturing operation that uses specialized machinery and labour to produce its output. In this case, the input that is not fixed in the short run is labour. Answer: TRUE Diff: 1 Type: TF Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 29) Accounting costs exclude implicit costs. Answer: TRUE Diff: 1 Type: TF Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 30) If the firm is producing no output in the short run, then its total costs are zero. Answer: FALSE Diff: 2 Type: TF Topic: Total Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 31) In economics, what is the difference between the short run and the long run? Answer: In economics, the short run refers to the period of time during which at least one of a firm's inputs is fixed. The long run refers to the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant. Diff: 1 Type: SA Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

32) What is the difference between explicit costs and implicit costs? List three examples each of explicit costs and implicit costs that may be experienced by a small business. Answer: Explicit costs are costs that involve spending money. Implicit costs are nonmonetary opportunity costs. Explicit costs experienced by a small business may include wages, utility costs, and rent. Implicit costs experienced by a small business may include foregone salary, foregone interest, and economic depreciation. Diff: 1 Type: SA Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 33) Explain whether each of the following is a fixed cost or a variable cost for Damian Dandridge's tattoo parlor. a. The payment he makes to buy tattoo ink. b. The wages he pays his employees. c. The $500-per-month payment he makes to advertise his shop on highway billboards. d. The lease payment he makes to the landlord who owns the building where his shop is located. e. The payment he makes on his liability insurance policy. Answer: c., d., and e. are fixed costs because they do not change as the quantity of tattoos produced increases. a. and b. are variable costs because they increase as the quantity of tattoos produced increases. It is important to note that the time period under consideration is important. In the long run, all of these costs are variable. Diff: 1 Type: SA Topic: Fixed Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 34) Which of the following statements best describes the short run? A) It is a period of one year or less. B) It is a period during which firms are free to vary all of their inputs. C) It is a period during which at least one of the firm's inputs is fixed. D) It is a period during which fixed inputs become variable inputs because of depreciation. E) It is a period of 3 months. Answer: C Diff: 1 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

35) When firms analyze the relationship between their level of production and their costs, they separate the time period involved into A) morning and evening. B) 6 months or less, 6 months to 1 year, and more than 1 year. C) a fixed period and a variable period. D) the short run and the long run. E) 3 months, more than 3 months. Answer: D Diff: 1 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 36) The long run refers to a time period A) during which a firm is able to purchase all of its inputs, including its plant and equipment. B) long enough for a firm to vary all of its inputs, to adopt new technology, and to change the size of its physical plant. C) long enough for a firm to pay all of its creditors in full. D) long enough for a firm to change the use of its variable inputs. E) longer than three months. Answer: B Diff: 1 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 37) Which of the following can a firm do in the long run but not in the short run? A) decrease the size of its physical plant B) reduce its rate of output by laying off workers C) increase its variable costs D) increase its use of raw materials E) fire some of its workers Answer: A Diff: 1 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

38) Which of the following statements is false? A) An explicit cost is a nonmonetary opportunity cost. B) In the short run, total cost = fixed cost + variable cost. C) Variable costs are costs that change as output changes. D) In the long run there are no fixed costs. E) All are correct statements. Answer: A Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 39) In the long run, which of the following is true? A) Total cost = fixed cost + variable cost. B) The size of a firm's physical plant can be changed, but the firm cannot adopt new technology. C) There are no fixed costs. D) The firm can vary its explicit costs but not its implicit costs. E) None of the above is true. Answer: C Diff: 2 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 40) Which of the following is an implicit cost for a typical firm? A) the cost of labour B) the opportunity cost of capital owned and used by the firm C) the cost of energy used in production D) a business licensing fee E) rent forgone on the building that is now being used by the firm Answer: B Diff: 1 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

41) Which of the following is typically considered a fixed cost by academic book publishers but a variable cost by companies that print books? A) postage and supplies B) travel C) rent D) wages and salaries E) cost of paper Answer: D Diff: 1 Type: MC Topic: Fixed Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking Special Feature: Apply the Concept: Fixed Costs in the Publishing Industry 42) Which of the following statements is false? A) An implicit cost is a nonmonetary opportunity cost. B) Economic costs include both accounting costs and implicit costs. C) An explicit cost is a cost that involves spending money. D) Economists consider all costs to be implicit costs. E) An explicit cost is the one that accountants consider. Answer: D Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 43) An explicit cost is defined as A) a cost that does not change as output changes. B) a nonmonetary opportunity cost. C) a cost that involves spending money. D) a nonmonetary accounting cost. E) a loss in the business. Answer: C Diff: 1 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

44) Which of the following statements is true? A) An explicit cost is an actual cost; an implicit cost is a theoretical cost. B) Economic costs include both explicit costs and implicit costs. C) An explicit cost is more important, dollar for dollar, than an implicit cost. D) Explicit costs are accounting costs, not economic costs; implicit costs are economic costs, not accounting costs. E) Implicit cost is the total cost of production. Answer: B Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 45) Renny Pete moves her office from the premises she rents at a local industrial park to her home. As a result of this move A) Renny's explicit costs fall and her implicit costs rise. B) Renny's total costs fall. C) Renny's implicit costs fall. D) Renny's opportunity costs fall. E) nothing changes in Renny's cost. Answer: A Diff: 2 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 46) The relationship between the inputs employed by a firm and the maximum output that it can produce with those inputs is the firm's A) production function. B) supply curve or supply schedule. C) marginal product of labour. D) average product of labour. E) achievement. Answer: A Diff: 1 Type: MC Topic: The Production Function Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

47) The Prince George Salvage Company supplies raw metal to automotive parts dealers. An increase in the demand for its product led Prince George Salvage to hire 150 new workers. Prince George Salvage also plans to expand the capacity of its plant, but this project will take 2 years to complete. Which of the following statements is true? A) The wages and benefits paid to the new workers are implicit costs. B) The long run for Prince George Salvage is longer than 1 year. C) The short run for Prince George Salvage is 1 year. D) In the short run, Prince George Salvage's variable costs increase, but its fixed costs decrease. E) None of the above. Answer: B Diff: 1 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 48) Which of the following statements is true? A) Opportunity cost = explicit cost - implicit cost. B) Total cost = fixed cost + implicit cost. C) Total cost = fixed cost + variable cost. D) Variable cost = wages + salaries + benefits. E) Explicit Cost = implicit cost + opportunity cost. Answer: C Diff: 1 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 49) The rules of accounting generally require that ________ costs be used for purposes of keeping a company's financial records and for paying taxes. These costs are sometimes called ________ costs. A) economic; legal B) real; explicit C) total; economic D) explicit; accounting E) all; opportunity Answer: D Diff: 1 Type: MC Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

50) Stan owns a software design business. He does not have time to expand his office space or redesign the layout of his office. He can increase the amount of work he does by working more hours, asking his current employees to work more hours, or hiring more employees. The relationship between Stan's inputs and the maximum output his firm can produce is called his A) long-run production function. B) production possibilities frontier. C) short-run production function. D) cost function. E) supply curve. Answer: C Diff: 1 Type: MC Topic: The Production Function Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 51) Stan owns a software design business. He obtained a bank loan to buy computer equipment for his business. He pays $1,000 per month for interest on the loan. He has 10 employees, each of whom is paid $4,000 per month. Because his business has been successful, next month he will increase employee wages to $5,000. If the revenue from his business remains at its current level, Stan is considering an addition to his office. Which of the following statements regarding Stan's business is false? A) The payments Stan makes to his employees are variable costs and explicit costs. B) The monthly payment Stan makes for his bank loan is an implicit cost. C) The monthly payment Stan makes for his bank loan is a fixed cost. D) The time and effort Stan spends on his software design business is an implicit cost. E) None of the above statements is false about Stan's business. Answer: B Diff: 2 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Analytic Skills 52) Average total cost is A) total cost divided by the quantity of output produced. B) total explicit costs divided by the quantity of output produced. C) variable cost divided by the quantity of output produced. D) the change in fixed plus variable cost divided by the quantity of output produced. E) the cost of last unit produced. Answer: A Diff: 1 Type: MC Topic: Total Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

53) Bill owns "Bill's Home of Blues" a store that specializes in selling vinyl records and reel-to-reel tapes of blues musicians of the 1960s and 1970s. Bill took out a loan from his bank to pay for his store and its initial inventory. Bill pays the bank $900 per week for his loan. The $900 bank payment A) is a long-run implicit cost. B) is a fixed cost. C) is a short-run implicit cost. D) is a variable cost. E) is an implicit cost. Answer: B Diff: 1 Type: MC Topic: Fixed Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 54) In the short run, changes in output can only be brought about by a change in the quantity of variable inputs. Answer: TRUE Diff: 1 Type: TF Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 55) In the long run, all of a firm's inputs are variable. Answer: TRUE Diff: 1 Type: TF Topic: The Short Run and the Long Run Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 56) Costs that change as output changes are called incremental costs. Answer: FALSE Diff: 1 Type: TF Topic: Variable Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 57) Economic costs include implicit costs but not explicit costs. Answer: FALSE Diff: 1 Type: TF Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

58) The total cost schedule shows the relationship between different amounts of inputs and the resulting level of output. Answer: FALSE Diff: 1 Type: TF Topic: Total Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 59) What is the difference between total costs, variable costs, and fixed costs? Answer: Total costs are the costs of all inputs a firm uses in production. Variable costs are costs that change as output changes. Fixed costs are costs that remain constant as output changes. Total cost is equal to the sum of variable costs and fixed costs. Diff: 1 Type: SA Topic: Total Cost Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking 60) Are the costs of utilities always fixed, always variable, or can they be both? Briefly explain. Answer: For many firms, the cost of utilities can be a mixture of fixed and variable costs. For example, a store may keep its lights on and its outdoor signs lit day and night. The cost of the electricity to keep these lights on would, therefore, be a fixed cost because the cost does not vary with the quantity of the product sold. On the other hand, if the store is a laundromat, then the more people who use the washers and dryers, the more electricity it uses. So, that part of its electric bill is a variable cost. Diff: 2 Type: SA Topic: Variable Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Reflective Thinking

61) Sally quit her job as an auto mechanic earning $50,000 per year to start her own business. To save money, she operates her business out of a small building she owns, which, until she started her own business, she had rented out for $10,000 per year. She also invested her $20,000 savings (which earned a market interest rate of 5% per year) in her business. You are given the following information about the first year of her operations. Total revenue Cost of labour Cost of materials Equipment rental

$120,000 40,000 15,000 5,000

a. Calculate her economic costs. b. Calculate her accounting costs. c. Calculate her implicit costs. d. Sally tells you that she would really like to move to a location closer to town but she decided against it because "right now I don't pay any rent and it will cost me $10,000 a year to rent near town." Do you agree with her reasoning? Answer: a. $121,000 = 40,000 (labour) + 15,000 (materials) + 5,000 (equipment) + 10,000 (opportunity cost of building) + 1,000 (5% of 20,000, the opportunity cost of her savings) + 50,000 (opportunity cost of Sally's labour) b. $60,000 = 40,000 (labour) + 15,000 (materials) + 5,000 (equipment) c. $61,000 = 10,000 (opportunity cost of building) + 1,000 (5% of 20,000, the opportunity cost of her savings) + 50,000 (opportunity cost of Sally's labour) d. No. Although she does not incur a monetary cost for her garage space now, it is an opportunity cost and part of the economic cost of doing business. Sally could just as well rent her space out now, collect the rent and move closer to town. Diff: 2 Type: ES Topic: Explicit and Implicit Costs Learning Outcome: 9.2 Distinguish between the economic short run and the economic long run AACSB: Analytic Skills

9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour 1) The marginal product of labour is defined as A) the additional sales revenue that results when one more worker is hired. B) the additional output that results when one more worker is hired, holding all other resources constant. C) the additional number of workers required to produce one more unit of output. D) the cost of hiring one more worker. E) the output a worker produces. Answer: B Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 2) If four workers can produce 18 chairs a day and five can produce 20 chairs a day, the marginal product of the fifth worker is A) 2 chairs. B) 3 chairs. C) 4 chairs. D) 18 chairs. E) 38 chairs. Answer: A Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 3) Red Stone Creamery currently hires 5 workers. When it added a 6th worker, its output actually fell. Which of the following statements is true? A) The sixth worker does not have the skills needed for the job. B) The average product of the sixth worker is negative. C) The sixth worker is not as skilled as the fifth worker. D) The total product becomes negative. E) The marginal product of the sixth worker must be negative. Answer: E Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking

4) The law of diminishing marginal returns states A) that at some point, adding more of a fixed input to a given amount of variable inputs will cause the marginal product of the variable input to decline. B) that at some point, adding more of a variable input to a given amount of a fixed input will cause the marginal product of the variable input to decline. C) that in the presence of a fixed factor, at some point average product of labour starts to fall as more and more variable inputs are added. D) average total costs of production initially fall and after some point starts to rise at a decreasing rate as output increases. E) that adding more workers is never beneficial for the producers. Answer: B Diff: 2 Type: MC Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 5) The law of diminishing marginal returns A) explains why the average total cost and marginal cost curves are U-shaped in the short run. B) explains why the average total cost, average fixed cost and the marginal cost curves are U-shaped in the short run. C) causes average total costs to rise at a decreasing rate as output increases. D) causes the difference between average total cost and average variable cost to get smaller as output increases. E) explains that you will get to keep less money after taxes as you keep on working more hours. Answer: A Diff: 2 Type: MC Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 6) As a firm hires more labour in the short run, the A) level of total product stays constant. B) output per worker rises. C) extra output of another worker may rise at first, but eventually must fall. D) costs of production are increasing at a fixed rate per unit of output. E) wage bill will keep on increasing while output stays constant. Answer: C Diff: 2 Type: MC Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking

7) If diminishing marginal returns have already set in for Golden Lark Woodworks, and the marginal product of the 6th carpenter is 8 chairs, then the marginal product of the 7th carpenter is A) negative. B) less than 8 chairs. C) more than 8 chairs. D) zero. E) also 8 chairs. Answer: B Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking Figure 9.1

8) Refer to Figure 9.1. The marginal product of the 3rd worker is A) 57. B) 19. C) 15. D) 11. E) 9. Answer: C Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

9) Refer to Figure 9.1. The marginal product of the 7th worker is A) 66. B) 9.43. C) 2. D) -2. E) 0. Answer: D Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 10) Refer to Figure 9.1. The average product of the 4th worker A) is 68. B) is 17. C) is 11. D) cannot be determined. E) is 9. Answer: B Diff: 2 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 11) Refer to Figure 9.1. Diminishing marginal productivity sets in after A) the 2nd worker is hired. B) the 3rd worker is hired. C) the 4th worker is hired. D) the 5th worker is hired. E) the 6th worker is hired. Answer: A Diff: 2 Type: MC Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

12) Refer to Figure 9.1. In a diagram that shows the marginal product of labour on the vertical axis and labour on the horizontal axis, the marginal product curve A) never intersects the horizontal axis. B) intersects the horizontal axis at a point corresponding to the 5th worker. C) intersects the horizontal axis at a point corresponding to the 6th worker. D) intersects the horizontal axis at a point corresponding to the 7th worker. E) intersects the horizontal axis at a point corresponding to the 8th worker. Answer: B Diff: 3 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 13) If 11 workers can produce a total of 54 units of a product and a 12th worker has a marginal product of 6 units, then the average product of 12 workers is A) 60 units. B) 54 units. C) 48 units. D) 5 units. E) 3 units. Answer: D Diff: 2 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 14) If another worker adds 9 units of output to a group of workers who had an average product of 7 units, then the average product of labour A) will remain the same. B) will increase. C) will decrease. D) will become negative. E) cannot be determined. Answer: B Diff: 2 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

15) In the short run, marginal product of labour increases at first and then falls because A) as more labour is hired, they are not as skilled as the first ones hired. B) there are fewer opportunities for division of labour and specialization when additional workers are hired. C) managerial inefficiency sets in when a firm gets too large. D) the new workers do not have as much experience as those who have been with the firm for a long time and therefore are not as productive. E) firms hire highly trained workers in the beginning and then they start hiring untrained workers. Answer: B Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking Special Feature: Apply the Concept: Adam Smith's Famous Account of the Division of Labour in a Pin Factory 16) When Adam Smith toured a pin factory in 18th Century England he found that an average worker was able to produce 4800 pins a day. He also estimated that a single worker working alone but using all the same machinery would be able to produce just 20 pins a day. What conclusion did Adam Smith draw from this example? A) The division of labour raises productivity and thus living standards. B) The marginal product of labour is diminishing and so there is an upper bound to living standards. C) Coordination of a guild or other central authority was unnecessary for the growing wealth of a nation. D) Only the marginal product of capital is subject to diminishing returns. E) Workers can produce the goods by working alone if provided with the good machinery. Answer: A Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking Special Feature: Apply the Concept: Adam Smith's Famous Account of the Division of Labour in a Pin Factory

Table 9.1 Number of Workers 1 2 3 4 5 6

Mushrooms per Day (pounds) 12 30 45 50 54 56

Table 9.1 shows the technology of production at the Matsuko's Mushroom Farm for the month of May 2011. 17) Refer to Table 9.1. What is the marginal product of the 4th worker? A) 137 pounds B) 50 pounds C) 12.5 pounds D) 5 pounds E) 4 pounds Answer: D Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 18) Refer to Table 9.1. What is the average product of labour when the farm hires 5 workers? A) 4 pounds B) 10.8 bushels C) 38.2 pounds D) 54 pounds E) 56 pounds Answer: B Diff: 1 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

19) Refer to Table 9.1. Diminishing marginal returns sets in when the ________ worker is hired. A) 2nd B) 3rd C) 4th D) 5th E) 6th Answer: B Diff: 2 Type: MC Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 20) Who was the economist who first analyzed the advantages of specialization and the division of labour? A) David Ricardo B) Arthur C. Pigou C) Ronald Coase D) Adam Smith E) Robert Lucas Answer: D Diff: 1 Type: MC Topic: Division of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking Special Feature: Apply the Concept: Adam Smith's Famous Account of the Division of Labour in a Pin Factory 21) One reason why, in the short run, the marginal product of labour might increase initially as more workers are hired is that A) the first workers hired get to use the best equipment. B) specialization allows a worker to focus on one task, thereby increasing her proficiency at that task. C) the best workers are hired first and later hires are not as skillful. D) beyond some point, a firm has hired too many workers. E) All of the above are the reasons for marginal product of labour to increase initially. Answer: B Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking Special Feature: Apply the Concept: Adam Smith's Famous Account of the Division of Labour in a Pin Factory

Figure 9.2

22) Refer to Figure 9.2. The curve labeled "E" is A) the total product curve. B) the average product curve. C) the marginal product curve. D) the output supply curve. E) the demand curve. Answer: C Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 23) Refer to Figure 9.2. The curve labeled "F" is A) the total product curve. B) the average product curve. C) the marginal product curve. D) the output supply curve. E) the demand curve. Answer: B Diff: 1 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

24) Refer to Figure 9.2. Diminishing returns to labour set in A) after L1. B) after L2. C) after L3. D) immediately. E) none of the above. Answer: A Diff: 2 Type: MC Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 25) Refer to Figure 9.2. Short-run output is maximized at A) L1. B) L2. C) L3. D) all of the above. E) insufficient information to determine. Answer: C Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 26) Refer to Figure 9.2. The average product of labour declines after L2 because A) the marginal product of labour is below the average product of labour. B) the marginal product of labour is falling. C) the marginal product of labour is negative. D) the marginal product of labour is positive. E) the marginal product of labour is zero. Answer: A Diff: 2 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

27) If we have information about workers' marginal products, then total and average product can be found by A) dividing marginal costs by the number of workers. B) multiplying the average marginal product times the number of workers. C) summing the marginal values to find the total and multiplying it times the number of workers to get the average. D) summing the marginal values to find the total and dividing it by the number of workers to get the average. E) multiplying the marginal product by the number of workers to get the total and getting the average by multiplying the total with number of workers. Answer: D Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 28) If, after hiring the 6th worker, a firm's output falls, then the marginal product of the 6th worker is negative. Answer: TRUE Diff: 2 Type: TF Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 29) A downward sloping marginal product of labour curve demonstrates the law of diminishing marginal returns. Answer: TRUE Diff: 2 Type: TF Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 30) If average product is decreasing, then marginal product must be negative. Answer: FALSE Diff: 2 Type: TF Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking

31) State the law of diminishing marginal returns. Answer: As more units of a variable input are used in conjunction with a fixed input, the extra output of the variable input will eventually begin to decrease and continue to decrease as more units are used. Diff: 2 Type: SA Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 32) Damian owns a tattoo parlor and has hired three tattoo artists to work for him. The marginal product of labour is 8 for the first artist, 12 for the second artist, and 7 for the third artist. What is Damian's average product of labour for these three tattoo artists? Answer: The average product of labour is the average of the marginal products of labour. Therefore, Damian's average product of labour for these three artists is (8 + 12 + 7) / 3 = 9. Diff: 2 Type: SA Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

33) Fill in the missing values in the following table. Draw one graph showing how total output increases with the quantity of workers hired, and another graph showing the marginal product of labour and the average product of labour.

Quantity of Workers 0 1 2 3 4 5

Total Output 0 200 500 900 1,150 1,300

Marginal Product of labour

Average Product of labour

Answer: Quantity of Workers 0 1 2 3 4 5

Total Output 0 200 500 900 1,150 1,300

Marginal Product of labour --200 30 400 250 150

Average Product of labour --200 250 300 287.5 260

Diff: 2 Type: SA Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

34) The marginal product of labour is defined as A) the change in total revenue that results when an additional unit of a labour is hired. B) the additional labour required to produce one more unit of output. C) the additional labour cost of producing one more unit of output. D) the change in output that a firm produces as a result of hiring one more worker. E) the output all workers produce during the last hour of their work each day. Answer: D Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 35) Diminishing marginal product of labour occurs when adding another unit of labour A) decreases output. B) changes output by an amount smaller than the output added by the previous unit of labour. C) increases output by an amount larger than the output added by the previous unit of labour. D) decreases output by an amount smaller than the output added by the previous unit of labour. E) reduces average productivity. Answer: B Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 36) Increases in the marginal product of labour result from A) the use of new technology. B) hiring more efficient workers. C) the division of labour and specialization. D) increasing the usage of all inputs. E) hiring highly trained workers. Answer: C Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking

37) Gertrude Stork's Chocolate Shoppe normally employs 4 workers. When the Chocolate Shoppe hired a 5th worker, the Shoppe's total output decreased. Therefore, A) the marginal product of the 5th worker is negative. B) the total output of Gertrude Stork's Chocolate Shoppe is negative. C) the average product of the 5th worker is negative. D) the 5th worker should be hired only if he is willing to accept a wage lower than the wage paid to the other 4 workers. E) the 5th worker does not have the necessary skills for the job. Answer: A Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 38) An apple orchard employs five full-time workers. Currently, the average product of labour is 120 kilograms of apples per day. The orchard hires a 6th full-time worker and his marginal product is 150 kilograms of apples. The average product of the six workers will now be A) more than 120 kilograms. B) less than 120 kilograms. C) equal to 120 kilograms. D) less than the marginal product of labour. E) equal 150 kilograms as well. Answer: A Diff: 2 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking

Figure 9.3

Fancy Footwear manufactures shoes. Figure 9.3 shows Fancy Footwear's marginal product of labour and average product of labour curves in the short run. 39) Refer to Figure 9.3. Which of the following statements correctly describes the curves in the figure? A) The marginal product of labour curve is represented by curve A, and the average product of labour curve is represented by curve B. B) The marginal product of labour curve is represented by curve A, and the total product of labour curve is represented by curve A. C) Curve A could represent either the average product curve or the marginal product and curve. Curve B represents the total product curve. D) Curve B could represent either the average product curve or the marginal product curve. Curve A represents the total product curve. E) The marginal product of labour curve is represented by curve B, and the average product of labour curve is represented by curve A. Answer: E Diff: 1 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 40) Refer to Figure 9.3. For what quantity of labour does production display diminishing returns? A) for more than 1 unit of labour B) for more than 4 units of labour C) for more than 5 units of labour D) for more than 8 units of labour E) for less than 4 units of labour Answer: B Diff: 1 Type: MC Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 44 Copyright © 2024 Pearson Canada Inc.

41) The law of diminishing marginal returns A) sets in because not all workers are equally productive. B) applies only in the short run. C) holds even when there are no fixed factors. D) ultimately explains why production displays diseconomies of scale. E) applies only in the long run. Answer: B Diff: 2 Type: MC Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 42) In the short run, why does a production function eventually display diminishing returns to labour? A) As the number of workers increases, it becomes difficult to monitor them. B) As a firm hires more workers, the skills and the work ethic of the additional workers will eventually decline. C) As the number of workers increases, eventually the gains from the division of labour and specialization are used up. D) The opportunity cost of hiring additional workers must eventually rise. E) The new workers are not as trained as the older ones. Answer: C Diff: 2 Type: MC Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking

Table 9.2 Number of Workers 1 2 3 4 5 6

Apples per Day (bushels) 50 120 180 230 270 300

Table 9.2 summarizes production at the Crunchy Apple Orchard for the month of April 2015. 43) Refer to Table 9.2. What is the marginal product of the 4th worker? A) 230 bushels B) 57.4 bushels C) 50 bushels D) 12.4 bushels E) 30 bushels Answer: C Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 44) Refer to Table 9.2. What is the average product of labour when the orchard employs 5 workers? A) 270 bushels B) 54 bushels C) 40 bushels D) 8 bushels E) 4 bushels Answer: B Diff: 1 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

45) The division of labour and specialization explain A) why, when the marginal product of labour increases, so does the average product of labour. B) why the average product of labour falls when firms use more capital or change the layout of their businesses. C) why the marginal product of labour rises as a firm hires its first units of labour. D) why firms may find it profitable to use more workers when the marginal product of labour is negative. E) why firm does not need to hire highly trained workers any more. Answer: C Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 46) Duddy Lisée owns a firm in Montreal's garment district. If Duddy keeps adding workers to use the same number of sewing machines, eventually the workplace will become so crowded that workers will get in each other's way. At this point A) the marginal product of labour in Duddy's business would be negative and his total output would decrease. B) Duddy should encourage his workers to share their sewing machines. C) Duddy's business will be in violation of safety rules that have been established by the Québec government. D) Duddy should begin using a division of labour in his business. E) Duddy needs to start the work in different shifts so that workers don't get in each other's way. Answer: A Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking Special Feature: Apply the Concept: Adam Smith's Famous Account of the Division of Labour in a Pin Factory

47) In his book The Wealth of Nations, Adam Smith employed the example of a pin factory in order to explain what economic concept? A) the relationship between the marginal and average product of labour B) the law of diminishing returns C) why no firm would want to hire so many workers as to experience a negative marginal product of labour D) the division of labour E) the human capital Answer: D Diff: 1 Type: MC Topic: Division of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking Special Feature: Apply the Concept: Adam Smith's Famous Account of the Division of Labour in a Pin Factory 48) The total output produced by a firm divided by the quantity of workers employed by the firm is the definition of A) the marginal product of labour. B) the division of labour. C) the average product of labour. D) the average cost of production. E) total factor productivity. Answer: C Diff: 1 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 49) After Suzie, owner of Suzie's Sweet Shop, hires her 8th worker, the average product of labour declines. Which of the following statements must be true? A) The marginal product of the 8th worker is negative. B) The marginal product of the 8th worker is less than the average product of labour before the 8th worker was hired. C) Suzie's profits would be greater if she did not hire the 8th worker. D) The average product of labour is negative. E) None of the above is true. Answer: B Diff: 2 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking

50) Which of the following statements is true? A) The average product of labour is at its maximum when the average product of labour equals the marginal product of labour. B) The average product of labour is at its minimum when the average product of labour equals the marginal product of labour. C) The average product of labour tells us how much output changes as the quantity of workers hired changes. D) Whenever the marginal product of labour is greater than the average product of labour, the average product of labour must be decreasing. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 51) The marginal product of labour is calculated using the formula A) L/Q. B) ΔL/ΔQ. C) ΔQ/ΔL. D) Q/L. E) L × Q divided by 2. Answer: C Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 52) Which of the following describes how output changes in the short run? Because of specialization and the division of labour, as more workers are hired, A) output will first increase at an increasing rate, then output will increase at a decreasing rate. B) output will first decrease at an increasing rate, then increase at a decreasing rate. C) the marginal product of labour will first decrease, then increase at a decreasing rate. D) the marginal product of labour will first be negative and then will be positive. E) output will keep on increasing at a steady rate forever. Answer: A Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking

53) If 11 workers can produce 53 units of output while 12 workers can produce 56 units of output, what is the marginal product of the 12th worker? A) 0.16 B) 3 C) 4.67 D) 36 E) 53 Answer: B Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 54) If 11 workers can produce 53 units of output while 12 workers can produce 56 units of output, what is the average product of the 12th worker? A) 0.16 B) 1.6 C) 3 D) 4.67 E) 36 Answer: C Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking

Table 9.3 Quantity of Workers 0 1 2 3 4 5

Quantity of Boxes 0 50 200 240 264 284

Marginal Product of Labour -----

Average Product of Labour -----

55) Refer to Table 9.3. The table above refers to the relationship between the quantity of workers employed and the number of cardboard boxes produced per day by Manny's House of Boxes. The capital used to produce the boxes is fixed. Diminishing returns to labour are first observed in this example after Manny hires the ________ worker. A) second B) third C) fourth D) fifth E) sixth Answer: B Diff: 1 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 56) Refer to Table 9.3. The table above refers to the relationship between the quantity of workers employed and the number of cardboard boxes produced per day by Manny's House of Boxes. The capital used to produce the boxes is fixed. The highest value of the average product is labour is ________ when Manny hires ________ workers. A) 80; 3 B) 100; 3 C) 100; 2 D) 80; 4 E) 60; 5 Answer: C Diff: 2 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

57) Refer to Table 9.3. The table above refers to the relationship between the quantity of workers employed and the number of cardboard boxes produced per day by Manny's House of Boxes. The capital used to produce the boxes is fixed. The average product of labour will equal 60 boxes when Manny hires A) the second worker. B) the third worker. C) the fourth worker. D) the fifth worker. E) the sixth worker. Answer: D Diff: 1 Type: MC Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 58) If marginal product is greater than average product, then A) average product must be decreasing. B) marginal product must be decreasing. C) marginal product must be increasing. D) average product must be increasing. E) marginal product could either be increasing or decreasing. Answer: E Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills 59) If production displays increasing marginal returns, then A) total product rises by a constant amount throughout. B) each new worker hired adds more to output than previous hires. C) the firm must be adding new capital to keep boosting productivity. D) total product reaches a maximum sooner than if production displayed decreasing returns. E) the new workers are more enthusiastic and skilled than older workers. Answer: B Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 60) If a firm experiences diminishing returns, its marginal product must be negative. Answer: FALSE Diff: 1 Type: TF Topic: Diminishing Returns Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 52 Copyright © 2024 Pearson Canada Inc.

61) The additional output a firm produces by hiring one more worker is called the marginal product of labour. Answer: TRUE Diff: 1 Type: TF Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 62) If marginal product is equal to average product, then total product is at a maximum. Answer: FALSE Diff: 2 Type: TF Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Reflective Thinking 63) What is the marginal product of labour and what is the average product of labour? Answer: The marginal product of labour is the additional output a firm produces as a result of hiring one more worker. The average product of labour is the total output produced by a firm divided by the quantity of workers. The average product of labour is the average of the marginal products of labour. Diff: 2 Type: SA Topic: Average Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

Table 9.4 Labour (hours) 1 2 3 4 5 6

Quantity of Fish (kilograms) 10 18 24 28 30 32

Marginal Product (kilograms)

64) Refer to Table 9.4. The table above shows the relationship between hours spent fishing and the quantity of fish caught for Juan, a commercial fisherman. a. Complete the Marginal Product column in the table. b. Characterize the production function (i.e., does the production function display increasing marginal returns, diminishing marginal returns, etc.). c. Using the data above, graph Juan's marginal product curve. Be sure to label the horizontal and vertical axes. Is your graph consistent with your answer to part (b)? Explain. d. Juan uses the following inputs for fishing: a small wooden boat (B), a fishing pole (P), and of course, his labour (L). Treating the boat and the fishing pole as fixed inputs and using the data above, graph Juan's Total Product of Labour curve. Be sure to label the horizontal and vertical axes. e. (Extra Credit) The opportunity cost of Juan's time is $8 per hour. If Juan receives $2 per kilogram for his fish, what is the optimal number of hours he should spend fishing? Explain how you arrived at your answer. Hint: Recall marginal benefit and marginal cost analysis.

Answer: a. Labour (hours) 1 2 3 4 5 6

Quantity of Fish (kilograms) 10 18 24 28 30 32

Marginal Product (kilograms) 10 8 6 4 2 2

b. The production displays diminishing marginal returns and then constant marginal returns with the 5th labour hour. c. See graph of "Marginal Product" below. Yes, the marginal curve slopes downwards and is horizontal for the 5th and 6th units of labour.

e. If Juan can sell his fish for $2 per kilogram, he should work for a total of 4 hours, up to the point where the marginal benefit from an additional unit of labour (i.e. marginal product × price per pound) equals the marginal cost of his time. Diff: 2 Type: ES Topic: Marginal Product of Labour Learning Outcome: 9.3 Explain and illustrate the relationship between the marginal product of labour and the average product of labour AACSB: Analytic Skills

9.4

Explain and illustrate the relationship between marginal cost and average total cost

1) Marginal cost is equal to the A) change in total cost divided by the change in output. B) change in average total costs divided by the change in output. C) change in total product divided by the change in output. D) change in average product divided by the change in output. E) change it total cost divided by output. Answer: A Diff: 1 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 2) Marginal cost is the A) change in average cost when an additional unit of output is produced. B) additional output when total cost is increased by one dollar. C) additional cost of producing an additional unit of output. D) change in the price of inputs if a firm buys more inputs to produce an additional unit of output. E) change it total cost divided by output. Answer: C Diff: 1 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking

3) In the short run, if marginal product is at its maximum, then A) average cost is at its minimum. B) average variable cost is at its minimum. C) marginal cost is at its minimum. D) total cost is at its maximum. E) total product is falling. Answer: C Diff: 2 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 4) When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increases to $9.4 million. Within this range, the marginal cost of an additional unit of output is A) $41.43. B) $134.29. C) $135. D) $140. E) $145. Answer: E Diff: 2 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Analytic Skills 5) When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increases to $9.4 million. Within this range, the marginal cost of an additional unit of output is A) $145. B) $350. C) $550. D) $850. E) $1050. Answer: A Diff: 2 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Analytic Skills

6) If the 15th unit of output has a marginal cost of $29.50 and the average cost of producing 14 units of output is $30.23, what will happen to the average cost of production if the 15th unit is produced? A) Average cost increases as more is produced. B) Average cost will fall. C) Average cost could increase or decrease depending on what happens to variable cost. D) Average cost could increase or decrease depending on what happens to fixed cost. E) Average cost will stay the same. Answer: B Diff: 2 Type: MC Topic: Average Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Analytic Skills 7) Which of the following costs will not change as output changes? A) marginal cost B) total variable cost C) average variable cost D) average fixed cost E) total fixed cost Answer: E Diff: 2 Type: MC Topic: Fixed Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 8) Average fixed costs of production A) remain constant. B) will rise at a fixed rate as more is produced. C) graph as a U-shaped curve. D) fall as long as output is increased. E) will change as variable cost changes. Answer: D Diff: 2 Type: MC Topic: Fixed Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking

9) If fixed costs do not change, then marginal cost A) also remains constant. B) equals the change in variable cost divided by the change in output. C) equals the change in average variable cost divided by the change in output. D) equals the change in average fixed cost divided by the change in output. E) equals average cost. Answer: B Diff: 2 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 10) In the short run, if marginal product is below average product, then average variable cost is increasing. Answer: TRUE Diff: 2 Type: TF Topic: Average Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 11) If marginal cost is above the average variable cost, then average variable cost is decreasing. Answer: FALSE Diff: 1 Type: TF Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 12) If the marginal product of labour is decreasing, then marginal cost of production must be rising. Answer: TRUE Diff: 2 Type: TF Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 13) Describe the relationship between marginal cost and average total cost. Answer: If marginal cost for a given output is below average total cost, average total cost will decrease as output increases but if marginal cost is above average total cost, average total cost will increase as output increases. If marginal cost equals average total cost, average total cost is at its minimum value. Diff: 2 Type: SA Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking

14) Is it possible for average total cost to be decreasing over a range of output where marginal cost is increasing? Briefly explain. Answer: Yes. As long as the marginal cost is below the average total cost, average total cost will be decreasing. Diff: 2 Type: SA Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking Table 9.5 Quantity of workers 0 1 2 3 4 5

Quantity of foot massages per day 0 10 25 45 60 70

Fixed cost

Variable cost

Total cost

Average total Marginal cost cost

15) Refer to Table 9.5. Alicia Gregory owns a foot massage business. She leases 4 computer-controlled massage booths, for which she pays $125 per day. She cannot increase the number machines she leases without giving the manufacturer 3 months' notice. She can hire as many workers as she wants at a cost of $75 per day per worker. These are the only two inputs she uses in her business. Use this information to fill in the columns in the above table. Answer: Quantity of foot Quantity of Variable Total Average Marginal massages per Fixed cost workers cost cost total cost cost day 0 0 $500 $0 $500 ----1 10 500 75 575 57.5 $7.50 2 25 500 150 650 26 5.00 3 45 500 225 725 16.11 3.75 4 60 500 300 800 13.33 5.00 5 70 500 375 875 12.5 7.50 Diff: 2 Type: SA Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Marginal Cost and Average Cost

16) The change in a firm's total cost from producing one more unit of a good or service is the firm's A) explicit cost of production. B) marginal cost of production. C) average cost of production. D) implicit cost of production. E) variable cost of production. Answer: B Diff: 1 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 17) Which of the following explains why the marginal cost curve has a U shape? A) Initially, the marginal product of labour falls, then rises. B) Initially, the average product of labour rises, then falls. C) Initially, the marginal cost of production rises, then falls. D) Initially, the average cost of production rises, then falls. E) Initially, the marginal product of labour rises, then falls. Answer: E Diff: 2 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 18) The shape of the average total cost curve is determined by the shape of A) the marginal cost curve. B) the average fixed cost curve. C) the average product curve. D) the firm's production function. E) marginal product curve. Answer: A Diff: 1 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking

19) Jill Johnson owns a pizzeria. She currently produces 10,000 pizzas per month at a total cost of $500. If she produced one more pizza her total cost would rise to $500.11. What does this tell us about Jill's marginal cost of producing pizzas? A) The marginal cost of producing pizzas is constant. B) The marginal cost of producing pizzas is falling. C) The marginal cost of producing pizzas cannot be determined without more information. D) The marginal cost of producing pizzas is rising. E) The marginal cost of producing pizza is equal the average cost of pizza. Answer: D Diff: 1 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Analytic Skills Special Feature: Solved Problem: The Relationship between Marginal Cost and Average Cost 20) Marginal cost is calculated for a particular increase in output by A) multiplying the total cost by the change in output. B) multiplying the change in total cost by the change in output. C) dividing the total cost by the change in output. D) dividing the change in total cost by the change in output. E) dividing the change in cost by output. Answer: D Diff: 1 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 21) When the marginal product of labour rises, A) the marginal cost of production will exceed the average total cost. B) the marginal cost of production also rises. C) the marginal cost of production falls. D) the average total cost of production also rises. E) the average product falls. Answer: C Diff: 2 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking

22) Akio Morita, chairman of Sony, used a curve to determine the cost of radios his company sold. This curve was A) a demand curve. B) an average total cost curve. C) a marginal product curve. D) a production function. E) a production possibility curve. Answer: B Diff: 1 Type: MC Topic: Total Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 23) Which of the following statements is false? A) Marginal cost will equal average total cost when marginal cost is at its lowest point. B) When marginal cost is less than average total cost, average total cost will fall. C) When marginal cost is greater than average total cost, average total cost will rise. D) Marginal cost will equal average total cost when average total cost is at its lowest point. E) None of the above is false. Answer: A Diff: 2 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 24) The change in a firm's total cost from producing one more unit of a good or service is A) the result of economies of scale. B) the definition of marginal product. C) the definition of marginal cost. D) impossible to observe in large firms with many manufacturing plants. E) the average cost. Answer: C Diff: 1 Type: MC Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 25) The marginal cost curve is U-shaped because of the law of increasing opportunity costs. Answer: FALSE Diff: 2 Type: TF Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking

26) If average total cost is falling, marginal cost must also be falling. Answer: FALSE Diff: 2 Type: TF Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking 27) In the short run, if average product is at its maximum, then average variable cost is at its minimum. Answer: TRUE Diff: 2 Type: TF Topic: Average Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking

Table 9.6 Number of Workers

Output (boxes)

0 1 2 3 4 5 6

0 220

Marginal Office Rent Labour Cost Total Cost Product of (dollars) (dollars) (dollars) Labour -400 200 250 800

680 160 940 980

1,200 1,000 1,600

28) Refer to Table 9.6. Suzette's Fancy Packaging subcontracts with Sunshineland Pecans to box dried fruit and nuts for Suzette's mail order business. Suzette rents space for her factory for $400 a week in a nearby strip mall. She can hire temporary workers for $200 a week. Table 9.6 shows her output and cost data. Use the table to answer the following questions. a. Complete the table. b. In the last week of summer Suzette closes her business to go on a family vacation. What are her costs during that week? c. In one week, Suzette exactly breaks even. If her revenue for the week is $1,200, how many boxes of fruit and nuts did she produce? d. Judging from the marginal product of labour data, would you say that Suzette had to settle for increasingly unproductive workers? Explain your answer. e. Suzette has received an order for 1,500 boxes of nuts per week for the next 3 months. If she expects the trend in the marginal product of labour will continue in the same direction, what do you think she should do? Should she not commit until she can move to a larger space, or should she just hire more workers? Explain your answer.

Answer: a. Number of Workers

Output (boxes)

0 1 2 3 4 5 6

0 220 470 680 840 940 980

Marginal Product of Office Rent Labour Cost Total Cost Labour -$400 0 $400 220 $400 $200 $600 250 $400 $400 $800 210 $400 $600 $1,000 160 $400 $800 $1,200 100 $400 $1,000 $1,400 40 $400 $1,200 $1,600

b. $400 c. 840 boxes d. Diminishing marginal product of labour does not imply that the workers are unproductive. Rather, the marginal product declines because of the presence of a fixed factor, in this case the mall space. After hiring the 3rd worker, the other workers have begun to get in each other's way. e. She should not commit to meeting the order until she can move to a larger space and hire more workers. Diff: 3 Type: ES Topic: Short-Run Production and Short-Run Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Marginal Cost and Average Cost 29) Explain why the marginal cost of production must increase if the marginal product of a variable resource is decreasing. Answer: Consider a variable input such as labour. If the marginal product of labour is decreasing, it means that the output produced by each additional unit of labour hired is smaller than previous units of labour. If all workers are paid the same wage, the marginal cost of additional output each worker produces depends on the worker's marginal product. If the marginal product falls, then the marginal cost of that additional output must rise. Diff: 2 Type: ES Topic: Marginal Cost Learning Outcome: 9.4 Explain and illustrate the relationship between marginal cost and average total cost AACSB: Reflective Thinking

9.5

Graph average total cost, average variable cost, average fixed cost, and marginal cost

1) Which of the following equations is correct? A) AVC - ATC = AFC B) AVC + ATC = AFC C) AFC + AVC = ATC D) ATC + AVC = AFC E) AFC - ATC = AVC Answer: C Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 2) When the average total cost is $16 and the total cost is $800, then the number of units the firm is producing is A) 12,800. B) 784. C) 50. D) 25. E) impossible to determine with the information given. Answer: C Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 3) Adam spent $10,000 on new equipment for his small business, "Adam's Fitness Studio." Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per year to keep his studio open. Which of the following is true? A) The fixed cost of running the studio is $22,000. B) The variable cost of running the studio is $22,000. C) The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he'll need to continue operations is a variable cost. D) The $10,000 Adam spent on equipment is the total cost of starting the business and the $12,000 he'll need to continue operations is a marginal cost. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking

4) The formula for total fixed cost is A) TFC = TC + TVC. B) TFC = TVC - TC. C) TFC = TC/TVC. D) TFC = TC - TVC. Answer: D Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking Figure 9.4

5) Refer to Figure 9.4. What happens to the average fixed cost of production when the firm increases output from 150 to 200? A) It remains constant. B) It rises. C) It falls. D) It could rise or fall depending on what happens to total cost. E) It also becomes 200. Answer: C Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills

6) If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output? A) $65 B) $50 C) $15 D) $10 E) It is impossible to determine without additional information. Answer: C Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 7) If a firm produces 20 units of output and incurs a total cost of $1,000 and a variable cost is $700, calculate the firm's average fixed cost of production if it expands output to 25 units. A) $300 B) $15 C) $12 D) $8 E) It is impossible to determine without additional information. Answer: C Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 8) Average variable cost can be calculated using any of the formulas below except A) TVC/Q. B) (TC - FC)/Q. C) Δ(TC - FC)/ΔQ. D) (TC/Q) - AFC. E) ΔTC/ΔQ. Answer: C Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking

9) If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firm's total variable cost at that level of output is A) $1,000. B) $700. C) $300. D) $200. E) $100. Answer: B Diff: 3 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 10) Suppose you have just opened a store to sell espresso machines. Both you and a competing store buy this machine from a manufacturer for $130 each. Your competitor who has a store of the same size as yours is currently selling about 10 machines a month at a price of $200 per machine. You expect to sell about 6 machines a month at a price of $220 per machine. If you lower your price, you expect to make a loss. Which of the following could explain why your competitor is able to profitably sell the machine at a lower price although the cost of purchasing the machine is the same for both of you? A) The competing store probably has a lower marginal cost of production. B) The competing store probably has a lower average variable cost of production. C) The competing store's goal is to maximize revenue and not profit. D) The competing store probably has a lower average cost because average fixed cost falls as output increases. E) The competing store has probably lower opportunity cost of production. Answer: D Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills Special Feature: Economics in Your Life: Using Cost Concepts in Your Own Business

Table 9.7 Quantity of Lanterns 75 80 90 100 115 117 120

Fixed Cost (dollars) 200 200 200 200 200 200 200

Variable Cost (dollars) 170 230

Total Cost (dollars) 370 430

Average Total Cost (dollars) 4.93 5.36 7.67

810 1264 1480

1464

11.8 12.5

Table 9.7 shows cost data for Lotus Lanterns, a producer of whimsical night lights. 11) Refer to Table 9.7. What is the variable cost of production when the firm produces 115 lanterns? A) $1,556 B) $1,157 C) $956 D) $10.05 E) $7.67 Answer: B Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 12) Refer to Table 9.7. What is the average total cost of production when the firm produces 120 lanterns? A) $1,680 B) $72 C) $14 D) $12.3 E) $11.8 Answer: C Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills

13) Refer to Table 9.7. What is the average variable cost per unit of production when the firm produces 90 lanterns? A) $490 B) $33.67 C) $7.67 D) $5.44 E) $4.93 Answer: D Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 14) Refer to Table 9.7. What is the marginal cost per unit of production when the firm produces 100 lanterns? A) $420 B) $32 C) $11.1 D) $8.1 E) $5.44 Answer: B Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills

Figure 9.5

15) Refer to Figure 9.5. Identify the curves in the diagram. A) E = average fixed cost curve; F = variable cost curve; G = total cost curve; H = marginal cost curve B) E = marginal cost curve; F = total cost curve; G = variable cost curve; H = average fixed cost curve C) E = average fixed cost curve; F = average total cost curve; G = average variable cost curve; H = marginal cost curve D) E = marginal revenue curve; F = average revenue; G = average fixed cost curve; H = average variable cost curve E) E = marginal cost curve; F = average total cost curve; G = average variable cost curve; H = average fixed cost curve Answer: E Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 16) Refer to Figure 9.5. The vertical difference between curves F and G measures A) average fixed costs. B) marginal costs. C) fixed costs. D) sunk costs. E) opportunity cost. Answer: A Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 73 Copyright © 2024 Pearson Canada Inc.

17) Refer to Figure 9.5. Curve G approaches curve F because A) marginal cost is above average variable costs. B) average fixed cost falls as output rises. C) fixed cost falls as capacity rises. D) total cost falls as more and more is produced. E) fixed cost increases with output. Answer: B Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 18) If the marginal cost curve is below the average variable cost curve, then A) average variable cost is increasing. B) average variable cost is decreasing. C) marginal cost must be decreasing. D) average variable cost could either be increasing or decreasing. E) marginal cost must be increasing. Answer: B Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 19) If the average variable cost curve is above the marginal cost curve, then A) marginal costs must be decreasing. B) average variable costs must be increasing. C) marginal costs must be increasing. D) marginal costs can be either increasing or decreasing. E) fixed cost must be increasing. Answer: D Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 20) Average total cost is equal to average variable cost minus average fixed cost. Answer: FALSE Diff: 1 Type: TF Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking

21) As output increases, average fixed cost gets smaller and smaller. Answer: TRUE Diff: 1 Type: TF Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 22) As the level of output increases, what happens to the value of average fixed cost, and what happens to the difference between the value of average total cost and average variable cost? Answer: As the level of output increases, the value of average fixed cost decreases. The same fixed cost is divided by a larger and larger output. The difference between average total cost and average variable cost is average fixed cost, so as is stated above, the value decreases. Diff: 2 Type: ES Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 23) Suppose the total cost of producing 40,000 flash drives is $120,000, and the fixed cost is $30,000. a. What is the variable cost? b. When output is 40,000, what are the average variable cost and the average fixed cost? c. Assuming the cost curves have the usual shape, is the dollar difference between the average total cost and the average variable cost greater when the output is 40,000 flash drives or when the output is 60,000 flash drives? Explain. Answer: a. Variable cost = total cost - fixed cost. So, $90,000 = $120,000 - $30,000. b. AVC = VC/Q = $90,000/40,000 = $2.25. AFC = FC/Q = $30,000/40,000 = $0.75. c. The gap must get smaller as output rises because ATC = AVC + AFC, and AFC falls as output rises. So, the dollar difference between ATC and AVC is greater when the output of flash drives is 40,000. Diff: 2 Type: ES Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills

24) Explain how the listed events (a-d) would affect the following at Hilton Hotels. i. Marginal cost ii. Average variable cost iii. Average fixed cost iv. Average total cost a. Hilton decides on an across-the-board 5 percent increase in executive salaries. b. Hilton decides to eliminate all print advertising. c. Hilton signs a new contract with the Culinary Workers Union that requires the company to increase wages for all its kitchen workers. d. The federal government starts to levy a $5 room tax on all hotel rooms. Answer: a. Average fixed cost and average total cost will decrease; marginal cost and average variable cost will be unaffected. b. Average fixed cost and average total cost will increase; marginal cost and average variable cost will be unaffected. c. Marginal cost, average variable cost and average total cost will increase; average fixed cost will be unaffected. d. Marginal cost, average variable cost and average total cost will increase; average fixed cost will be unaffected. Diff: 2 Type: ES Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 25) Which of the following equations is incorrect? A) ATC - AFC = AVC B) AVC + AFC = ATC C) AFC = ATC - AVC D) ATC = AVC - AFC E) TC = TFC + TVC Answer: D Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking

26) Average total cost is equal to A) average fixed cost minus average variable cost. B) total cost divided by the level of output. C) marginal cost plus variable cost. D) total cost divided by the number of workers. E) change in total cost divided by output. Answer: B Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 27) Average fixed cost is equal to A) the amount of total cost that does not change as output changes in the short run. B) fixed cost divided by the quantity of output produced. C) fixed cost multiplied by the quantity of output produced. D) average total cost plus average variable cost. E) fixed cost divided by change in output. Answer: B Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 28) Which of the following statements is true? A) As output increases, average fixed cost becomes smaller and smaller. B) Average fixed cost does not change as output increases. C) The marginal cost curve intersects the average fixed cost curve at its minimum point. D) When marginal cost is greater than average fixed cost, average fixed cost increases. E) None of the above. Answer: A Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking

29) As output increases, A) average variable cost becomes smaller and smaller. B) the difference between average total cost and average variable cost decreases. C) marginal cost increases continuously. D) the difference between average total cost and average variable cost becomes greater and greater. E) the different between average total cost and average fixed cost decreases. Answer: B Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 30) Which of the following statements is false? A) When marginal cost equals average total cost, average total cost is at its highest value. B) The marginal cost curve intersects the average variable cost curve and the average total cost curve at their minimum points. C) The difference between average total cost and average fixed cost is average variable cost. D) Firms often refer to the process of lowering average fixed cost as "spreading the overhead." E) None of the above. Answer: A Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 31) Average fixed cost can be calculated using any of the formulas below except A) TFC/Q. B) (TC - VC)/Q. C) Δ(TC - VC)/ΔQ. D) (TC/Q) - AVC. E) ATC - AVC. Answer: C Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking

Figure 9.6

Figure 9.6 contains information about the short-run cost structure of a firm. 32) Refer to Figure 9.6. In the figure above, which letter represents the average variable cost curve? A) A B) B C) C D) D E) None of the above. Answer: C Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 33) Refer to Figure 9.6. In the figure above, which letter represents the average fixed cost curve? A) A B) B C) C D) D E) B and D Answer: D Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills

34) Refer to Figure 9.6. In the figure above, which letter represents the average total cost curve? A) A B) B C) C D) D E) B and C Answer: B Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 35) Refer to Figure 9.6. In the figure above, which letter represents the marginal cost curve? A) A B) B C) C D) D E) C and D Answer: A Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills

Figure 9.7

Figure 9.7 shows the cost structure for a firm. 36) Refer to Figure 9.7. When the output level is 100 units, average fixed cost A) is $10. B) is $8. C) is $5. D) is $3. E) Cannot be determined from the diagram. Answer: B Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 37) Refer to Figure 9.7. When output level is 100, what is the total cost of production? A) $20 B) $1,000 C) $1,200 D) $1,500 E) $2,000 Answer: E Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 81 Copyright © 2024 Pearson Canada Inc.

38) Refer to Figure 9.7. If output is 100 units, what is the fixed cost of production? A) $8 B) $800 C) $1,000 D) $1,200 E) $2,000 Answer: B Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 39) Which of the following is true at the output level where average total cost is at its minimum? A) Marginal cost equals average total cost. B) Average variable cost equals fixed cost. C) Marginal cost equals average variable cost. D) Average total cost equals average fixed cost. E) All of the above. Answer: A Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 40) All of the following cost curves are U-shaped except one. Which curve is not U-shaped? A) the marginal cost curve B) the average fixed cost curve C) the average total cost curve D) the average variable cost curve E) All of the above are U-shaped. Answer: B Diff: 1 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking

41) In a diagram showing the average total cost and average variable cost curves, the minimum point of the average total cost is A) at the same level of output as the minimum point of the average variable cost. B) at a larger level of output than the minimum point of the average variable cost. C) at a lower level of output than the minimum point of the average variable cost. D) at the same level of output as the maximum of the total product curve. E) at the same level of output as the minimum point of average product curve. Answer: B Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 42) A firm's short-run average total cost curve is parallel to its short-run average variable cost curve. Answer: FALSE Diff: 2 Type: TF Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking 43) As output increases, the distance between average total cost and average variable cost increases. Answer: FALSE Diff: 2 Type: TF Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking

Figure 9.8

44) Refer to Figure 9.8, above, to answer the following questions. a. Identify the curves in the diagram. A ________ B ________ C ________ b. What is the numerical value of fixed cost when the quantity of output is 10? c. What is the numerical value of variable cost when the quantity of output is 10? d. What is the numerical value of total cost when the quantity of output is 10? e. What is the numerical value of average fixed cost when the quantity of output is 10? f. What is the numerical value of average total cost when the quantity of output is 10? g. On the graph, identify the area that represents the total variable cost of production when the quantity of output is 10. h. On the graph, identify the area that represents the fixed cost of production when the quantity of output is 10. Answer: a. A = Marginal cost curve; B = Average total cost curve; C = Average variable cost curve. b. $150 c. $70 d. $220 e. $15 f. $22 g. the area of the rectangle 0$7e10 h. the area of the rectangle $7$22de Diff: 3 Type: ES Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills 84 Copyright © 2024 Pearson Canada Inc.

45) Use the general relationship between marginal and average values to explain why a marginal cost curve must intersect an average total cost curve and an average variable cost curve at their minimum points. Answer: The relationship between marginal and average values can be stated as follows: if the marginal value is below the average value for a variable, it pulls the average value down; and if the marginal value is above the average value, it pulls the average value up. Applying this to cost curves, if average total cost is falling, marginal cost must lie below average total cost. If average total cost is rising, marginal cost must lie above average total cost. Therefore, the marginal cost curve must intersect the average total cost curve at its minimum point. The same principle applies to the average variable cost curve. Diff: 2 Type: ES Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Reflective Thinking

Figure 9.9

46) Refer to Figure 9.9, above, to solve the following problems. a. Calculate the fixed cost of production. b. Calculate the average total cost of production when the firm produces 20 units of output. c. Calculate the average variable cost of production when the firm produces 20 units of output. d. Calculate the average fixed cost of production when the firm produces 20 units of output. e. Calculate the average fixed cost of production when the firm produces 15 units of output. f. If the firm increases output from 15 to 20 units, what is the marginal cost of output? Answer: a. $100 b. $22.5 c. $17.5 d. $5 e. $6.67 f. $14 Diff: 3 Type: ES Topic: Cost Curves Learning Outcome: 9.5 Graph average total cost, average variable cost, average fixed cost, and marginal cost AACSB: Analytic Skills

9.6

Explain how firms use the long-run average cost curve in their planning

1) Long-run cost curves are U-shaped because A) of the law of demand. B) of the law of diminishing returns. C) of economies and diseconomies of scale. D) of the law of supply. E) of the larger fixed cost. Answer: C Diff: 2 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 2) If, when a firm doubles all its inputs, its average cost of production decreases, then production displays A) diminishing returns. B) economies of scale. C) diseconomies of scale. D) declining fixed costs. E) diminishing average costs. Answer: B Diff: 1 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 3) If production displays economies of scale, the long-run average cost curve is A) above the short-run average total cost curve. B) downward sloping. C) upward sloping. D) below the long-run marginal cost curve. E) same as short run average cost curve. Answer: B Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

4) If a firm enjoys economies of scale, its total costs ________ when it ________. A) more than double; doubles its capital B) less than double; doubles all inputs C) less than double; doubles its labour D) more than double; doubles its labour E) decreases; increases output Answer: B Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 5) Economies of scale exist as a firm increases its size in the long run because of all of the following except A) the firm can afford more sophisticated technology in production. B) labour and management can specialize even further in their tasks. C) as a larger input buyer, the firm can purchase inputs at a lower per unit cost. D) as a firm expands its production, its profit margin per-unit of output increases. E) the firm can get inputs in bigger quantities at lower prices. Answer: D Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 6) Over the past twenty years, the number of small family farms has fallen significantly and in their place there are fewer, but larger, farms owned by corporations. Which of the following best explains this trend? A) diseconomies of scale in farming B) economies of scale in farming C) diminishing returns to labour in farming D) declining productivity E) increasing cost for small farmers Answer: B Diff: 1 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 7) The long-run average cost curve shows A) the minimum average cost of producing any level of output in the long run. B) where the most profitable level of output occurs. C) the average cost of producing where diminishing returns are not present. D) the plant size or scale that the firm should build. E) the lowest average cost of producing every level of output in the long run. Answer: E Diff: 2 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 88 Copyright © 2024 Pearson Canada Inc.

8) In 2018, Cimarex Energy founded in 2002 in Denver agreed to buy Resolute Energy founded in 2004 and also headquartered in Denver. Before the deal, Cimarex pumped 220,000 barrels of oil per day, and Resolute pumped 35,000 barrels per day. As a result of this deal, A) Cimarex will reach the minimum point on its average total cost curve. B) Cimarex will reach the maximum point on its average total cost curve. C) Cimarex will reach the minimum point on its marginal cost curve. D) Cimarex will reach the maximum point on its marginal cost curve. E) Cimarex’s average cost will fall along the long-run average cost curve but we cannot tell whether it will reach the minimum point on its average total cost curve. Answer: E Diff: 2 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills Special Feature: Solved Problem: Using Long-Run Average Cost Curves to Understand a Business Merger 9) In 1955, the chairman of the Sony corporation offered to sell transistor radios through department stores in the United States. Sony based its selling price on its average total cost of production. If a store bought 5,000 radios, Sony would sell them at $29.95 each. For 10,000 there would be a discount, and for more than 10,000 the price would begin to climb. Based on this information, Sony reached minimum efficient scale A) at a quantity below 5,000 radios. B) at a quantity of 5,000 radios. C) at a quantity of 10,000 radios. D) at a quantity above 10,000 radios. E) at a quantity of exactly 15,000 radios. Answer: C Diff: 2 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills Special Feature: Solved Problem: Using Long-Run Average Cost Curves to Understand a Business Merger 10) If a firm decreases its plant size and finds that its long-run average costs have decreased, then A) its labour is more productive in a smaller plant. B) its diseconomies of scale are less. C) the firm should reduce its plant size even more. D) the firm is now profitable. E) its labour supervision becomes easier in the smaller plant. Answer: B Diff: 2 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

11) If, when a firm doubles all its inputs, its average cost of production increases, then production displays A) diminishing returns. B) economies of scale. C) diseconomies of scale. D) declining fixed costs. E) increasing costs. Answer: C Diff: 1 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 12) Which of the following is a reason why a firm would experience diseconomies of scale? A) To finance an increase in the size of its plant, a firm must borrow more money or sell more shares of stock. B) As the size of the firm increases, it becomes more difficult to find markets where it doesn't already have operations. C) As the size of the firm increases, it becomes more difficult to coordinate the operations of its manufacturing plants. D) As the size of the firm increases, it must operate in other countries where differences in language, customs and laws increase its average costs. E) All of the above. Answer: C Diff: 1 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 13) The minimum efficient scale is A) the level of output where diminishing returns have not set in yet. B) the plant size that yields the most profit. C) level of operation where long-run average costs are lowest. D) the smallest output level where the firm finally reaches productive efficiency. E) a minimum level of output that a firm must produce to stay in business. Answer: C Diff: 1 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

14) All of the following statements are true of the minimum efficient scale except one. Which one? A) All possible economies of scale have been exhausted. B) The short-run average total cost curve's minimum point is equal to the long run average cost curve's minimum point. C) Any increase in the scale of operation will encounter diseconomies of scale. D) An increase in the output level will increase profit. E) All of the above are true. Answer: D Diff: 2 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 15) At the minimum efficient scale, A) all possible economies of scale have not been exhausted. B) the firm has achieved the lowest possible average cost of production. C) any increases in the scale of operation will encounter further economies of scale. D) marginal cost is at its minimum. E) the firm has reached the minimum level of output necessary to stay in business. Answer: B Diff: 2 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 16) The ABC Company manufactures routers that are used to provide high-speed Internet service. ABC sells an average of 1,000 routers each month, but to exhaust economies of scale in its industry, ABC would have to sell 3,000 routers each month. Therefore, A) ABC is experiencing diseconomies of scale. B) ABC is experiencing diminishing returns. C) to reach minimum efficient scale, ABC would have to sell at least 3,000 routers each month. D) ABC will soon go out of business. E) it will never reach the minimum efficient scale. Answer: C Diff: 1 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

17) When a firm's long-run average cost curve is horizontal for a range of output, then that range of production displays A) increasing returns to scale. B) constant returns to scale. C) decreasing returns to scale. D) constant average fixed costs. E) diseconomies of scale. Answer: B Diff: 1 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 18) Ford Motor Company started producing the Model A at plants scattered around the United States A) to save on transport costs. B) because diseconomies of scale at its initial River Rouge plant in Michigan resulted in high production costs. C) to locate its production centers closer to its customers. D) because it was not able to attract skilled workers to its first plant in River Rouge, Michigan. E) to achieve economies of scale. Answer: B Diff: 1 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills Special Feature: Apply the Concept: The Colossal River Rouge: Diseconomies of Scale at Ford Motor Company 19) If production displays diseconomies of scale, the long run average cost curve is A) above the short run average total cost curve. B) above the long run marginal cost curve. C) upward sloping. D) downward sloping. E) at its minimum efficient scale. Answer: C Diff: 2 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

20) Which of the following can cause economies of scale? A) Larger firms can borrow at a lower cost. B) Smaller firms tend to have more flexible management structures. C) Larger firms tend to have more capital available to them. D) Smaller firms tend to pay lower corporate income tax rates. E) Smaller firms producing more than their efficient scale. Answer: A Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 21) A Toyota plant president was quoted as saying, "Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years." This quote suggests that A) Toyota was experiencing an excess demand for its automobiles which it had difficulty keeping up with. B) as Toyota expanded its capacity, it experienced diseconomies of scale. C) Toyota was focused on "churning" out cars for which it did not invest sufficiently in training its workers. D) high demand for Toyota's cars prevented the company from focusing on its strength: auto design. E) Toyota is not able to handle large quantity of output. Answer: B Diff: 2 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 22) A Toyota plant president was quoted as saying, "Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years." Based on this quote, what must be true of the plant's average cost of production curve? A) It is upward sloping. B) It is downward sloping. C) It is a ray from the origin. D) It is U-shaped. E) We require more information to determine the average cost. Answer: A Diff: 2 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills

23) What is the difference between "diminishing marginal returns" and "diseconomies of scale"? A) Both concepts explain why marginal cost increases after some point but diminishing marginal returns applies only in the short run when there is at least one fixed factor, while diseconomies of scale applies in the long run when all factors are variable. B) Both concepts explain why average total cost increases after some point but diminishing marginal returns applies only in the short run when there is at least one fixed factor, while diseconomies of scale applies in the long run when all factors are variable. C) Both concepts apply in the short run when at least one factor is fixed, explains why marginal cost increases, hence there is no difference. D) Diminishing marginal returns, which applies only in the long run when all factors are variable, explains why average variable cost increases, while diseconomies of scale, which applies in the short run when at least one factor is fixed, explains why average total cost increases. E) Diminishing marginal returns, which applies only in the short run when at least one factor is fixed, explains why marginal cost increases, while diseconomies of scale, which applies in the long run when all factors are variable, explains why long run average total costs increase. Answer: E Diff: 2 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Diminishing Returns with Diseconomies of Scale

Figure 9.10

24) Refer to Figure 9.10. Suppose for the past 8 years the firm has been producing Qd units per period using plant size ATC4. Now, following a permanent change in demand, it plans to cut production to Qc units. What will happen to its average cost of production? A) In the short run, its average cost falls from $47 to $41, and in the long run, average cost falls even further to $37. B) In the short run, its average cost rises from $47 to $55, and in the long run, average cost falls to $41. C) In the short run, its average cost falls from $47 to $37, and in the long run, average cost rises to $41. D) In the short run, its average cost rises from $41 to $47, and in the long run, average cost falls to $37. E) In the short run, its average cost rises from $47 to $55, and in the long run, average cost falls to $37. Answer: E Diff: 2 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills Special Feature: Solved Problem: Using Long-Run Average Cost Curves to Understand a Business Merger 25) Refer to Figure 9.10. Identify the minimum efficient scale of production. A) Qa B) Qb C) Qc D) Qd E) Qb and Qd Answer: B Diff: 2 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills Special Feature: Solved Problem: Using Long-Run Average Cost Curves to Understand a Business Merger 95 Copyright © 2024 Pearson Canada Inc.

26) Refer to Figure 9.10. Identify the long-run average total cost curve. A) ATC1 B) ATC2 C) ATC3 D) ATC4 E) ATC5 Answer: E Diff: 2 Type: MC Topic: Cost Curves Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills 27) The following concept is related to short run. A) Economies of scale. B) Diseconomies of scale. C) Constant returns to scale. D) Production possibilities frontier. E) Diminishing marginal productivity. Answer: E Diff: 2 Type: MC Topic: Short-Run Production and Short-Run Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 28) In the long run, the relevant cost is total cost. Answer: TRUE Diff: 2 Type: TF Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 29) If the long-run average total cost curve is downward sloping, then the firm is experiencing decreasing returns to scale. Answer: FALSE Diff: 2 Type: TF Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 30) If production displays constant returns to scale, then all economies of scale have been exhausted. Answer: TRUE Diff: 2 Type: TF Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

31) An important reason why diseconomies of scale arise is because firms may have to hire lower skilled workers as firms expand. Answer: FALSE Diff: 1 Type: TF Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 32) What are economies of scale? What are diseconomies of scale? Answer: Economies of scale occur when a firm's long-run average costs fall as it increases output. Diseconomies of scale occur when a firm's long-run average costs rise as the firm increases output. Diff: 2 Type: ES Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 33) What is the difference between total cost and variable cost in the long run? Answer: In the short run, total cost = variable cost + fixed cost; but in the long run, total cost = variable cost because there are no fixed costs in the long run. Diff: 1 Type: ES Topic: Total Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

34) Suppose Argyle Sachs has to choose between building a smaller sweater factory and a larger sweater factory. In the following graph, the relationship between costs and output for the smaller factory is represented by the curve ATC1, and the relationship between costs and output for the larger factory is represented by the curve ATC2.

a. If Argyle expects to produce 3,600 sweaters per month, should he build a smaller factory or a larger factory? Briefly explain. b. If Argyle expects to produce 5,000 sweaters per month, should he build a smaller factory or a larger factory? Briefly explain. c. If the average cost of producing sweaters is lower in the larger factory when Argyle produces 6,500 sweaters per week, why isn't it also lower when Argyle produces 4,000 sweaters per week? Answer: a. Argyle's costs will be lower with a smaller factory. b. Argyle's costs will be lower with a larger factory. c. Economies of scale often take the form of a larger factory allowing for lower average cost for a large quantity, but actually higher average cost for a smaller quantity. Diff: 2 Type: ES Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking Special Feature: Solved Problem: Using Long-Run Average Cost Curves to Understand a Business Merger

35) Due to a downturn in business and increased competition, Dave Amundson, owner of Dave's Delicious Donuts, decides to close half of his 36 donut shops. Use a graph to illustrate average total cost curves for Dave's Delicious Donuts before and after closing the 18 stores. Assume that after closing the stores, Dave's Delicious Donuts will be producing at minimum average total cost. Answer:

Before closing the stores, Dave's would be represented by ATC2, because he expected their sales to be Q2. In that case, their average costs would have been AC1. In fact, their sales were only Q1, which meant their costs were AC3. Based on declining sales, Dave closed 18 stores. After closing these stores, Dave's is represented by ATC1. This would have lowered their average costs to AC2, which is at the minimum of this average total cost curve. Diff: 2 Type: ES Topic: Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills 36) In the long run, A) the firm's fixed costs are greater than its fixed costs in the short run. B) all of the firm's costs are explicit costs; there are no implicit costs of production. C) the firm is more profitable than it is in the short run. D) all of the firm's costs are variable costs. E) there is more fixed cost than in the short run. Answer: D Diff: 1 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

37) Which of the following statements regarding a firm's long-run average total cost (LRATC) curve and its short-run average total cost (SRATC) curve is true? A) The shape of the LRATC is affected by the law of diminishing returns. B) The SRATC, but not the LRATC, can be used by a firm's managers for planning. C) The LRATC shows the lowest cost at which a firm is able to produce a given level of output when no inputs are fixed. D) The contribution of average fixed cost to LRATC is greater than its contribution to SRATC. E) None of the above statements is true about the long-run and short-turn average total cost curves. Answer: C Diff: 2 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 38) If a firm's long-run average total curve shows that it can produce 5,000 DVDs at an average cost of $2.00 and 15,000 DVDs at an average cost of $1.50, this is evidence of A) diminishing returns. B) economies of scale. C) diseconomies of scale. D) the law of supply. E) better technology. Answer: B Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 39) Economies of scale occur when A) a firm's long-run average total costs fall as it increases the quantity of output it produces. B) the marginal product of labour is greater than the average product of labour. C) short-run marginal cost falls. D) the demand for a firm's output increases. E) the firm produces huge quantity of output at a higher cost. Answer: A Diff: 1 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

40) When Henry Ford was establishing manufacturing plants for his Model A, he could begin producing 5,000 per year and sell them at approximately $400 each. When he established the Highland Park factory, he could produce 10,000 and could afford to sell them at a discount. When he built the River Rouge factory, he could produce more than 10,000 but was no longer profitable at $400. Based on this information, Ford began experiencing diseconomies of scale A) at a quantity of less than 5,000 automobiles. B) at a quantity between 5,000 and 10,000 automobiles. C) at a quantity of 10,000 automobiles. D) at a quantity just greater than 10,000 automobiles. E) at any quantity because $400 is a low price at all levels of output. Answer: D Diff: 2 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills Special Feature: Apply the Concept: The Colossal River Rouge: Diseconomies of Scale at Ford Motor Company 41) When Henry Ford was establishing manufacturing plants for his Model A, he could begin producing 5,000 per year and sell them at approximately $400 each. When he established the Highland Park factory, he could produce 10,000 and could afford to sell them at a discount. When he built the River Rouge factory, he could produce more than 10,000, but was no longer profitable at $400. Based on this information, Ford experienced economies of scale A) only at quantities up to 5,000 automobiles. B) only at quantities between 5,000 and 10,000 automobiles. C) only at quantities between 0 and 10,000 automobiles. D) only at quantities above 10,000 automobiles. E) at twice the quantity of 10,000 automobiles. Answer: C Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills Special Feature: Apply the Concept: The Colossal River Rouge: Diseconomies of Scale at Ford Motor Company

42) If an airport decides to expand by building an additional passenger terminal, and in doing so it lowers its average cost per airplane landing, it was previously operating at A) minimum efficient scale. B) more than minimum efficient scale. C) less than minimum efficient scale. D) minimum capacity. E) full capacity. Answer: C Diff: 1 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills Special Feature: Solved Problem: Using Long-Run Average Cost Curves to Understand a Business Merger 43) If an airport decides to expand by building an additional passenger terminal, and in doing so it lowers its average cost per airplane landing, then the expansion would provide ________ to the airlines. A) economies of scale B) diseconomies of scale C) higher average costs but lower total costs D) higher marginal costs but lower total costs E) no benefits Answer: A Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking Special Feature: Solved Problem: Using Long-Run Average Cost Curves to Understand a Business Merger 44) Which of the following is not a reason why firms experience economies of scale? A) Technology can make it possible to increase production with a smaller increase in at least one input. B) Workers and managers can become more specialized, enabling them to be more productive. C) Larger firms may be able to purchase inputs at lower costs than smaller competitors. D) As output increases, the managers can begin to have difficulty coordinating the operations of their firms. E) All of the above are reasons for why firms experience economies of scale. Answer: D Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

45) Diseconomies of scale occur when A) long-run average costs rise as a firm increases its output. B) long-run average costs fall as a firm expands its plant size. C) short-run average costs rise as a firm expands its plant size. D) long-run labour costs rise as a firm increases its output. E) marginal cost is less than average cost. Answer: A Diff: 1 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 46) A curve showing the lowest cost at which a firm is able to produce a given level of output in the long run is A) a long-run production function. B) a long-run marginal cost curve. C) a minimum efficient scale curve. D) a long-run average total cost curve. E) a constant returns to scale curve. Answer: D Diff: 1 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 47) The level of output at which all economies of scale have been exhausted is known as A) constant returns to scale. B) minimum efficient scale. C) the economically efficient output level. D) optimal economic size. E) increasing returns to scale. Answer: B Diff: 1 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 48) Minimum efficient scale is defined as the level of output at which A) all economies of scale are exhausted. B) diminishing returns affect average total cost. C) the firm's long-run average total cost starts falling. D) the maximum output is produced. E) the firm achieved the economically efficient output level. Answer: A Diff: 1 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 103 Copyright © 2024 Pearson Canada Inc.

Figure 9.11

Figure 9.11 illustrates the long-run average cost curve for a firm that produces picture frames. The graph also includes short-run average cost curves for three firm sizes: ATCa, ATCb and ATCc. 49) Refer to Figure 9.11. The minimum efficient scale of output is reached at what rate of output? A) 10,000 workers B) 5,000 picture frames C) 20,000 picture frames D) 10,000 picture frames E) 15,000 picture frames Answer: D Diff: 1 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills 50) Refer to Figure 9.11. For output rates greater than 20,000 picture frames per month, A) the firm will not make a profit because the average cost of production will be too high. B) the firm will experience diseconomies of scale. C) the firm will experience diminishing returns. D) the short-run average total cost will equal the long-run average total cost of production. E) the firm can still produce more and go up to 25,000 picture frames per month. Answer: B Diff: 1 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills

51) Refer to Figure 9.11. Constant returns to scale A) occur for output rates greater than 5,000 picture frames. B) occur between 5,000 and 20,000 picture frames per month. C) occur between 5,000 and 10,000 pictures frames per month. D) will shift the long-run average cost curve downward. E) occur between 10,000 and 20,000 pictures frames per month. Answer: E Diff: 1 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills 52) Refer to Figure 9.11. In the short run, if the firm sells fewer than 5,000 picture frames per month, A) it should produce with the scale of operation associated with ATCa. B) it should produce with the scale of operation associated with ATCb. C) it should produce with the scale of operation associated with ATCc. D) it will experience constant returns to scale. E) it should produce with the scale of operation associated with either ATCa or ATCb. Answer: A Diff: 1 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills 53) Refer to Figure 9.11. If the firm chooses to produce and sell 25,000 frames per month by operating in the short run with a scale operation represented by ATCc, A) the firm will not be operating efficiently. B) the firm will be operating efficiently. C) the firm would lower its average costs by reducing its scale of operation. D) the firm will not be able to earn a profit. E) the firm should consider exiting the market. Answer: B Diff: 2 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills

Table 9.8 Quantity (sets) 100 200 300 400 500

Long Run Average Cost $40 35 30 30 35

Elegant Settings manufactures stainless steel cutlery. Table 9.8 shows the company's cost data. 54) Refer to Table 9.8. Elegant Settings experiences A) economies of scale up to an output level of 400. B) diminishing returns up to an output level of 400. C) increasing returns beyond an output level of 400. D) economies of scale at an output of 300 or less and diseconomies of scale at an output level above 400. E) losses at any level of output. Answer: D Diff: 2 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills 55) Refer to Table 9.8. What is the minimum efficient scale of production? A) 100 units B) 200 units C) 300 units D) 400 units E) 500 units Answer: C Diff: 1 Type: MC Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills

56) The River Rouge plant was built by the Ford Motor Company in the 1920s to produce the company's Model A car. Which of the following is evidence that the River Rouge plant suffered from diseconomies of scale? A) Despite an expensive advertising campaign, the Model A did not earn the company a profit. B) Model A cars made at the River Rouge plant failed to earn Ford a profit. Ford eventually constructed smaller plants to make the Model A at a lower average cost. C) Model A cars made at the River Rouge plant failed to earn a profit. Ford reduced the average cost of the Model A by cutting its employees' wages. D) Model A cars made at the River Rouge plant failed to earn a profit because the price of steel used to manufacture the Model A rose when workers in the steel industry went on strike. E) None of the above is evidence that the River Rouge plant suffered from diseconomies of scale. Answer: B Diff: 1 Type: MC Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills Special Feature: Apply the Concept: The Colossal River Rouge: Diseconomies of Scale at Ford Motor Company 57) Which of the following statements explains the difference between diminishing returns and diseconomies of scale? A) Diminishing returns are the result of changes in explicit costs. Diseconomies of scale are the result of changes in explicit costs and implicit costs. B) Diminishing returns refer to production while diseconomies of scale refer to costs. C) Diminishing returns cause a firm's marginal cost curve to rise; diseconomies of scale cause a firm's marginal cost curve to fall. D) Diminishing returns apply only to the short run; diseconomies of scale apply only in the long run. E) Diminishing returns apply to smaller firms; diseconomies of scale apply to larger firms. Answer: D Diff: 1 Type: MC Topic: The Short Run and the Long Run Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Diminishing Returns with Diseconomies of Scale

58) Two stores—Lazy Guys and Ralph's Recliners—are located in the same city. Both stores buy recliner chairs from the same manufacturer at the same price and both stores are about the same size, so that the fixed costs of production for both stores are the same. Ralph's Recliners sells more recliners per month and Ralph's has a lower average total cost of production. Which of the following can explain why the average total cost of production is lower for Ralph's Recliners? A) Because Ralph's Recliners sells more output, its average fixed costs are lower than Lazy Guys' average fixed cost. B) The rent Lazy Guys pays for its building is greater than the rent paid by Ralph's Recliners. C) Ralph's explicit costs are less because Ralph owns the land on which his building is located. Lazy Guys must make lease payments for the land on which its store is located. D) The price of recliners charged by Ralph's is greater than the price charged by Lazy Guys. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Fixed Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking Special Feature: Economics in Your Life: Using Cost Concepts in Your Own Business 59) Assume that you observe the long-run average cost curve of ACME Bookstores, a national chain. Starting from the point on the curve where output is zero and moving to the right, which of the following lists the behaviour of long-run average costs in the correct sequence (that is, which will be observed first, second, etc.)? A) minimum efficient scale; economies of scale; constant returns to scale; diseconomies of scale B) economies of scale; constant returns to scale; diseconomies of scale; minimum efficient scale C) constant returns to scale; economies of scale; minimum efficient scale; diseconomies of scale D) economies of scale; minimum efficient scale; constant returns to scale; diseconomies of scale E) minimum efficient scale; constant returns to scale; economies of scale; diseconomies of scale Answer: D Diff: 2 Type: MC Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 60) When solar panels were first introduced to the market, sales numbers were low and production costs were high. Manufacturers realized the need to produce and sell more solar panels at a lower average total cost in order to achieve A) economies of scale. B) diseconomies of scale. C) positive technological change. D) a reduction in total fixed costs. E) achieve market power. Answer: A Diff: 1 Type: MC Topic: Marginal Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

61) Minimum efficient scale is defined as the level of output at which the short-run average total cost stops decreasing. Answer: FALSE Diff: 1 Type: TF Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 62) If a firm is experiencing diseconomies of scale, its long-run average cost curve is increasing. Answer: TRUE Diff: 1 Type: TF Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 63) A U-shaped long run average cost curve implies that a firm experiences economies of scale at low levels of production and diseconomies of scale at high levels of production. Answer: TRUE Diff: 1 Type: TF Topic: Long-Run Average Cost Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking

Table 9.9 Fixed Cost Small plant Medium plant Large plant

$10,000 15,000 25,000

Average Variable Cost $2.00 1.30 0.50

64) Refer to Table 9.9. Clock It To Me manufactures clock radios. The table above shows estimates of fixed cost per period and average variable cost for three possible plant sizes. a. You are employed as the company's cost accountant and have been asked to prepare cost estimates for various output levels for each of the three possible plant sizes. Record your calculations in the table below. Average Cost of Production 5,000 Clock Radios Small plant Medium plant Large plant

8,000 Clock Radios

20,000 Clock Radios

b. For each of the three output levels, which plant size will generate the lowest average total cost of production? c. Suppose the firm currently sells 8,000 clock radios per period (using the optimal plant size for this output level). However, it has just secured a long-term contract to supply 20,000 clock radios per period. In the short run, what is the average total cost of producing 20,000 clock radios? Provide a numerical value based on your answer in part a. d. What happens to average total cost of production in the long run? Provide a numerical value based on your answer in part a. Answer: a. Average Cost of Production 5,000 Clock 8,000 Clock 20,000 Clock Radios Radios Radios Small plant $4.00 $3.25 $2.50 Medium plant 4.30 3.18 2.05 Large plant 5.50 3.63 1.75 b. For an output of 5,000 units, the lowest average cost is achieved with a small plant size. For an output of 8,000 units, the lowest average cost is achieved with a medium plant size and for output 20,000 units the lowest average cost is achieved with a large plant size. c. The firm currently has a medium-sized plant. In the short run, average total cost of producing 20,000 units is $2.05. d. In the long run, when it is able to build a larger plant, the average total cost will fall to $1.75. Diff: 3 Type: ES Topic: The Short Run and the Long Run Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills 110 Copyright © 2024 Pearson Canada Inc.

65) State the law of diminishing returns. How do diminishing returns differ from diseconomies of scale? Be sure to define diseconomies of scale in your answer. Answer: The law of diminishing returns states that at some point, adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline. The law applies in the short run when there is at least one fixed factor of production. Diseconomies of scale applies in the long run when a firm is free to vary all of its inputs. Diseconomies of scale exist when a firm's long-run average cost rises as it increases output. Diff: 2 Type: ES Topic: Diminishing Returns Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 66) What is minimum efficient scale? What is likely to happen in the long run to firms that do not reach minimum efficient scale? Answer: Minimum efficient scale is the lowest level of output at which all economies of scale have been exhausted—that is, where the long-run average cost curve stops sloping downward. In the long run, firms that don't reach minimum efficient scale will have higher average costs than competitors that do reach minimum efficient scale, so they will probably be driven out of business. However, firms that justify selling at premium prices due to product differentiation can survive. Diff: 2 Type: ES Topic: Minimum Efficient Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Reflective Thinking 67) Use a long-run average cost curve graph to illustrate how diseconomies of scale would not make it beneficial for two companies to go through with a merger. Answer: Assume the two companies are on ATC1. If they merge, they would move to ATC2 and be on the section of the long-run average cost curve that exhibits diseconomies of scale.

Diff: 2 Type: ES Topic: Diseconomies of Scale Learning Outcome: 9.6 Explain how firms use the long-run average cost curve in their planning AACSB: Analytic Skills 111 Copyright © 2024 Pearson Canada Inc.

9.7

Use isoquants and isocost lines to understand production and cost

1) An isoquant shows A) the combinations of two goods that yield the same total satisfaction. B) the combinations of two inputs that yield the same total product. C) the combinations of two inputs that cost the same total quantity of money. D) the combination of two goods that cost the same amount of money. E) the combination of output that use the same quantity of inputs. Answer: B Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 2) The slope of an isoquant measures A) the price ratio of the two inputs. B) the average product of labour. C) the ratio of the marginal utility of the two inputs. D) the rate at which inputs can be substituted for each other keeping total output constant. E) the ratio of two outputs that can be produced with different combination of inputs. Answer: D Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 3) The marginal rate of technical substitution is A) the rate at which a firm is able to substitute one input for another, while keeping total cost constant. B) the rate at which a firm is able to substitute one input for another, while keeping the level of output constant. C) the rate at which a firm is able to institute positive technological changes to its production process. D) the rate at which a firm is able to increase its output by replacing labour with technology. E) the rate at which a firms is able to increase output by applying technical skills. Answer: B Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking

4) An isocost line shows A) all the possible combinations of two inputs that a firm can use to produce its output. B) all the possible combinations of two inputs a firm can use to minimize its cost. C) all the possible combinations of two inputs a firm can use that have the same marginal cost. D) all the possible combinations of two inputs with constant returns to scale. E) all the possible combinations of two inputs a firm can use that have the same total cost. Answer: E Diff: 2 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 5) The absolute value of the slope of an isocost line equals the ratio of A) the marginal productivities of the two inputs. B) the prices of the two inputs. C) the marginal utilities of the two inputs. D) the quantities of the two inputs. E) the marginal cost of inputs. Answer: B Diff: 2 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 6) Higher isocost lines correspond to higher A) profits. B) total costs of production. C) input prices. D) sales revenue. E) total production. Answer: B Diff: 1 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 7) You own a business that answers telephone calls for physicians after their offices close. You have an incentive to substitute capital for labour if the A) price of capital increases. B) price of labour decreases. C) price of labour increases. D) marginal product of labour increases. E) marginal product of capital decreases. Answer: C Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 113 Copyright © 2024 Pearson Canada Inc.

8) Suppose the price of capital and labour remain constant but that the average educational level of workers has increased and therefore, productivity of labour increases. This would lead a firm A) to adopt a more capital-intensive production technology. B) to adopt a more labour-intensive technology. C) to keep its output and production technology unchanged, but to use fewer units of labour. D) to use only labour to produce the product. E) to adopt a neutral technology. Answer: B Diff: 1 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking Figure 9.12

9) Refer to Figure 9.12. The movement from isoquant T to isoquant U depicts A) a change in preferences with regards to input usage. B) an increase in the cost of production. C) an increase in output. D) an increase in labour usage holding capital and output constant. E) a decrease in output. Answer: C Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills

10) Refer to Figure 9.12. Which of the following statements about the input combinations shown in the diagram is false? A) The firm produces a higher output level when it uses input combination b compared to input combination a. B) The firm produces a lower output level when it uses input combination d compared to input combination a. C) The firm produces the same output level when it uses input combination a or c. D) The firm incurs the same total cost when it uses input combination a or c to produce a given quantity of output. E) All of the above are true statements. Answer: D Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking Figure 9.13

11) Refer to Figure 9.13. The lines shown in the diagram are isocost lines. Which of the following shows an increase in the price of labour while the price of capital remains unchanged? A) the movement from AF to BD B) the movement from AF to CE C) the movement from BF to BD D) the movement from BF to CE E) the movement from AF to BF Answer: C Diff: 3 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills

12) Refer to Figure 9.13. The lines shown in the diagram are isocost lines. Which of the following shows a decrease in the price of capital while the price of labour remains unchanged? A) the movement from AF to BF B) the movement from BF to AF C) the movement from BF to BD D) the movement from BF to CE E) the movement from AF to CE Answer: B Diff: 3 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 13) Refer to Figure 9.13. The lines shown in the diagram are isocost lines. Which of the following shows an increase in the firm's total cost while the price of labour and the price of capital remain unchanged? A) the movement from CE to BF B) the movement from CE to AF C) the movement from BD to AF D) the movement from BD to CE E) the movement from BF to BD Answer: A Diff: 3 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 14) Refer to Figure 9.13. The lines shown in the diagram are isocost lines. A movement from CE to BD occurs when A) the price of capital increases while the price of labour remains unchanged. B) the price of labour decreases while the price of capital remains unchanged. C) the price of capital increases while the price of labour decreases. D) the price of capital decreases while the price of labour increases. E) the price of capital and price of labour both decrease. Answer: D Diff: 3 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills

15) Refer to Figure 9.13. The lines shown in the diagram are isocost lines. If the price of labour is $50 per unit, then along the isocost AF, the total cost A) is $500. B) is $750. C) is $1,250. D) is $1,500. E) is $1,700. Answer: A Diff: 3 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 16) Refer to Figure 9.13. The lines shown in the diagram are isocost lines. If the price of labour is $50 per unit, what is the price of capital along the isocost CE? A) $400 per unit B) $100 per unit C) $25 per unit D) $10 per unit E) $5 per unit Answer: C Diff: 3 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills

Figure 9.14

Figure 9.14 shows the optimal input combinations for the production of a given quantity of potash in Canada and in China. 17) Refer to Figure 9.14. Consider the following statements at points A and B: a. For each country, the marginal product per dollar spent on labour equals to the marginal product per dollar spent on capital. b. The price of labour is relatively higher in Canada than in China and the price of capital is relatively lower in Canada than in China. c. The price of labour and the price of capital are relatively higher in Canada than in China. Based on the figure, which of the statements above are true? A) statements a and c only B) statements a and b only C) statements b and c only D) All of the statements are true. E) All the statements are false. Answer: B Diff: 3 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills

18) Refer to Figure 9.14. Which of the following could explain why Canada and China use different input combinations to produce a given quantity of potash and yet, each country produces that quantity at the lowest possible cost? A) because the prices of inputs are not the same for the two countries: labour is relatively lower-priced and capital is relatively higher priced in Canada B) because the input resources available to both countries are different and they try to trade in input resources with one another to minimize the cost C) because Canada has more sophisticated technology and therefore is more efficient in potash production D) because the marginal product per dollar spent on capital yields a higher return in Canada than in China E) because the prices of inputs are not the same for the two countries: labour is relatively lower-priced and capital is relatively higher priced in China Answer: E Diff: 3 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills Figure 9.15

19) Refer to Figure 9.15. What is the combination of inputs that produces 200 gooseberry pies at the lowest cost? A) combination e: 10 hours of labour and 48 units of capital B) combination f: 40 hours of labour and 24 units of capital C) combination g: 60 hours of labour and 14 units of capital D) combination h: 60 hours of labour and 9 units of capital E) combination f: 60 hours of labour and 48 units of capital Answer: B Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 119 Copyright © 2024 Pearson Canada Inc.

20) Refer to Figure 9.15. Suppose Hilda hires labour at $8 per hour and capital costs $10 per unit. What is the minimum cost of producing 200 gooseberry pies? A) $3,600 B) $1,120 C) $592 D) $560 E) $450 Answer: D Diff: 3 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 21) Refer to Figure 9.15. Suppose Hilda produces 100 gooseberry pies. What is the marginal rate of technical substitution of labour for capital when labour is increased from 10 to 20 hours? A) 1 unit of capital B) 10 units of capital C) 14 units of capital D) 24 units of capital E) 34 units of capital Answer: A Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 22) Maximizing the level of output for a given total cost of production A) is equivalent to producing the profit maximizing output level. B) is equivalent to minimizing cost for a given level of output. C) necessitates using only relatively low-priced inputs. D) will maximize total revenue. E) is equivalent to balancing the cost and revenue. Answer: B Diff: 2 Type: MC Topic: Cost Minimization Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking Special Feature: Apply the Concept: Do National Football League Teams Behave Efficiently?

23) An expansion path shows A) the level of sales necessary for a firm if it wants to expand. B) the level of long-run average cost at different scales of operation. C) the least-cost combination of inputs for each level of output. D) the returns to scale at each level of output. E) how a firm can grow in the long run. Answer: C Diff: 2 Type: MC Topic: Expansion Path Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 24) The slope of an isocost line determines the marginal rate of substitution. Answer: FALSE Diff: 1 Type: TF Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 25) An isoquant is a curve that shows all the combinations of two inputs that will produce the same level of output. Answer: TRUE Diff: 1 Type: TF Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 26) What is an isoquant? What is the slope of an isoquant? Answer: An isoquant is curve that shows all the combinations of two inputs, such as capital and labour, that will produce the same level of output. Its slope is the rate at which a firm can substitute one input for the other while keeping output constant, or the marginal rate of technical substitution (MRTS). Diff: 2 Type: SA Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 27) If the marginal product of labour is 45 units of output and the marginal product of capital is 56 units of output while the wage rate is $20 per worker and the cost of capital is $28 per machine, are these two inputs being used in the least-cost combination? What should be done if they are not? Answer: The marginal product per dollar spent on labour is 2.25 units and the marginal product per dollar spent on capital is 2 units. Therefore, the firm is not using the least cost combination of inputs. To reduce costs the firm should use more labour and less capital. Diff: 3 Type: SA Topic: Cost Minimization Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills Special Feature: Solved Problem: Determining the Optimal Combination of Inputs

28) A curve that shows all the combinations of two inputs, such as labour and capital, that will produce the same level of output is called A) an isoquant. B) an isocost line. C) a budget line. D) an optimal input combination curve. E) the production possibilities curve. Answer: A Diff: 1 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 29) The rate at which a firm is able to substitute one input for another while keeping the level of output constant is called the A) opportunity cost of inputs. B) marginal rate of technical substitution. C) input trade-off rate. D) isoquant substitution rate. E) constant marginal cost. Answer: B Diff: 1 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 30) The typical shape of an isoquant is A) convex towards the origin. B) concave towards the origin. C) linear and downward sloping. D) linear and upward sloping. E) horizontal. Answer: A Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking

31) The slope of a typical isoquant is negative because to produce a given output, a producer A) will use more of one input only if it uses more of another. B) can use less of one input only if the productivity of that input increases. C) can use less of one input only if it uses more of another. D) will use more of one input only if the price of that input falls. E) output increases with the increase in inputs. Answer: C Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 32) The marginal rate of technical substitution is measured by A) the slope of the isoquant. B) the relative input prices. C) the slope of the isocost line. D) the ratio of the product's price to the product's cost of production. E) the ratio of technology and its cost. Answer: A Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 33) The slope of an isocost line ________ and equals the negative of ________. A) increases as we move down the line; the ratio of input prices B) decreases as we move down the line; the ratio of the marginal products C) is constant; the ratio of input prices D) is constant; the ratio of the marginal products E) increases as we move up the line; the ratio of marginal costs Answer: C Diff: 2 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 34) As a firm moves to higher isocost lines, A) its profits increase. B) its revenue increases. C) its input price ratio increases. D) its total cost increases. E) its production is growing. Answer: D Diff: 1 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking

35) An isocost line shows A) combinations of two goods that a firm can produce using similar inputs. B) combinations of two inputs that result in the same total output for a firm. C) combinations of the two inputs that result in the same profit for a firm. D) the different levels of total cost that result from various combinations of two inputs. E) combinations of two inputs that result in the same total cost for a firm. Answer: E Diff: 1 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 36) Suppose the price of capital and labour remain constant. As a firm's expenditures for capital and labour increase, its isocost line A) shifts out parallel to the original isocost line. B) shifts in parallel to the original isocost line. C) rotates outward on the Y-intercept. D) rotates outward on the X-intercept. E) stays the same as firm will use less of each to reduce the cost. Answer: A Diff: 2 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 37) On an isoquant/isocost graph, the least cost input combination of producing a given output is A) any point on the isoquant curve. B) any point on the isocost curve. C) given by the tangency between the isoquant curve and the isocost line. D) one of the intercept values on the graph. E) impossible to locate. Answer: C Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking

Figure 9.16

38) Refer to Figure 9.16. The figure above illustrates a series of isoquants. Which of the following statements is true? A) Points x, z, and y all represent the same output. B) Points z and y represent the same output; this output is produced with more capital at z than at y. C) Points x and y represent the same output but the cost of production at y is greater than the cost of production at x. D) Point z represents a greater output than point x or point y. E) Point y represents more output than point x and point z. Answer: D Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 39) A change in the slope of an isocost line is due to a change in A) the output price. B) the price of one or both inputs. C) total cost. D) quantity of output. E) demand for the output they are used for. Answer: B Diff: 1 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking

40) Consider a firm that uses two inputs, labour and capital, to produce its output. Assume labour is measured on the horizontal axis and capital on the vertical axis. Which of the following best explains why the marginal rate of technical substitution decreases in absolute value as we move down an isoquant? A) The law of diminishing returns: For a given decline in capital, decreasing amounts of labour are required to produce the same level of output. B) The law of increasing marginal opportunity cost: If a firm uses less and less capital it must use more and more labour, which drives up the cost of labour. C) The law of diminishing returns: For a given decline in capital, increasing amounts of labour are required to produce the same level of output. D) The law of imperfect substitutability: Labour and capital are not perfect substitutes; therefore, a firm must replace decreases in capital with increases in labour. E) All of the above. Answer: C Diff: 3 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 41) Suppose two countries use different combinations of inputs, such as labour and capital, to produce the same product. This implies all of the following except that A) the two countries use different technologies to produce the product. B) the inputs are not equally productive in the two countries. C) the prices of the inputs are not the same in the countries. D) one country is more efficient in the production of the good than the other. E) the two countries have different endowments of each input. Answer: D Diff: 3 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 42) Suppose a firm uses labour and capital to produce output. The last unit of labour hired has a marginal product of 12 units of output, and the last unit of capital employed has a marginal product of 20 units. Use the optimal combination of inputs rule to calculate the price of capital if the price of labour is $6 per unit. The price of capital is A) $2. B) $10. C) $20. D) $30. E) $40. Answer: B Diff: 3 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills Special Feature: Solved Problem: Determining the Optimal Combination of Inputs

Figure 9.17

43) Refer to Figure 9.17. Assume that production isoquants are convex. Total cost and output produced must increase for each of the following movements except one. Which movement is the exception? A) point a to point b B) point a to point c C) point b to point c D) point b to point d E) point c to point d Answer: C Diff: 2 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 44) A firm's expansion path A) is the same thing as its long-run average cost curve. B) is a curve that shows a firm's cost-minimizing combination of inputs for every level of output, holding input prices constant. C) shows the targeted growth rate in sales over the long run. D) is a curve that shows expected profits at various price levels. E) is a curve that shows a firms future growth path. Answer: B Diff: 1 Type: MC Topic: Expansion Path Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking

Figure 9.18

45) Refer to Figure 9.18. Starting from point D, a movement along isoquant2 to point F A) increases the total cost of production with no change in output. B) increases output but not the total cost of production. C) increases the total cost of production and decreases output. D) increases both the total cost of production and output. E) increases total output and decrease the cost of production. Answer: A Diff: 2 Type: MC Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 46) Refer to Figure 9.18. Starting from point E, a movement along the isocost to point F A) decreases the total cost of production but not output. B) increases the total cost of production and decreases output. C) decreases both the total cost of production and output. D) decreases output but not the total cost of production. E) increase output and the total cost of production. Answer: D Diff: 2 Type: MC Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 128 Copyright © 2024 Pearson Canada Inc.

47) Refer to Figure 9.18. A curve that connects points A, D, and E is called A) an input-output curve. B) a total cost line. C) an expansion path. D) an indifference line. E) an isocost line. Answer: C Diff: 1 Type: MC Topic: Expansion Path Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills 48) Joan Jillson owns a coffee shop. Assume that the marginal product of the labour Joan employs (MPL) equals 500 cups per week and the marginal product of her shop's capital (MPK) equals 1,000. Assume also that the wage (w) Joan pays her workers equals $250 per week and the rental price (r) of her capital — her coffee machines — equals $500 per week. Which of the following correctly analyzes whether Joan is minimizing her costs? A) No, Joan is not minimizing her costs because MPK is greater than MPL and r is greater than w. B) Yes, Joan is minimizing her costs because MPK/r equals MPL/w. C) No, Joan is not minimizing her costs because MPL × w is less than MPK × r. D) Yes, Joan is minimizing her costs because she is a price-taker in the markets for labour and capital. E) Yes, Joan is minimizing her costs because MPK is less than MPL. Answer: B Diff: 2 Type: MC Topic: Cost Minimization Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills Special Feature: Solved Problem: Determining the Optimal Combination of Inputs 49) Economists Cade Massey and Richard Thaler analyzed whether teams in the National Football League distributed salaries efficiently. Massey and Thaler found that A) the first few players selected in first round of the NFL draft are paid much higher salaries relative to their marginal products than players drafted later in the first round. B) rookies are paid salaries greater than their marginal products; veteran players are paid salaries less than their marginal products. C) veteran players who sign as free agents are paid more relative to their marginal products than rookie players selected in the first round of the draft. D) both rookie players and veteran players are paid less than the value of their marginal products because of the lack of competition among teams. E) all players were paid according to their marginal productivity at all times. Answer: A Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking Special Feature: Apply the Concept: Do National Football League Teams Behave Efficiently?

50) The slope of an isoquant is equal to the ratio of the price of the input on the horizontal axis divided by the price of the input on the vertical axis, multiplied by -1. Answer: FALSE Diff: 2 Type: TF Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 51) Firms in different countries that face different input prices may produce the same good using different combinations of inputs, even though they have access to the same technology. Answer: TRUE Diff: 2 Type: TF Topic: Cost Minimization Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Reflective Thinking 52) What is an isocost line? What is the slope of an isocost line? Answer: The isocost line shows all the combinations of two inputs, such as capital and labour, that have the same total cost. The slope of the isocost line is equal to the ratio of the price of the input on the horizontal axis divided by the price of the input on the vertical axis, multiplied by -1. Diff: 2 Type: SA Topic: Isocost Lines Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills

53) Use the graph below to answer the following questions.

a. If the wage rate and the rental price of machines are both $50 and total cost is $800, is the costminimizing point A, B, or C? b. If the wage rate is $40, the rental price of equipment is $120, and total cost is $1,200, is the costminimizing point A, B, or C? c. If the wage rate is $60, the rental price of equipment is $90, and total cost is $1,800, is the costminimizing point A, B, or C? Answer: a. If total cost is $800 and the wage rate and rental price of machines both equal $50, the isocost line's endpoints are at 16 and 16. Along this isocost line, the cost minimizing point for producing 6,000 units is at point A. b. If the wage rate is one-third the rental price of machines, we must be on the isocost line whose endpoints are where capital = 10 and labour = 30, because we can buy three times as much labour with a total cost of $1,200. Along this isocost line the cost-minimizing point for producing 6,000 units is point B. c. If the wage rate is two-thirds the rental price of machines, we must be on the isocost line whose endpoints are where capital = 20 and labour = 30, because we can buy three times as much labour with a total cost of $1,800. Along this isocost line the cost-minimizing point for producing 14,000 units is point C. Diff: 2 Type: SA Topic: Isoquants Learning Outcome: 9.7 Use Isoquants and Isocost Lines to understand production and cost AACSB: Analytic Skills

Microeconomics, 4Ce (Hubbard) Chapter 10 Firms in Perfectly Competitive Markets 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve 1) Assume the market for organically-grown produce is perfectly competitive. All else equal, as farmers find it less profitable to produce and sell organic produce in this market, A) the demand curve will shift to the left and the equilibrium price will decrease. B) the supply curve will shift to the left and the equilibrium price will increase. C) the supply curve will shift to the right, the demand curve will shift to the left, and the equilibrium price will decrease. D) the supply curve will shift to the left, the demand curve will shift to the left, and the equilibrium price will increase. E) the supply and demand both will shift right and the price will remain the same. Answer: B Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Analytic Skills Special Feature: Chapter Opener: Are Cage-Free Eggs the Road to Riches? 2) Which of the following is not a characteristic of a perfectly competitive market structure? A) There are a very large number of firms that are small compared to the market. B) All firms sell identical products. C) There are no restrictions to entry by new firms. D) There are restrictions on exit of firms. E) All firms are price taker. Answer: D Diff: 1 Type: MC Topic: Market Structures Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 3) Which of the following is not a characteristic of a monopolistically competitive market structure? A) There is a large number of independently acting small sellers. B) All sellers sell products that are differentiated. C) There are low barriers to entry of new firms. D) Each firm must react to actions of other firms. E) Each firm has some degree of monopoly due to product differentiation. Answer: D Diff: 1 Type: MC Topic: Market Structures Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 1 Copyright © 2024 Pearson Canada Inc.

4) Which of the following is a characteristic of an oligopolistic market structure? A) There are few dominant sellers. B) Each firm sells a unique product. C) It is easy for new firms to enter the industry. D) Each firm need not react to the actions of rivals. E) Firms are price taker. Answer: A Diff: 1 Type: MC Topic: Market Structures Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 5) Which of the following is a characteristic of a monopoly? A) It is easy for new firms to enter the market. B) There is only one seller in the market. C) The product is not unique. D) The firm has no control over price. E) The firm is price taker. Answer: B Diff: 1 Type: MC Topic: Market Structures Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 6) Perfect competition is characterized by all of the following except A) heavy advertising by individual sellers. B) homogeneous products. C) sellers are price takers. D) a horizontal demand curve for individual sellers. E) large number of sellers and buyers. Answer: A Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

7) A very large number of small sellers who sell identical products implies A) a multitude of vastly different selling prices. B) a downward-sloping demand for each seller's product. C) the inability of one seller to influence price. D) chaos in the market. E) less buyers of the product. Answer: C Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 8) Which of the following is the best example of a perfectly competitive industry? A) soft drinks production B) steel production C) electricity production D) airplane production E) wheat production Answer: E Diff: 2 Type: MC Topic: Market Structures Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 9) The price of a seller's product in perfect competition is determined by A) the individual seller. B) a few of the sellers. C) market demand and market supply. D) the individual consumer. E) the government. Answer: C Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

10) Both individual buyers and sellers in perfect competition A) can influence the market price by their own individual actions. B) can influence the market price by joining with a few of their competitors. C) have to take the market price as a given. D) have the market price dictated to them by government. E) have the right to choose the price of the good. Answer: C Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 11) Both buyers and sellers are price takers in a perfectly competitive market because A) the price is determined by government intervention and dictated to buyers and sellers. B) each buyer and seller knows it is illegal to conspire to affect price. C) both buyers and sellers in a perfectly competitive market are concerned for the welfare of others. D) each buyer and seller is too small relative to others to independently affect the market price. E) they want to abide by the agreement of staying passive about the prices. Answer: D Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 12) Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen? A) The firm's profits will increase. B) The firm's revenue will increase. C) The firm will not sell any output. D) The firm will sell more output than its competitors. E) The firm will sell less output than its competitors. Answer: C Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

13) The demand curve for each seller's product in perfect competition is horizontal at the market price because A) each seller is too small to affect market price. B) the price is set by the government. C) all the sellers get together and set the price. D) all the demanders get together and set the price. E) the government has set the price for the market. Answer: A Diff: 1 Type: MC Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 14) An individual seller in perfect competition will not sell at a price lower than the market price because A) demand for the product will exceed supply. B) the seller would start a price war. C) they want to increase their profits. D) demand is perfectly inelastic. E) the seller can sell any quantity she wants at the prevailing market price. Answer: E Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 15) Jason, a high-school student, mows lawns for families in his neighbourhood. The going rate is $12 for each lawn-mowing service. Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service. If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price? A) He would lose some but not all his customers. B) Initially, his customers might complain but over time they will come to accept the new rate. C) If Jason raises his price he would lose all his customers. D) If Jason raises his price, then all others supplying the same service will also raise their prices. E) He would be able to earn more profit than his competitors. Answer: C Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking Special Feature: Economics in Your Life: Are You an Entrepreneur?

16) The demand curve for an individual seller's product in perfect competition is A) the same as market demand. B) downward sloping. C) vertical. D) horizontal. E) non linear. Answer: D Diff: 2 Type: MC Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 17) In perfect competition, A) the market demand curve and the individual's demand are identical. B) the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic. C) the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic. D) the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic. E) the market demand curve is linear while demand for an individual seller's product is non-linear. Answer: D Diff: 2 Type: MC Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Demand Curve for Farmer Parker's Wheat with the Market Demand Curve for Wheat 18) The demand curve facing a single firm in a perfectly competitive market is A) perfectly elastic. B) perfectly inelastic. C) inelastic. D) unit elastic. E) non-linear. Answer: A Diff: 2 Type: MC Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

19) The demand curve facing a single firm in a perfectly competitive industry is horizontal because A) there are large number of other firms producing perfect substitutes for the firm's output. B) there are no close substitutes for the firm's output. C) there are no barriers to entry into a perfectly competitive industry. D) consumers' income effect of a price change of that specific firm's output is large. E) the government has selected the price and no one can change it. Answer: A Diff: 2 Type: MC Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 20) A perfectly competitive firm's horizontal demand curve implies that the firm does not have to lower its price to sell more output. Answer: TRUE Diff: 2 Type: TF Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 21) The market demand curve for a perfectly competitive industry is the horizontal summation of each individual firm's demand curve. Answer: FALSE Diff: 2 Type: TF Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 22) Why are individual buyers and sellers in perfect competition called price takers? Answer: They are called price takers because each firm and customer is too small to influence the market price and has to take the market price as given. Diff: 2 Type: SA Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

23) Consider the market for wheat which is a perfectly competitive market. Is the market demand curve the same as the demand curve facing an individual producer? If not, explain how and why they are different. Illustrate your answer graphically. Answer: The market demand is downward sloping while the demand for an individual firm's output is horizontal at the equilibrium market price. This is because an individual producer is too small to influence the market price and must take the market price as given. At the market price, the individual seller can sell all the output she desires. The figure below shows the market demand curve and the demand curve for a single firm.

Diff: 2 Type: SA Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Demand Curve for Farmer Parker's Wheat with the Market Demand Curve for Wheat 24) Which of the following arguments could be made as evidence that the market for produce sold at a farmers' market is perfectly competitive? A) The Canadian Food Inspection Agency has established standards for the labeling of organic produce sold at farmers' markets. B) Sales of organically grown food have increased at a rate of 20 percent per year. C) As more farmers have begun selling their products at farmers' markets, the increase in supply has driven down prices to the point where they just cover the cost of production. D) The profits earned by farmers who sell their products at farmers' markets have continued to grow, despite the increasing number of farmers entering this market. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking Special Feature: Chapter Opener: Are Cage-Free Eggs the Road to Riches? 8 Copyright © 2024 Pearson Canada Inc.

25) Which of the following characteristics of the market for cage-free eggs would make it a good example of a perfectly competitive market? A) Selling cage-free eggs market was very profitable for in the mid 2010s. As result, many farmers sold their farms to larger firms. B) Farmers who sell cage-free eggs are similar to other entrepreneurs who introduce products that earn short-run profits but invite competition that drives down prices and profits in the long run. C) Farmers who sell cage-free eggs are similar to other business owners who take advantage of the willingness of some consumers to pay high prices for new and different products. D) Farmers cage-free eggs provide a product that is a necessity, rather than a luxury. E) None of the above. Answer: B Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking Special Feature: Chapter Opener: Are Cage-Free Eggs the Road to Riches? 26) Firms in perfectly competitive industries are unable to control the prices of the products they sell and earn a profit in the long run. Which of the following is one reason for this? A) Owners of perfectly competitive firms realize that their short-run profits are temporary. Therefore, they either sell their businesses or develop other products that will earn short-run profits. B) Firms in perfectly competitive industries can use advertising in the short run to persuade consumers that their products are better than those of other firms, but eventually consumers realize that all of the firms sell virtually identical products. C) Firms from other countries are able to produce similar products at lower costs. D) Firms in these industries sell identical products. E) None of the above. Answer: D Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 27) The delivery of first-class mail by Canada Post is an example of A) a monopoly. B) perfect competition because consumers have access to other methods of written communication, for example, email and text messaging. C) monopolistic competition because mail delivery is a differentiated product provided by many firms. D) an oligopoly because a few other firms provide delivery of letters and packages. E) special service to the customers. Answer: A Diff: 1 Type: MC Topic: Market Structures Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 9 Copyright © 2024 Pearson Canada Inc.

28) A perfectly competitive firm faces a demand curve that is A) horizontal. B) vertical. C) perpendicular to the quantity axis. D) perfectly inelastic. E) inelastic. Answer: A Diff: 1 Type: MC Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 29) Some markets have many buyers and sellers but fall into the category of monopolistic competition rather than perfect competition. The most common reason for this is A) there are high barriers to entering these markets. B) firms in these markets sell identical products. C) firms in these markets make high profits. D) firms in these markets do not sell identical products. E) there are only few sellers. Answer: D Diff: 1 Type: MC Topic: Market Structures Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 30) Which of the following is a characteristic of a firm in a perfectly competitive market? A) The firm cannot make a profit in the short run because it is too small a part of the total market. B) The firm can make a profit in the long run but not in the short run. C) The firm can sell as much as it wants without having to lower its price. D) The firm must lower its price in order to increase quantity demanded. E) The firm has to follow the government regulation and keep the profit at the required level. Answer: C Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

31) If a perfectly competitive firm raises the price it charges to consumers, which of the following is the most likely outcome? A) The firm's revenue will not change because some consumers will refuse to pay the higher price. B) The firm will not sell any output. C) The firm's total revenue will increase only if the demand for its product is inelastic. D) The firm's total revenue will increase only if the demand for its product is elastic. E) The firm will have more profit than its competitors. Answer: B Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 32) A perfectly competitive firm has to charge the same price as every other firm in the market. Therefore, the firm A) faces a perfectly inelastic demand curve. B) is not able to make a profit in the short run. C) is a price taker. D) faces a perfectly elastic supply curve. E) is not happy. Answer: C Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 33) Which of the following is not an assumption of perfectly competitive markets? A) There are many sellers and many buyers, all of which are small relative to the market. B) Each firm produces a similar but not identical product. C) There are no barriers to new firms entering the market. D) The products sold by all firms in the market are identical. E) All of the above are assumptions of perfectly competitive markets. Answer: B Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

34) In a perfectly competitive market, the term "price taker" applies to A) sellers and buyers. B) firms but not buyers. C) buyers but not sellers. D) only the smallest sellers and buyers. E) only those who are directed by the government. Answer: A Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 35) Which of the following describes the difference between the market demand curve for a perfectly competitive industry and the demand curve for a firm in this industry? A) The market demand curve is a horizontal line; the firm's demand curve is downward sloping. B) The market demand curve is downward sloping; the firm's demand curve is a vertical line. C) The market demand curve cannot have a constant slope; the firm's demand curve has a slope equal to zero. D) The market demand curve is downward sloping; the firm's demand curve is a horizontal line. E) The market demand curve is linear; the firm's demand curve is non-linear. Answer: D Diff: 2 Type: MC Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 36) The price a perfectly competitive firm receives for its output A) is determined by the interaction of the firm and all of the consumers who buy from the firm. B) is determined by the interaction of all sellers and all buyers in the firm's market. C) will not change in response to changes in market demand and supply because the firm is a price taker. D) will be lowered by the firm in order to sell more output. E) will be determined by how much quantity it wants to sell. Answer: B Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

37) Which of the following is the best example of a perfectly competitive firm? A) a canola farmer in Saskatchewan B) a Taco Time restaurant C) Ford Motor Company D) United Parcel Service (UPS) E) a wheat farmer in Ontario Answer: A Diff: 1 Type: MC Topic: Market Structures Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 38) Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $12. Which of the following will happen? A) The firm will sell more output than its competitors. B) The firm's revenue will increase. C) The firm will not sell any output. D) The firm's profits will increase. E) The firm will be closed for violating the rules. Answer: C Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 39) Firms that are price takers A) must lower their prices to increase sales. B) are able to sell a fixed quantity of output at the market price. C) can raise their prices as a result of a successful advertising campaign. D) are able to sell all their output at the market price. E) are not able to sell their output until they lower the price. Answer: D Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

40) Firms in perfect competition are price takers because A) one firm determines the price that all other firms in the industry will charge. B) consumers have enough market power to set prices. C) firms accept the price determined by the government. D) they are ordered by the government to do that. E) each firm is too small relative to the market to be able to influence price. Answer: E Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 41) A wheat farmer and a firm in a perfectly competitive market are similar in that A) both face vertical demand curves. B) both have to lower their prices if a rival firm lowers its price. C) both face horizontal demand curves. D) both will earn an economic profit if their total revenue equals their total cost. E) both are competing to get the most share of the market. Answer: C Diff: 1 Type: MC Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Demand Curve for Farmer Parker's Wheat with the Market Demand Curve for Wheat 42) Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms? A) Restaurants do not sell identical products. B) Restaurants compete in small market areas—neighborhoods and cities—rather than in regional or national markets. Therefore, restaurants are not small relative to their market size. C) Restaurants usually have entry barriers in the form of zoning restrictions and health regulations. D) Restaurants have significant liability costs that perfectly competitive firms do not have; for example, customers may sue if they suffer from food poisoning. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

43) Assume that the market for cage-free eggs is perfectly competitive. All else equal, as more farmers choose to produce and sell cage-free eggs, what is likely to happen to the equilibrium price of the eggs and profits of these farmers in the long run? A) The equilibrium price is likely to increase and profits are likely to remain unchanged. B) The equilibrium price is likely to remain unchanged and profits are likely to increase. C) The equilibrium price is likely to decrease and profits are likely to decrease. D) The equilibrium price is likely to increase and profits are likely to increase. E) Both, the equilibrium price and profits are likely to remain unchanged. Answer: C Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Analytical Thinking Special Feature: Chapter Opener: Are Cage-Free Eggs the Road to Riches? 44) Assume that the market for cage-free eggs is perfectly competitive. All else equal, as farmers find it less profitable to produce and sell cage-free eggs in this market A) the demand curve will shift to the left and the equilibrium price will decrease. B) the supply curve will shift to the left and the equilibrium price will increase. C) the supply curve will shift to the right, the demand curve will shift to the left, and the equilibrium price will decrease. D) the supply curve will shift to the left, the demand curve will shift to the left, and the equilibrium price will increase. E) the supply curve will shift to the left, the demand curve will shift to the right, and the equilibrium price will remain unchanged. Answer: B Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Analytical Thinking Special Feature: Chapter Opener: Are Cage-Free Eggs the Road to Riches? 45) Perfectly competitive industries tend to produce low-priced, low-technology products. Answer: FALSE Diff: 2 Type: TF Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

46) The market demand curve in a perfectly competitive market is downward sloping. Answer: TRUE Diff: 1 Type: TF Topic: Demand Curves in Perfectly Competitive Industries Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking 47) What assumptions are necessary for a market to be perfectly competitive? Explain why each of these assumptions is important. Answer: The assumptions necessary for a market to be perfectly competitive are: 1. There are many buyers and sellers, all of whom are small relative to the market. This assumption ensures that each seller (or firm) and buyer is a price taker. A price taker cannot affect the market price. 2. All firms sell identical products. This condition excludes the possibility of any product differences that might justify different prices. Because the consumer cannot differentiate between products of different producers, any firm that charges a higher price will lose all its customers. 3. No barriers to new firms entering the market or exiting the market. This assumption guarantees that economic profits earned in the short run will be eliminated in the long run. In the long run, perfectly competitive firms will break even. Diff: 2 Type: SA Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

48) Of the following industries, which are perfectly competitive? For those that are not perfectly competitive, explain why. a. Restaurants b. Corn c. College education d. Local radio and television Answer: a. Restaurants are not perfectly competitive. Although cities typically have many restaurants for consumers to choose from, they do not sell identical products. They also differ in the services they offer their customers. Some restaurants have take-out windows, and some have servers while others (McDonald's, Burger King) require customers to pick up their own orders. b. The market for corn (and other agricultural commodities) is a perfectly competitive market. Each buyer and seller is small relative to the total market. Although there are varieties of corn (for example "number 2" corn), within these varieties one farmer's corn is indistinguishable from any other farmer's corn. c. The market for a college education is not perfectly competitive. This is an example of a market that offers consumers (students) a differentiated product. Colleges and universities differ in size, amenities, quality of instruction, location, and many other factors. d. Local radio and television markets are not perfectly competitive. Radio and television stations do not offer identical products. Some radio stations broadcast only classical music, while others play classic rock, alternative rock, country music, etc. Television stations also offer different programming including movies, sports, news, etc. Diff: 2 Type: ES Topic: Market Structures Learning Outcome: 10.1 Explain what a perfectly competitive market is and why a perfect competitor faces a horizontal demand curve AACSB: Reflective Thinking

10.2

Explain how a firm maximizes profit in a perfectly competitive market

1) If the market price is $25, the average revenue of selling five units is A) $5. B) $12.50. C) $25. D) $50. E) $125. Answer: C Diff: 2 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 2) If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is A) $5. B) $12.50. C) $25. D) $50. E) $125. Answer: C Diff: 2 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 3) Which of the following is not true for a firm in perfect competition? A) Profit equals total revenue minus total cost. B) Price equals average revenue. C) Average revenue is greater than marginal revenue. D) Marginal revenue equals the change in total revenue from selling one more unit. E) Average revenue is equal marginal revenue and price. Answer: C Diff: 2 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

Table 10.1 Quantity

Total Cost (dollars)

Variable Cost (dollars)

$1,000

100

1,360

360

200

1,560

560

300

1,960

960

400

2,760

1,760

500

4,000

3,000

600

5,800

4,800

Table 10.1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that output can only be increased in batches of 100 units. 4) Refer to Table 10.1. What is the fixed cost of production? A) $0 B) $500 C) $1,000 D) $1,500 E) It cannot be determined. Answer: C Diff: 3 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 5) Refer to Table 10.1. If the market price of each camera case is $8, what is the profit-maximizing quantity? A) 300 units B) 400 units C) 500 units D) 600 units E) 700 units Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

6) Refer to Table 10.1. If the market price of each camera case is $8, what is the firm's total revenue? A) $2,400 B) $3,200 C) $4,000 D) $4,800 E) $5,200 Answer: B Diff: 2 Type: MC Topic: Total Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 7) Refer to Table 10.1. If the market price of each camera case is $8 and the firm maximizes profit, what is the amount of the firm's profit or loss? A) $0 (it breaks even) B) loss of $1,000 C) profit of $440 D) loss of $440 E) profit of $1,000 Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 8) Refer to Table 10.1. Suppose the fixed cost of production rises by $500 and the price per unit is still $8. What happens to the firm's profit-maximizing output level? A) It must fall. B) It must rise to offset the increased cost. C) It will remain the same. D) The firm will shut down. E) The firm will exit the market. Answer: C Diff: 3 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

9) Refer to Table 10.1. The firm will not produce in the short run if the output price falls below A) $8. B) $4. C) $3.20. D) $2.80. E) $1.50. Answer: D Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills Figure 10.1

10) Refer to Figure 10.1. If the firm is producing 700 units, A) it is making a profit. B) it is making a loss. C) it should cut back its output to maximize profit. D) it should increase its output to maximize profit. E) it is breaking even. Answer: C Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

11) Refer to Figure 10.1. If the firm is producing 700 units, what is the amount of its profit or loss? A) loss of $280 B) loss equivalent to the area A C) profit equivalent to the area A D) profit of $280 E) There is insufficient information to answer the question. Answer: E Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 12) Refer to Figure 10.1. If the firm is producing 200 units, A) it breaks even. B) it is incurring a loss. C) it should cut back its output to maximize profit. D) it should increase its output to maximize profit. E) it is making positive economic profit. Answer: D Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 13) A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The price of each good is $10. Calculate the firm's short-run profit or loss. A) loss of $6,000 B) profit of $6,000 C) profit of $30,000 D) loss of $30,000 E) There is insufficient information to answer the question. Answer: A Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

14) If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing it, the firm A) added more to total costs than it added to total revenue. B) added more to total revenue than it added to total cost. C) is maximizing marginal profit. D) has minimized its losses. E) incurred some loss. Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 15) If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should A) increase its output. B) reduce its output. C) keep output constant and enjoy the above normal profit. D) lower the price. E) stop producing. Answer: A Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

Figure 10.2

16) Refer to Figure 10.2. What is the amount of profit if the firm produces Q2 units? A) It is equal to the vertical distance c to g. B) It is equal to the vertical distance c to Q2. C) It is equal to the vertical distance g to Q2. D) It is equal to the vertical distance c to g multiplied by Q2 units. E) It is equal to the horizontal distance up to Q2. Answer: A Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 17) Refer to Figure 10.2. Suppose the firm is currently producing Q2 units. What happens if it expands output to Q3 units? A) Its profit increases by the size of the vertical distance df. B) It makes less profit. C) It incurs a loss. D) It will be moving toward its profit-maximizing output. E) it will make zero economic profit. Answer: B Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

18) Refer to Figure 10.2. The firm breaks even at an output level of A) Q1 units. B) Q2 units. C) Q3 units. D) Q4 units. E) between Q2 and Q3. Answer: D Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 19) Refer to Figure 10.2. What happens if the firm produces more than Q4 units? A) Its profit increases. B) It incurs a loss. C) Its total revenue is increasing faster than its total cost. D) It could make a profit or incur a loss, depending on what happens to demand. E) It will have to exit the market. Answer: B Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 20) Refer to Figure 10.2. Why is the total revenue curve a ray from the origin? A) because revenue increases at an increasing rate B) because revenue increases at a decreasing rate C) because the firm can sell its product at a constant price D) because the firm must lower its price to sell more E) because the firm must sell all it produces Answer: C Diff: 2 Type: MC Topic: Total Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 21) In a graph with output on the horizontal axis and total revenue on the vertical axis, what is the shape of the total revenue curve for a perfectly competitive seller? A) U-shaped B) inverted U-shaped C) a horizontal line D) a ray from the origin E) a downward sloping curve Answer: D Diff: 2 Type: MC Topic: Total Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 25 Copyright © 2024 Pearson Canada Inc.

22) For a perfectly competitive firm, which of the following is not true at profit maximization? A) Market price is greater than marginal cost. B) Marginal revenue equals marginal cost. C) Total revenue minus total cost is maximized. D) Price equals marginal cost. E) Price equals average revenue. Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 23) Assume that price is greater than average variable cost. If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits the firm should A) continue producing at the current output. B) produce a larger level of output. C) produce a smaller level of output. D) shut down. E) exit the market. Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 24) Assume a firm's marginal cost function is MC = 2q, where q is the number of units the firm produces. What is the profit maximizing level of output when the market price is $100? A) 25 units B) 50 units C) 100 units D) 200 units E) 300 units Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

25) Assume a firm's marginal cost function is MC = 4q, where q is the number of units the firm produces. What is the profit maximizing level of output when the market price is 1,000? A) 150 units B) 250 units C) 1,000 units D) 4,000 units E) 5,000 units Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 26) An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run. Answer: TRUE Diff: 1 Type: TF Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 27) A perfectly competitive firm's marginal revenue curve is downward sloping. Answer: FALSE Diff: 2 Type: TF Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 28) Assume that price is greater than average variable cost. If a perfectly competitive firm is producing at an output where price is $114 and the marginal cost is $102, then the firm is probably producing more than its profit-maximizing quantity. Answer: FALSE Diff: 2 Type: TF Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 29) How are market price, average revenue, and marginal revenue related for a perfectly competitive firm and why? Answer: They are all equal to each other. The market price for any firm equals average revenue. This can be verified by noting that average revenue = total revenue ÷ quantity = (price × quantity) ÷ quantity. Further, a perfectly competitive firm faces a horizontal demand curve at the market price which means that it does not need to reduce the price to sell more. Therefore, its marginal revenue equals price. Diff: 2 Type: SA Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

30) Assuming a market price of $4, fill in the columns in the following table. What is the profitmaximizing level of production? What are the two ways to determine the profit-maximizing level of production?

Quantity 0 1 2 3 4 5 6 7

Total Revenue Total Cost (TR) (TC) 3 5 6 9 14 20 28 40

Profit

Marginal Revenue (MR)

Marginal Cost (MC)

Answer: Total Revenue Quantity (TR) 0 0 1 4 2 8 3 12 4 16 5 20 6 24 7 28

Total Cost (TC) 3 5 6 9 14 20 28 40

Profit -3 -1 2 3 2 0 -4 -12

Marginal Marginal Revenue (MR) Cost (MC) ----4 2 4 1 4 3 4 5 4 6 4 8 4 12

The profit-maximizing level of production is 3 units, which can be determined by the greatest difference between total revenue and total cost, which is equal to profit, and can also be determined where marginal revenue is equal to marginal cost (or marginal revenue is the closest to marginal cost, without being below marginal cost). Diff: 2 Type: SA Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

31) To maximize profit, a perfectly competitive firm A) should sell the quantity of output determined by the interaction between industry demand and supply. B) should sell the quantity of output that results in a value for total revenue that is equal to total cost. C) should produce the quantity of output that results in the greatest difference between total revenue and total cost. D) should produce the quantity of output that results in the greatest difference between marginal revenue and marginal cost. E) should produce the quantity that always allow it to earn positive economic profit. Answer: C Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 32) For a perfectly competitive firm, average revenue is equal to A) marginal cost. B) the market price. C) total revenue. D) average fixed cost. E) average cost. Answer: B Diff: 1 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 33) If the market price is $40, the average revenue of selling five units is A) $8. B) $20. C) $40. D) $200. E) $250. Answer: C Diff: 2 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

34) If the market price is $40 in a perfectly competitive market, the marginal revenue from selling the fifth unit is A) $8. B) $20. C) $40. D) $200. E) $250. Answer: C Diff: 2 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 35) For a firm in a perfectly competitive market, price is A) equal to both average revenue and marginal revenue. B) equal to average revenue but greater than marginal revenue. C) greater than marginal revenue but less than average revenue. D) less than both average revenue and marginal revenue. E) equal to marginal revenue but greater than average revenue. Answer: A Diff: 1 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 36) Marginal revenue is A) total revenue divided by the total quantity of output. B) the change in profit divided by the change in the quantity of output. C) the change in total revenue divided by the change in total cost. D) the change in total revenue divided by the change in the quantity of output. E) the change in total revenue divided by quantity of output. Answer: D Diff: 1 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 37) Marginal revenue for a perfectly competitive firm is A) equal to average revenue. B) equal to the market price. C) the same at all levels of sales. D) all of the above. E) none of the above. Answer: D Diff: 1 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 30 Copyright © 2024 Pearson Canada Inc.

38) In a graph that illustrates a perfectly competitive firm, marginal revenue is A) a diagonal line that lies below the firm's demand curve. B) a line that intersects the firm's demand curve from below at its lowest point. C) a line that intersects the firm's average total cost curve from below at its lowest point. D) the same as the firm's demand curve. E) always less than average revenue. Answer: D Diff: 1 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 39) The marginal revenue curve for a perfectly competitive firm A) is downward sloping. B) is the same as its demand curve. C) is perfectly inelastic. D) is the same as its marginal cost curve. E) is always below the average revenue curve. Answer: B Diff: 1 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 40) Mark Frost grows apples in a perfectly competitive market. If we drew a line in a graph that illustrates Mark's total revenue from selling apples, it would be A) a straight, upward-sloping line. B) a horizontal line. C) a straight, downward-sloping line. D) a curve that is negatively sloped at low levels of output and positively sloped at higher levels of output. E) a vertical line. Answer: A Diff: 1 Type: MC Topic: Total Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

41) Producing where marginal revenue equals marginal cost is equivalent to producing where A) average total cost equals average revenue. B) average fixed cost is minimized. C) total revenue is equal to total cost. D) firm is making a loss. E) total profit is maximized. Answer: E Diff: 1 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 42) A perfectly competitive firm's marginal revenue A) is greater than price. B) is less than price because a firm must lower its price to sell more. C) is equal to price. D) may be either greater or less than price, depending on the quantity sold. E) is below the average revenue. Answer: C Diff: 1 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

Table 10.2 Apples (Kilograms) 0 100 150 200 250 300 350 400

Market Price Total Revenue Average Marginal per Kilogram (TR) Revenue (AR) Revenue (MR) $3 $0 ---------

Table 10.2 lists the various amounts (kg) of apples that Margie Stattler can sell. Assume that Margie operates in a perfectly competitive market. 43) Refer to Table 10.2. What is Margie's total revenue if she sells 250 kilograms of apples? A) $250 B) $500 C) $750 D) $800 E) There is not enough information in the table to determine Margie's total revenue. Answer: C Diff: 1 Type: MC Topic: Total Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 44) Refer to Table 10.2. How many kilograms of apples should Margie sell to maximize her profit? A) 300 kilograms B) 400 kilograms C) 450 kilograms D) This can be determined only when all of the values for market price, total revenue, average revenue, and marginal revenue are given. E) This cannot be determined without knowing Margie's total or marginal production costs. Answer: E Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

45) What is the relationship among the following variables for a perfectly competitive firm: the market price, average revenue, and marginal revenue? A) Average revenue is equal to the market price; average revenue is greater than marginal revenue. B) The market price is equal to both average revenue and marginal revenue. C) Average revenue is equal to marginal revenue; average revenue is greater than the market price. D) As a firm lowers the market price to sell more output, marginal revenue and average revenue will be less than the market price. E) The market price is greater than marginal revenue and smaller than average revenue. Answer: B Diff: 2 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 46) At the profit-maximizing level of output for a perfectly competitive firm, A) price equals marginal cost. B) average revenue equals average variable cost and price equals marginal cost. C) marginal revenue equals marginal cost and average total cost equals average fixed cost. D) price equals average revenue and marginal cost equals average variable cost. E) price is greater than marginal cost. Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 47) For a perfectly competitive firm, at profit maximization, A) market price exceeds marginal cost. B) total revenue is maximized. C) marginal revenue equals marginal cost. D) production must occur where average cost is minimized. E) marginal revenue equals average revenue. Answer: C Diff: 2 Type: MC Topic: Average Revenue and Marginal Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

48) At the profit-maximizing level of output for a perfectly competitive firm, price equals marginal cost. Which of the following is also true? A) The difference between total revenue and total cost is the greatest. B) Total revenue equals total cost. C) Average revenue equals average total cost. D) Marginal profit equals marginal cost. E) None of the above is true. Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 49) If, for the last bushel of apples produced and sold by an apple farm, marginal revenue exceeds marginal cost, then in producing that bushel, the farm A) added more to total cost than it added to total revenue. B) added an equal amount to both total revenue and total cost. C) added more to total revenue than it added to total cost. D) maximized its profits or minimized its losses. E) incurred losses. Answer: C Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 50) If a perfectly competitive apple farm's marginal revenue exceeds the marginal cost of the last bushel of apples sold, what should the farm do to maximize its profit? A) determine what the total revenue and total cost of production are B) increase output C) decrease output D) lower its price to sell more E) shut down operation Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

51) A perfectly competitive apple farm produces 1,000 bushels of apples at a total cost of $36,000. The price of each bushel is $50. Calculate the firm's short-run profit or loss. A) loss of $14,000 B) profit of $14,000 C) profit of $50,000 D) loss of $50,000 E) profit of $18,000 Answer: B Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills Figure 10.3

52) Refer to Figure 10.3. If the firm is producing 500 units, A) it is making a profit. B) it is incurring a loss. C) it should maintain its output to maximize profit. D) it should increase its output to maximize profit. E) it should shut down. Answer: C Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

53) Refer to Figure 10.3. If the firm is producing 500 units, what is the amount of its profit or loss? A) profit of $280 B) loss equivalent to the area A C) profit equivalent to the area A D) loss of $280 E) There is insufficient information to answer the question. Answer: E Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 54) Refer to Figure 10.3. If the firm is charging a price of $12 per unit, A) it breaks even. B) it is making a profit. C) it is selling 700 units. D) it is not selling any output. E) it is making losses. Answer: D Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

Table 10-3 Quantity (gallons) 0 10 20 30 40 50 60

Total Cost (dollars) 200 280 400 560 760 1,000 1,320

Variable Cost (dollars) 0 80 200 360 560 800 1,120

Table 10.3 shows the short-run cost data of a perfectly competitive firm that produces paint. Assume that output can only be increased in batches of 10 gallons. 55) Refer to Table 10.3. What is the fixed cost of production? A) $0 B) $200 C) $500 D) $1,320 E) It cannot be determined. Answer: B Diff: 3 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytical Thinking 56) Refer to Table 10.3. If the market price of each gallon of paint is $24, what is the profit-maximizing quantity according to the MR = MC rule? A) 30 gallons B) 40 gallons C) 50 gallons D) 60 gallons E) 80 gallons Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytical Thinking

57) Refer to Table 10.3. If the market price of each gallon of paint is $24, what is the firm's total revenue when the profit-maximizing quantity is found where MR = MC? A) $720 B) $960 C) $1,200 D) $1,440 E) $1,500 Answer: C Diff: 2 Type: MC Topic: Total Revenue Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytical Thinking 58) Refer to Table 10.3. If the market price of each gallon of paint is $24 and the firm maximizes profit, what is the value of the firm's total profit? A) $120 B) $160 C) $200 D) $320 E) $400 Answer: C Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytical Thinking 59) Refer to Table 10.3. Suppose the fixed cost of production rises by $125 and the price per gallon is still $24. What happens to the firm's profit-maximizing output level? A) It must fall. B) It must rise to offset the increased cost. C) It will remain the same. D) The firm will shut down. E) We don’t have sufficient information to determine. Answer: C Diff: 3 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytical Thinking

60) Refer to Table 10.3. The firm will not produce in the short run if the per-gallon output price falls below A) $8. B) $10. C) $12. D) $14. E) $16. Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytical Thinking 61) Being a price-taker, a perfectly competitive firm cannot receive a producer surplus in the short run. Answer: FALSE Diff: 2 Type: TF Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills 62) For a perfectly competitive firm, at the profit-maximizing output, average revenue equals marginal cost. Answer: TRUE Diff: 2 Type: TF Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking 63) Explain two different ways to determine the profit-maximizing level of output for a firm in a perfectly competitive market. Answer: One way is using total revenue and total cost. The profit-maximizing level of output is where the difference between total revenue and total cost is the greatest. Another way is using marginal revenue and marginal cost. The profit-maximizing level of output is where marginal revenue equals marginal cost. Diff: 2 Type: SA Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Reflective Thinking

64) Fill in the columns in the following table and use the values in the table to determine the profitmaximizing level of output.

Quantity 0 1 2 3 4 5 6 7 8 9 10

Total Revenue Total Cost (TR) (TC) 0 3 5 5 10 6 15 8 20 11 25 15 30 21 35 30 40 42 45 60 50 85

Profit

Marginal Revenue (MR)

Marginal Cost (MC)

Answer:

Quantity 0 1 2 3 4 5 6 7 8 9 10

Total Revenue Total Cost (TR) (TC) Profit 0 3 -3 5 5 0 10 6 4 15 8 7 20 11 9 25 15 10 30 21 9 35 30 5 40 42 -2 45 60 -15 50 85 -35

Marginal Revenue (MR) -5 5 5 5 5 5 5 5 5 5

Marginal Cost (MC) -2 1 2 3 4 6 9 12 18 25

The profit-maximizing level of output is 5 units. Diff: 2 Type: SA Topic: Profit-Maximizing Level of Output Learning Outcome: 10.2 Explain how a firm maximizes profit in a perfectly competitive market AACSB: Analytic Skills

10.3

Use graphs to show a firm's profit or loss

1) A firm's total profit can be calculated as all of the following except A) total revenue minus total cost. B) average profit per unit times quantity sold. C) (price minus average total cost) times quantity sold. D) marginal profit times quantity sold. E) all of the above can be used to calculate total profit. Answer: D Diff: 2 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 2) If a perfectly competitive firm's price is above its average total cost, the firm A) is earning a profit. B) should shut down. C) is incurring a loss. D) is breaking even. E) should exit. Answer: A Diff: 2 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking

Figure 10.4

3) Refer to Figure 10.4. Suppose the prevailing price is P1 and the firm is currently producing its lossminimizing quantity. Identify the area that represents the loss. A) (P2-P1)Q2 B) (P3-P1)Q1 C) (P2-P0)Q0 D) (P2-P1)Q1 E) (P3-P2)Q1 Answer: B Diff: 2 Type: MC Topic: Profit and Loss Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 4) If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm A) is earning a profit. B) should shut down. C) is incurring a loss. D) is breaking even. E) should exit the market. Answer: C Diff: 2 Type: MC Topic: Profit and Loss Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 43 Copyright © 2024 Pearson Canada Inc.

Figure 10.5

Figure 10.5 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. 5) Refer to Figure 10.5. If the market price is $30, the firm's profit-maximizing output level is A) 0. B) 50. C) 130. D) 180. E) 240. Answer: D Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 6) Refer to Figure 10.5. If the market price is $30 and if the firm is producing output, what is the amount of its total variable cost? A) $7,200 B) $6,480 C) $5,400 D) $4,500 E) $3,960 Answer: E Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills

7) Refer to Figure 10.5. What is the amount of its total fixed cost? A) $1,080 B) $1,440 C) $2,520 D) $3,960 E) It cannot be determined. Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 8) Refer to Figure 10.5. If the market price is $30 and the firm is producing output, what is the amount of the firm's profit or loss? A) loss of $1,080 B) profit of $1,440 C) loss of $2,520 D) profit of $1,300 E) loss of $1,300 Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 9) Refer to Figure 10.5. If the market price is $30, should the firm represented in the diagram continue to stay in business? A) No, it should shut down because it is making a loss. B) No, it should shut down because it cannot cover its variable cost. C) Yes, because it is covering part of its fixed cost. D) Yes, because it is making a profit. E) No, because it is not covering any of its costs. Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills

10) Refer to Figure 10.5. What is the lowest prices at which this firm will produce output in the short-run? A) $30 B) $22 C) $20 D) $36 E) $40 Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 11) A perfectly competitive firm earns a profit when price is A) equal to minimum average total cost. B) above minimum average total cost. C) equal to minimum average variable cost. D) equal to minimum average fixed cost. E) higher than marginal cost. Answer: B Diff: 2 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 12) All of the following can be used to compute average profit except A) marginal profit minus marginal cost. B) total profit divided by quantity. C) average revenue minus average total cost. D) price minus average total cost. E) All of the above can be used to compute average profit. Answer: A Diff: 2 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit

13) An increase in demand for Canadian farm exports will ________ the market prices for these exports and ________ economic profit in these markets. A) increase; decrease B) decrease; increase C) increase; increase D) decrease; decrease Answer: C Diff: 1 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 14) Assume that after a banner year in Canadian farm exports in 2017, farmers are expected to break even in 2018. This means that at the quantity being produced in 2018, A) MC = AVC. B) MR = MC. C) MR = ATC. D) AVC = ATC. E) MR = P. Answer: C Diff: 2 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking

Figure 10.6

Figure 10.6 shows cost and demand curves facing a typical firm in a constant-cost, perfectly competitive industry. 15) Refer to Figure 10.6. If the market price is $20, what is the firm's profit-maximizing output? A) 750 units B) 1,100 units C) 1,350 units D) 1,800 units E) 2,000 units Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Solved Problem: Determining Profit-Maximizing Price and Quantity 16) Refer to Figure 10.6. If the market price is $20, what is the amount of the firm's profit? A) $5,400 B) $6,750 C) $8,100 D) $10,200 E) $16,300 Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Solved Problem: Determining Profit-Maximizing Price and Quantity 48 Copyright © 2024 Pearson Canada Inc.

17) Refer to Figure 10.6. If the market price is $20, what is the average profit at the profit-maximizing quantity? A) $5 B) $6 C) $9 D) $20 E) $22 Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit 18) Refer to Figure 10.6. The firm's manager suggests that the firm's goal should be to maximize average profit. In that case, what is the output level and what is the average profit that will achieve the manager's goal? A) Q = 1,350 units, average profit = $5 B) Q = 1,100 units, average profit = $20 C) Q = 1,350 units, average profit = $9 D) Q = 1,800 units, average profit = $20 E) Q = 1,100 units, average profit = $6 Answer: E Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit 19) Refer to Figure 10.6. The firm's manager suggests that the firm's goal should be to maximize average profit. If the firm does this, what is the amount of profit that it will earn? A) $6,600 B) $6,750 C) $12,150 D) $24,000 E) $36,000 Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit

20) Refer to Figure 10.6. What is the amount of the firm's fixed cost of production? A) $5,400 B) $6,750 C) $8,100 D) $10,200 E) It cannot be determined. Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 21) Refer to Figure 10.6. If the firm's fixed cost increases by $1,000 due to a new environmental regulation, what happens in the diagram above? A) All the cost curves shift upward. B) Only the average variable cost and average total cost curves shift upward; marginal cost is not affected. C) Only the average total cost curve shifts upward; the marginal cost and average variable cost curves are not affected. D) Only the marginal cost curve shifts upward; the average cost curves are not affected. E) None of the curves shifts; only the fixed cost curve, which is not shown here, is affected. Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 22) Refer to Figure 10.6. The figure shows the cost structure of a firm in a perfectly competitive market. If the firm's fixed cost increases by $1,000 due to a new environmental regulation, what happens to its profit-maximizing output level? A) It increases. B) It decreases. C) It remains the same. D) It increases by $1,000. E) It could increase, decrease or remain constant, depending on whether the firm is able to cut costs somewhere else. Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking

23) Refer to Figure 10.6. What is the minimum price the firm requires to produce output? A) $20 B) $14 C) $5 D) $3 E) It cannot be determined. Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 24) A perfectly competitive firm breaks even at a price equal to its minimum average total cost. Answer: TRUE Diff: 1 Type: TF Topic: Break Even Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 25) Maximizing average profit is equivalent to maximizing total profit. Answer: FALSE Diff: 1 Type: TF Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit 26) In the short run, if price falls below a firm's minimum average total cost, the firm should shut down. Answer: FALSE Diff: 1 Type: TF Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit

27) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per day and her costs are as follows: Output per Day 0 1 2 3 4 5 6 7 8

Total Cost $20 32 37 48 61 75 92 113 136

Suppose the current equilibrium price in the teapot market is $20. To maximize profit, how many teapots will Veronica produce, what price will she charge, and how much profit (or loss) will she make? Draw a graph to illustrate your answer. Your graph should include Veronica's demand, ATC, AVC, MC, and MR curves, the price she is charging, the quantity she is producing, and the area representing her profit (or loss). Answer: Veronica will produce 6 teapots per day. She will charge the market price of $20. She will make a profit of $28.

Diff: 2 Type: SA Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Solved Problem: Determining Profit-Maximizing Price and Quantity 52 Copyright © 2024 Pearson Canada Inc.

28) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per day and her costs are as follows: Output per Day 0 1 2 3 4 5 6 7 8

Total Cost $20 32 37 48 61 75 92 113 136

Suppose the current equilibrium price in the teapot market is $15. To maximize profit, how many teapots will Veronica produce, what price will she charge, and how much profit (or loss) will she make? Draw a graph to illustrate your answer. Your graph should include Veronica's demand, ATC, AVC, MC, and MR curves, the price she is charging, the quantity she is producing, and the area representing her profit (or loss). Answer: Veronica will produce 5 teapots per day. She will charge the market price of $15. She will break even and make a profit of $0.

29) Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's profit? A) P - ATC B) (P × Q) - TC C) (P × Q) - (P × ATC) D) P - TC E) MR - MC Answer: B Diff: 2 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 30) Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's average profit? A) P - ATC B) (P - ATC) × Q C) (P × Q) - TC D) P - TC E) TR - TC Answer: A Diff: 2 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 31) If price equals marginal cost at the output produced by a perfectly competitive firm, and the firm is earning an economic profit, then A) marginal revenue is less than price. B) average total cost is at a minimum. C) total revenue equals total cost. D) price exceeds average total cost. E) price equals average total cost. Answer: D Diff: 3 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking

32) What is always true at the quantity where a firm's average total cost equals average revenue? A) The firm's revenue is maximized. B) The firm's profit is maximized. C) The firm breaks even. D) Marginal cost equals marginal revenue. E) The firm is losing money. Answer: C Diff: 1 Type: MC Topic: Break Even Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 33) Profit is the difference between A) marginal revenue and marginal cost. B) total revenue and variable cost. C) total revenue and total explicit cost. D) total revenue and total cost. E) marginal revenue and average fixed cost. Answer: D Diff: 1 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking

Table 10.4 Quantity 0 1 2 3 4 5 6 7 8 9

Total Cost $10.00 15.00 17.50 22.50 30.00 40.00 52.50 67.50 85.00 105.00

Average Total Cost Marginal Cost --------$15.00 $5.00 8.75 2.50 7.50 5.00 7.50 7.50 8.00 10.00 8.75 12.50 9.64 15.00 10.63 17.50 11.67 20.00

Arnie sells basketballs in a perfectly competitive market. Table 10.4 summarizes Arnie's output per day (Q), total cost (TC), average total cost (ATC) and marginal cost (MC). 34) Refer to Table 10.4. What price (P) will Arnie charge and how much profit will he earn if the market price of basketballs is $12.50? A) Price and profit cannot be determined from the information given. B) P = $12.50; profit = $52.50 C) P = $12.50; profit = $22.50 D) P = $20; profit = $75.00 E) P = $20; profit = $52.50 Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Solved Problem: Determining Profit-Maximizing Price and Quantity 35) Refer to Table 10.4. What will Arnie's output be and how much profit will he earn if the market price of basketballs is $5.00? A) Q = 1; profit = -$10.00 B) Q = 3; profit = -$7.50 C) Q = 0; profit = -$10.00 D) Q = 1; profit = -$7.50 E) Price and profit cannot be determined from the information given. Answer: B Diff: 3 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Solved Problem: Determining Profit-Maximizing Price and Quantity

36) A firm will break even when A) P = ATC. B) P > ATC. C) P < AVC. D) P = AVC. E) P = AFC. Answer: A Diff: 2 Type: MC Topic: Break Even Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 37) A firm will make a profit when A) P > AVC. B) P > ATC. C) P = ATC. D) P = MC. E) P = AFC. Answer: B Diff: 2 Type: MC Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking

Figure 10.7

Figure 10.7 shows the demand, marginal cost (MC), and average total cost (ATC) curves for Jason's House of Apples. 38) Refer to Figure 10.7. To maximize his profit, Jason should produce the rate of output indicated by point A) a. B) b. C) e. D) d. E) a and d Answer: D Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit 39) Refer to Figure 10.7. Jason is currently producing 20 thousand kilograms of apples. To maximize his profit, Jason should A) keep production at 20 thousand kilograms. B) increase production to the output rate indicated by point b. C) increase production to the output rate indicated by point e. D) decrease production to the output rate indicated by point a. E) increase production to the output rate indicated by point d. Answer: E Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit 58 Copyright © 2024 Pearson Canada Inc.

40) Refer to Figure 10.7. Which of the following statements is true? A) Jason should produce where MC equals $3 (point d), where he will minimize his losses. B) Jason should produce where the distance between MC and his demand curve is greatest (point b). C) Jason cannot earn a profit from selling any number of apples. D) Jason should produce where MC equals $3 (point d), where he will maximize his profit. E) Jason should earn positive profit ay any quantity sold. Answer: D Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit 41) Refer to Figure 10.7. If Jason maximizes his profit, he will produce the output rate indicated by point ________ and his average profit will equal ________. A) d; $3 minus ATC at point d B) b; $3 minus ATC at point b C) e; $3 minus ATC at point e D) a; $3 E) b; $3 Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember That Firms Maximize Their Total Profit, Not Their Profit per Unit 42) A perfectly competitive firm will maximize its profit at the rate of output where the vertical distance between its total revenue and total cost is the largest. This is the same rate of output where A) average total cost equals marginal revenue. B) marginal revenue equals marginal profit. C) marginal revenue equals marginal cost. D) marginal revenue equals average revenue. E) marginal revenue equals average variable cost. Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking

Figure 10.8

Figure 10.8 illustrates the cost curves of a perfectly competitive firm. 43) Refer to Figure 10.8. If the market price is P1, A) the firm will experience a loss and raise its price to P2. The firm will then break even. B) the firm will break even by producing a quantity of Q2. C) the firm will experience a loss since price is less than ATC. D) the firm may make a profit if it can increase the demand for its product. E) the firm may raise it to P3 to earn profit. Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 44) Refer to Figure 10.8. If the market price is P3, the firm A) will break even. B) will make a profit. C) will earn enough revenue to cover its variable costs but not its fixed costs. D) will produce a quantity of Q1. E) will produce a quantity of Q2. Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills

45) Refer to Figure 10.8. If the market price is P2, the firm A) will break even and produce a quantity of Q3. B) will make a profit and produce a quantity of Q2. C) will make a profit and produce a quantity of Q1. D) will make a profit and produce a quantity of Q3. E) will break even and produce a quantity of Q2. Answer: E Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Figure 10.9

46) Refer to Figure 10.9. Suppose the firm produces 4,000 units. What does the shaded area labeled A represent? A) total variable cost B) profit C) total fixed cost D) total revenue E) average total cost Answer: C Diff: 2 Type: MC Topic: Profit and Loss Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills

47) Refer to Figure 10.9. Suppose the market price is $120. Which of the following is true? A) The firm earns a profit equal to the area A. B) The firm earns a profit equal to the area A + B. C) The firm suffers a loss equal to the area A. D) The firm will break even. E) The firm suffers a loss equal to area A + B. Answer: C Diff: 2 Type: MC Topic: Profit and Loss Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 48) Refer to Figure 10.9. Suppose the firm produces 4,000 units. What does the shaded area labeled B represent? A) the firm's economic loss B) total variable cost C) average variable cost D) total fixed cost E) average fixed cost Answer: B Diff: 2 Type: MC Topic: Profit and Loss Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills

Table 10.5 Quantity 20 40 60 80 100 120

Average Fixed Average Marginal Cost Cost Variable Cost $40 $18 $18 20 14 10 13.1 16 20 10 22 40 8 30 62 6.61 40 90

Table 10.5 shows the short-run cost data of a perfectly competitive firm. Assume that output can only be increased in batches of 20 units. 49) Refer to Table 10.5. If the market price is $45, the firm will produce A) 60 units. B) 80 units. C) 100 units. D) 120 units. E) 140 units. Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 50) Refer to Table 10.5. If the market price is $45, the firm A) will earn a profit of $3,600. B) will suffer a loss of $200. C) will break even. D) will earn profit of $1,040. E) will suffer a loss of $1,040. Answer: D Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 51) Refer to Table 10.5. If the market price is $20, the firm will produce A) 20 units. B) 40 units. C) 60 units. D) 80 units. E) 100 units. Answer: C Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 63 Copyright © 2024 Pearson Canada Inc.

52) Refer to Table 10.5. If the market price is $20, the firm A) will earn a profit of $240. B) will suffer a loss of $546. C) will break even. D) will earn profit of $414. E) will earn a profit of $546. Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 53) Refer to Table 10.5. If the market price is $10, the firm will produce A) 0 units. B) 20 units. C) 40 units. D) 60 units. E) 80 units. Answer: A Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 54) Refer to Table 10.5. If the market price is $10, the firm A) will earn a loss of $960. B) will suffer a loss of $800. C) will earn a loss of $80. D) will earn profit of $160. E) will suffer a loss of $160. Answer: B Diff: 2 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills 55) If price is equal to average variable cost, a perfectly competitive firm breaks even. Answer: FALSE Diff: 1 Type: TF Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking

56) For a given quantity, the total profit of a perfectly competitive firm is equal to the vertical distance between the firm's total revenue curve and its total cost curve. Answer: TRUE Diff: 1 Type: TF Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 57) If firms do not earn economic profits in a competitive equilibrium, why would the firms choose to stay in business? Answer: When firms earn no economic profit but earn a normal profit, they earn precisely as much as they could have earned by investing their time and money elsewhere. In other words, each producer is able to earn sufficient accounting profits to cover the opportunity cost of invested factors (time and money) and to continue operating. The source of the confusion stems from the difference between accounting and economic profits. Diff: 3 Type: ES Topic: Profit Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking

58) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per day and her costs are as follows: Output per Day 0 1 2 3 4 5 6 7 8

Total Cost $20 32 37 4 61 75 92 113 136

Suppose the current equilibrium price in the teapot market is $10. To maximize profit, how many teapots will Veronica produce, what price will she charge, and how much profit (or loss) will she make? Draw a graph to illustrate your answer. Your graph should include Veronica's demand, ATC, AVC, MC, and MR curves, the price she is charging, the quantity she is producing, and the area representing her profit (or loss). Answer: Veronica will produce 2 teapots per day. She will charge the market price of $10. She will make a profit of $-17 (a loss of $17).

59) To maximize profit, a firm will produce the level of output where MR = MC. Whether a firm actually makes a profit depends on the relationship of price to average total cost. What are the three possible relationships between price and average total cost that determine if a firm will make a profit, experience a loss, or break even? Answer: If P > ATC, the firm makes a profit. If P < ATC, the firm experiences a loss. If P = ATC, the firm breaks even. Diff: 3 Type: ES Topic: Profit and Loss Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Reflective Thinking 60) A perfectly competitive firm maximizes profit by producing where MR = MC. If the firm is making losses where MR = MC, the loss will be minimized. Explain the relationship of market price P to MC, to AVC and to ATC if the firm is making losses in the short run and it is still producing. Answer: If a firm is making losses and it is still operating and not shutting down then it must have the following relation of market price to costs. P = MC because that is profit maximizing/loss minimizing condition P < ATC because the firm is making losses P > AVC because the firm is still operating and not shutting down. Diff: 3 Type: SA Topic: Profit Maximization Learning Outcome: 10.3 Use graphs to show a firm's profit or loss AACSB: Analytic Skills Special Feature: Solved Problem: Determining Profit-Maximizing Price and Quantity

10.4

Explain why firms may shut down temporarily

1) If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, the firm A) is earning a profit. B) should shut down. C) should increase output. D) should increase price. E) should keep on producing. Answer: B Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 2) A perfectly competitive firm's supply curve is its A) marginal cost curve. B) marginal cost curve above its minimum average total cost. C) marginal cost curve above its minimum average variable cost. D) marginal cost curve above its minimum average fixed cost. E) marginal revenue curve. Answer: C Diff: 2 Type: MC Topic: The Firm's Supply Curve Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 3) When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell A) the output where marginal revenue equals marginal cost. B) any positive output the entrepreneur decides upon because all of it can be sold. C) nothing at all; the firm shuts down. D) the output where average total cost equals price. E) the output at a higher price than the market price. Answer: C Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking

4) Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from its previous owner, Mary Pickford. The lease has five years remaining and requires a monthly payment of $4,000. The lease A) is a fixed cost of operating the tattoo parlor. B) is a variable cost of operating the tattoo parlor. C) is an implicit cost of operating the tattoo parlor. D) is part of the marginal cost of operating the tattoo parlor. E) is part of variable cost of operating the tattoo parlor. Answer: A Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking Special Feature: Solved Problem: When to Shut Down a Farm. 5) Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from its previous owner, Mary Pickford. The lease has five years remaining and requires a monthly payment of $4,000. Max's explicit cost amounts to $3,000 per month more than his revenue. Should Max continue operating his business? A) Max's explicit cost exceeds his total revenue. He should shut down his tattoo parlor. B) Max should continue to run the tattoo parlor until his lease runs out. C) If Max's marginal revenue is greater than or equal to his marginal cost, then he should stay in business. D) Max should continue producing in the hope of earning profit in future. E) This cannot be determined without information on his revenue. Answer: B Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking Special Feature: Solved Problem: When to Shut Down a Farm.

Figure 10.10

Figure 10.10 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm. 6) Refer to Figure 10.10. At price P1, the firm would produce A) Q1 units. B) Q3 units. C) Q4 units. D) Q5 units. E) zero units. Answer: E Diff: 2 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 7) Refer to Figure 10.10. At price P1, the firm would A) lose an amount equal to its fixed cost. B) lose an amount more than fixed cost. C) lose an amount less than fixed cost. D) break even. E) lose an amount more than variable cost. Answer: B Diff: 2 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills

8) Refer to Figure 10.10. At price P2, the firm would produce A) Q2 units. B) Q3 units. C) Q4 units. D) Q5 units. E) zero units. Answer: A Diff: 2 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 9) Refer to Figure 10.10. At price P2, the firm would A) lose an amount equal to its fixed cost. B) lose an amount more than fixed cost. C) lose an amount less than fixed cost. D) break even. E) lose an amount equal to variable cost. Answer: C Diff: 2 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 10) Refer to Figure 10.10. At price P3, the firm would produce A) Q2 units. B) Q3 units. C) Q4 units. D) Q5 units. E) 0 units. Answer: B Diff: 2 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 11) Refer to Figure 10.10. At price P3, the firm would A) lose an amount equal to its fixed cost. B) lose an amount more than fixed cost. C) lose an amount less than fixed cost. D) break even. E) lose an amount equal to variable cost. Answer: D Diff: 2 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 71 Copyright © 2024 Pearson Canada Inc.

12) Refer to Figure 10.10. At price P4, the firm would produce A) Q3 units. B) Q4 units. C) Q5 units. D) Q6 units. E) 0 units. Answer: B Diff: 2 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 13) Refer to Figure 10.10. At price P4, the firm would A) lose an amount equal to its fixed cost. B) make a profit. C) lose an amount less than fixed cost. D) make a normal profit. E) lose an amount more than fixed cost. Answer: B Diff: 2 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 14) Refer to Figure 10.10. Identify the short-run shut down point for the firm. A) a B) b C) c D) d E) e Answer: B Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 15) Refer to Figure 10.10. Identify the firm's short-run supply curve. A) the marginal cost curve B) the marginal cost curve from a and above C) the marginal cost curve from b and above D) the marginal cost curve from d and above E) the marginal cost curve from c and above Answer: C Diff: 2 Type: MC Topic: The Firm's Supply Curve Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 72 Copyright © 2024 Pearson Canada Inc.

16) Market supply is found by A) vertically summing the relevant part of each individual producer's marginal cost curve. B) horizontally summing the relevant part of each individual producer's marginal cost curve. C) vertically summing each individual producer's average total cost curve. D) horizontally summing each individual producer's average total cost curve. E) adding the quantities of all the individual firms' supply curves and prices. Answer: B Diff: 2 Type: MC Topic: The Firm's Supply Curve Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 17) If total variable cost exceeds total revenue at all output levels, a perfectly competitive firm A) should produce in the short run. B) is making short-run profits. C) should shut down in the short run. D) has covered its fixed cost. E) should reduce production. Answer: C Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 18) If total revenue exceeds fixed cost, a firm A) should produce in the short run. B) has covered its variable cost. C) is making short-run profits. D) should continue producing. E) may or may not produce in the short run, depending on whether total revenue covers variable cost. Answer: E Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 19) If a firm shuts down in the short run, A) its loss equals zero. B) its loss equals its fixed cost. C) it makes zero economic profit. D) its total revenue is not large enough to cover its fixed cost. E) it has covered its variable cost. Answer: B Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking

20) A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run? A) No, it should shut down because it is making a loss. B) Yes, it should continue to produce because its price exceeds its average fixed cost. C) Yes, it should continue to produce because it is minimizing its loss. D) There is insufficient information to answer the question. E) No, it should shut down because it is not able to cover its variable cost. Answer: C Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 21) In the short run, a firm that incurs losses might choose to produce rather than shut down if the amount of its revenue is less than its fixed cost. Answer: FALSE Diff: 1 Type: TF Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 22) In the short run, if a firm shuts down, it avoids its variable cost but not its fixed cost. Answer: TRUE Diff: 2 Type: TF Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 23) In the short run, if a firm shuts down, its maximum loss equals the amount of its fixed cost. Answer: TRUE Diff: 1 Type: TF Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 24) The minimum point on the average variable cost curve is called the loss-minimizing point. Answer: FALSE Diff: 1 Type: TF Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking

25) If a firm's fixed cost exceeds its total revenue, the firm should stop production by shutting down temporarily. Answer: FALSE Diff: 2 Type: TF Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 26) Under what conditions should a competitive firm shut down in the short run? Answer: When market price is below average variable cost at the output where marginal revenue equals marginal cost, the firm should shut down in the short run. Diff: 2 Type: SA Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking, Ethical Reasoning 27) Use a graph to show the demand, AVC, ATC, MC, and MR curves of a firm that should temporarily shut down in the short run. Identify the shutdown point on the graph. Answer:

Diff: 2 Type: SA Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking, Ethical Reasoning

28) In the short run, a firm that is operating at a loss has two options. These options are A) to reduce output or reduce its variable costs. B) to go out of business or declare bankruptcy. C) to shut down temporarily or continue to produce. D) to adopt new technology or change the size of its physical plant. E) increase the price of its output or exit the market. Answer: C Diff: 1 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 29) If a firm shuts down, it A) will suffer a loss equal to its variable costs. B) will produce nothing but must pay its variable costs. C) will produce nothing but must pay its fixed and variable costs. D) will earn enough revenue to cover its variable costs but not all of its fixed costs. E) will suffer a loss equal to its fixed costs. Answer: E Diff: 1 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 30) How are sunk costs and fixed costs related? A) They are not related in any way. B) Sunk costs cannot be recovered and fixed costs can be avoided by shutting down. C) In the short run, they are equal to each other. D) In the long run, they are equal to each other. E) Fixed costs cannot be avoided and sunk costs can be avoided by careful planning. Answer: C Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 31) If a firm shuts down in the short run, it will A) break even. B) declare bankruptcy. C) suffer a loss equal to its variable costs. D) suffer a loss equal to its fixed costs. E) not incur any loss. Answer: D Diff: 1 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking

32) Which of the following best describes a firm's short run shut down condition? A) a firm should stop production if marginal cost is greater than average variable cost. B) a firm should stop production if revenue is less than fixed costs. C) a firm should stop production if revenue is less than total costs. D) a firm should stop production if revenue is less than variable costs. E) None of the above. Answer: D Diff: 1 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 33) Ben's Peanut Shoppe suffers a short-run loss. Ben will not choose to shut down if A) his Shoppe's total revenue exceeds his fixed cost. B) his Shoppe's total revenue exceeds his variable cost. C) his Shoppe's total revenue exceeds his implicit costs. D) his Shoppe's total revenue exceeds his capital costs. E) he keeps on earning profit. Answer: B Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 34) Ted's Pancake Kitchen suffers a short-run loss. When should Ted decide to shut down rather than continue to produce? A) if his Kitchen's revenue is less than its variable costs B) if his Kitchen's revenue is less than its fixed costs C) if his Kitchen's revenue is less than its explicit costs D) if his Kitchen's revenue is less than its total costs E) He should never shut down. Answer: A Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking

35) Marty's Bird House suffers a short-run loss. Marty can reduce his loss below the amount of his total fixed costs by continuing to produce if his revenue A) exceeds his implicit costs. B) exceeds his nonmonetary opportunity costs. C) exceeds his variable costs. D) exceeds his marginal costs. E) exceeds his average total cost. Answer: C Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 36) In analyzing the decision to shut down in the short run, we assume that the firm's fixed costs are A) implicit costs. B) capital costs. C) nonmonetary opportunity costs. D) sunk costs. E) opportunity costs. Answer: D Diff: 1 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 37) Which of the following is not an option for a perfectly competitive firm that suffers short-run losses? A) shutting down B) reducing production C) reducing the use of variable factors D) raising price E) All of the above are options for a perfectly competitive firm that suffers short-run losses. Answer: D Diff: 1 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking

38) The supply curve of a perfectly competitive firm in the short run is A) the firm's average variable cost curve. B) the portion of the firm's marginal cost curve below the minimum point of the average variable cost curve. C) the portion of the firm's average cost curve above the marginal revenue curve. D) the portion of the firm's marginal cost curve above the minimum point of the average total cost curve. E) the portion of the firm's marginal cost curve above the minimum point of the average variable cost curve. Answer: E Diff: 2 Type: MC Topic: The Firm's Supply Curve Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 39) A perfectly competitive firm's short-run supply curve is A) upward sloping and is the portion of the marginal cost curve that lies above the average total cost curve. B) upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve. C) perfectly elastic at the market price. D) horizontal at the minimum average total cost. E) upward sloping and is the portion of average total cost curve that lies above the marginal revenue curve. Answer: B Diff: 1 Type: MC Topic: The Firm's Supply Curve Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 40) The minimum point on the average variable cost curve is called A) the shutdown point. B) the break-even point. C) the loss minimizing point. D) the point of diminishing returns. E) the minimum efficient scale. Answer: A Diff: 1 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking

41) If a perfectly competitive firm's total revenue is less than its total variable cost, the firm A) should raise its price above its average variable cost. B) should continue to produce and increase its demand. C) should stop production by shutting down temporarily. D) should adopt new technology in order to lower its costs of production. E) should continue producing to keep its place in the market. Answer: C Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 42) In the mid-1990s, cattle ranchers in Canada kept raising cattle even though prices were at a ten-year low and below average total cost. What is the likely explanation for this? A) Continuing to operate resulted in smaller losses than would have been incurred by shutting down. B) The ranchers were hoping to receive government subsidies. C) The exit costs were too high. D) Cattle is a national industry and its production is essential for Canadian economic success. E) None of the above can explain the ranchers' decision. Answer: A Diff: 2 Type: MC Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking Figure 10.11

43) Refer to Figure 10.11. The firm's short-run supply curve is its A) marginal cost curve. B) marginal cost curve from b and above. C) marginal cost curve from c and above. D) marginal cost curve from d and above. E) marginal cost curve from a and above. Answer: B Diff: 2 Type: MC Topic: The Firm's Supply Curve Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 80 Copyright © 2024 Pearson Canada Inc.

44) Refer to Figure 10.11. Total revenue at the profit-maximizing level of output is A) $1,200. B) $2,500. C) $4,800. D) $6,000. E) $7,000. Answer: D Diff: 1 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 45) Refer to Figure 10.11. The total cost at the profit-maximizing output level equals A) $4,800. B) $3,300. C) $2,500. D) $1,800. E) $1,200. Answer: B Diff: 1 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 46) Refer to Figure 10.11. At the profit-maximizing output level, the firm earns A) zero economic profit. B) a profit of $600. C) a profit of $1,200. D) a profit of $2,700. E) a profit of $3,000. Answer: D Diff: 3 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills 47) Refer to Figure 10.11. The lowest price at which this firm would operate in the short run is A) $20. B) $10. C) $11. D) $6. E) $4. Answer: D Diff: 2 Type: MC Topic: Short-Run Equilibrium Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills

48) In the short run, a profit-maximizing firm will shut down if its total revenue is greater than its variable costs. Answer: FALSE Diff: 2 Type: TF Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 49) In the short run, a firm might choose to produce rather than shut down even if its market price is less than its average total cost of production. Answer: TRUE Diff: 1 Type: TF Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 50) If a firm's total variable cost exceeds its total revenue, the firm should stop production by shutting down temporarily. Answer: TRUE Diff: 2 Type: TF Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 51) The short-run supply curve for a perfectly competitive firm is that part of the firm's marginal cost curve that lies above the minimum point of its average variable cost curve. Answer: TRUE Diff: 1 Type: TF Topic: The Firm's Supply Curve Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking 52) Why some restaurants in Toronto closed their businesses as a result of higher rents and higher minimum wages? Answer: Restaurants in Toronto, like in any other large city are very competitive. In recent years when landlords increase the rent and the government raised the minimum wage, many restaurants were not able to pass along the cost to consumers in the form of higher prices because if they charge higher price, people will turn to one of many other restaurants. In these circumstances, only those who have more money of their own will survive because the entrepreneur has to bear the most loss. Diff: 1 Type: SA Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking Special Feature: Apply the Concept: Losing Money in the Restaurant Business.

53) What is the difference between "shutting down temporarily" and "exiting the industry"? Answer: The difference between the two has to do with fixed costs. In the short run a firm cannot avoid its fixed costs. When price falls so low that the firm can no longer cover its variable costs of production with the revenue it earns from selling its product, it should shut down temporarily and wait for economic conditions to improve. In the long run, all costs are variable. If total revenue cannot cover all costs, the firm will exit the industry. Diff: 3 Type: ES Topic: Shutting Down in the Short Run Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Reflective Thinking

54) Werner & Sons is a manufacturer of three-ring binders operating in a perfectly competitive industry. Table 10.6 shows the firm's cost schedule. Table 10.6 Quantity (cases)

Variable Cost

0 1 2 3 4 5 6 7 8 9

$0 30 50

Total Cost

Marginal Cost

Average Variable Cost

Average Total Cost

$76 106 134 140 160

114 150 190 316

Use the table to answer the following questions. a. Complete Table 10.6 by filling in the blank cells. b. Werner is selling in a perfectly competitive market at a price of $40. What is the profit maximizing or loss-minimizing output? c. Calculate the firm's profit or loss. d. Should the firm continue to produce in the short run? Explain. e. If the firm's fixed costs were $30 higher, what would be the profit-maximizing output level in the short run? Indicate whether the output level will increase, decrease, or remain unchanged compared to your answer in b. f. Suppose fixed cost remains at $76. If the price of three-ring binders falls to $20, what is the profitmaximizing or loss-minimizing output? g. Calculate the profit or loss. Should the firm continue to produce in the short run? Explain your answer. h. Suppose the fixed cost remains at $76. What price corresponds to the shut-down point? i. Suppose the fixed cost remains at $76. What price corresponds to the break-even point?

Answer: a. Quantity (cases)

Variable Cost

Total Cost

Marginal Cost

0 1 2

$0 30 50

$76 106 126

-$30 20

Average Variable Cost -$30 25

134

19.33

4 5

64 84

140 160

6 20

16 16.8

114

190

150

226

21.43

190

266

23.75

240

316

26.67

Average Total Cost $76 106 63 44.67 35 32 31.67 32.29 33.25 35.11

b. Quantity = 8 units c. Profit = $54 d. Yes, it is earning an economic profit. e. The profit-maximizing output will not change since marginal cost is not affected by changes in fixed cost. f. Quantity = 5 units g. Loss = $60. Yes, it is loss-minimizing. h. The shut-down point corresponds to a price of $16 and an output of 4 units. i. The break-even point occurs at a price $31.67 and an output of 6 units. Diff: 3 Type: ES Topic: Profit-Maximizing Level of Output Learning Outcome: 10.4 Explain why firms may shut down temporarily AACSB: Analytic Skills

10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run 1) Assume the market for humane beef sold at farmers' markets is perfectly competitive. All else equal, as more farmers choose to produce and sell humane beef at farmers' markets, what is likely to happen to the equilibrium price of the produce and profits of the humane cattle ranchers in the long run? A) The equilibrium price is likely to increase and profits are likely to remain unchanged. B) The equilibrium price is likely to remain unchanged and profits are likely to increase. C) The equilibrium price is likely to decrease and profits are likely to decrease. D) The equilibrium price is likely to increase and profits are likely to increase. E) The equilibrium price is likely to increase and profits are likely to increase. Answer: C Diff: 2 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills Special Feature: Chapter Opener: Are Cage-Free Eggs the Road to Riches? 2) Which of the following statements is correct? A) Economic profit takes into account all costs involved in producing a product. B) Accounting profit is not relevant in preparing the firm's financial statement. C) Economic profit always exceeds accounting profit. D) Accounting profit is the same as economic profit. E) None of the above. Answer: A Diff: 1 Type: MC Topic: Profit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

Figure 10.12

3) Refer to Figure 10.12. Suppose the prevailing price is $20 and the firm is currently producing 1,350 units. In the long-run equilibrium, the firm represented in the diagram A) will continue to produce the same quantity. B) will reduce its output to 1,100 units. C) will reduce its output to 750 units. D) will cease to exist. E) will increase production to 1,800 units. Answer: B Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 4) Refer to Figure 10.12. Suppose the prevailing price is $20 and the firm is currently producing 1,350 units. In the long-run equilibrium, A) there will be fewer firms in the industry and total industry output decreases. B) there will be more firms in the industry and total industry output increases. C) there will be fewer firms in the industry but total industry output increases. D) there will be more firms in the industry and total industry output remains constant. E) there will be more firms in the industry and profits for all the firms will increase. Answer: B Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 87 Copyright © 2024 Pearson Canada Inc.

5) Refer to Figure 10.12. If this is a constant-cost industry, what is the market price in the long-run equilibrium? A) $5 B) $14 C) $15 D) $20 E) $25 Answer: B Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 6) If a typical firm in a perfectly competitive industry is earning profits, then A) all firms will continue to earn profits. B) new firms will enter in the long run causing market supply to decrease, market price to rise and profits to increase. C) new firms will enter in the long run causing market supply to increase, market price to fall and profits to decrease. D) the number of firms in the industry will remain constant in the long run. E) in the long run some will merge and try to get the bigger share of the market. Answer: C Diff: 1 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

Figure 10.13

7) Refer to Figure 10.13. Consider a typical firm in a perfectly competitive industry that makes short-run profits. Which of the diagrams in the figure shows the effect on the industry as it transitions to a long-run equilibrium? A) Panel A B) Panel B C) Panel C D) Panel D E) Panel A and Panel B Answer: B Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

8) If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then A) firms are breaking even. B) new firms are attracted to the industry. C) existing firms will exit the industry. D) market supply will remain constant. E) some firms will shut down. Answer: B Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking Figure 10.14

9) Refer to Figure 10.14. Suppose the prevailing price is P1 and the firm is currently producing its lossminimizing quantity. In the long-run equilibrium, A) there will be more firms in the industry and total industry output decreases. B) there will be more firms in the industry and total industry output increases. C) there will be fewer firms in the industry but total industry output increases. D) there will be more firms in the industry and total industry output remains constant. E) there will be fewer firms in the industry and total industry output decreases. Answer: E Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 90 Copyright © 2024 Pearson Canada Inc.

10) Refer to Figure 10.14. Suppose the prevailing price is P1 and the firm is currently producing its lossminimizing quantity. If the firm represented in the diagram continues to stay in business, in the long-run equilibrium, A) it will reduce its output to Q0 and face a price of P0. B) it will continue to produce Q1 but faces the higher price of P2. C) it will expand its output to Q2 and face a price of P2. D) it will expand its output to Q3 and face a price of P1. E) it will expand its output to Q3 and face a price of P2. Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 11) If a typical firm in a perfectly competitive industry is incurring losses, then A) all firms will continue to lose money. B) some firms will exit in the long run, causing market supply to decrease and market price to rise increasing profits for the remaining firms. C) some firms will exit in the long run, causing market supply to decrease and market price to fall increasing losses for the remaining firms. D) some firms will enter in the long run, causing market supply to increase and market price to rise increasing profit for all firms. E) all firms will exit in the long run. Answer: B Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

12) A perfectly competitive market is in long-run equilibrium. At present there are 100 identical firms each producing 5,000 units of output. The prevailing market price is $20. Assume that each firm faces increasing marginal cost. Now suppose there is a sudden increase in demand for the industry's product which causes the price of the good to rise to $24. Which of the following describes the effect of this increase in demand on a typical firm in the industry? A) In the short run, the typical firm increases its output and makes an above normal profit. B) In the short run, the typical firm's output remains the same but because of the higher price, its profit increases. C) In the short run, the typical firm increases its output but its total cost also rises, resulting in no change in profit. D) In the short run, the typical firm increases its output but its total cost also rises. Hence, the effect on the firm's profit cannot be determined without more information. E) None of the above. Answer: A Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 13) In long-run perfectly competitive equilibrium, which of the following is false? A) There is efficient, low-cost production at the minimum efficient scale. B) Economic surplus is maximized. C) Firms earn economic profit. D) Economies of scale are exhausted. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

Figure 10.15

14) Refer to Figure 10.15. Consider a typical firm in a perfectly competitive industry which is incurring short-run losses. Which of the diagrams in the figure shows the effect on the industry as it transitions to a long-run equilibrium? A) Panel A B) Panel B C) Panel C D) Panel D E) Panel B and Panel C Answer: A Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

15) If in a perfectly competitive industry, the market price facing a firm is below its average total cost but above average variable cost at the output where marginal cost equals marginal revenue, A) the industry supply will not change. B) new firms are attracted to the industry. C) some existing firms will exit the industry. D) firms are breaking even. E) the industry supply will increase. Answer: C Diff: 2 Type: MC Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

Figure 10.16

16) Refer to Figure 10.16. Assume that the medical screening industry is perfectly competitive and that some firms are making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. Which of the diagrams in the figure best describes what happens in the industry? A) Panel A B) Panel B C) Panel C D) Panel D E) Panel A and Panel B Answer: D Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

17) Refer to Figure 10.16. Suppose a typical firm in a perfectly competitive market is earning economic profits in the short run. Which of the diagrams in the figure depicts what happens in the industry as it transitions to a long-run equilibrium? A) Panel A B) Panel B C) Panel C D) Panel D E) Panel A and Panel C Answer: B Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 18) Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. How will this affect a typical firm that remains in the industry? A) The firm's supply curve shifts right and its marginal revenue curve shifts upwards as the market price rises and ultimately the firm starts making profits. B) The firm's marginal revenue curve and average cost curve shift upwards in response to the increase in market price and advertising expenditure. The firm increases output until it starts breaking even. C) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production and eventually starts making profits. D) The marginal revenue curve shifts downwards, the firm's output decreases along its marginal cost curve, it reduces output until the losses are eliminated. E) The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production until it breaks even. Answer: E Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

19) An industry's long-run supply curve shows A) the relationship in the long run between market price and quantity supplied. B) how the government determines the price of the product. C) how average productivity is changing. D) greater than normal profit. E) constant costs. Answer: A Diff: 2 Type: MC Topic: Market Supply Curve Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 20) In the long run, a perfectly competitive market will A) produce only the quantity of output that yields a long-run profit for the typical firm. B) supply whatever amount consumers will buy at a price which earns the market an economic profit. C) supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve. D) generate a long-run equilibrium where the typical firm operates at a loss. E) earn positive economic profit as it can adjust its costs according to revenue. Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 21) A perfectly competitive wheat farmer in a constant-cost industry produces 3,000 bushels of wheat at a total cost of $36,000. The prevailing market price is $15. What will happen to the market price of wheat in the long run? A) The price remains constant at $15. B) The price falls to $12. C) The price rises above $15. D) The price rises to $17. E) There is insufficient information to answer the question. Answer: B Diff: 2 Type: MC Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

22) A perfectly competitive wheat farmer in a constant-cost industry produces 1,000 bushels of wheat at a total cost of $50,000. The prevailing market price is $48. What will happen to the market price of wheat in the long run? A) The price remains constant at $48. B) The price falls below $48. C) The price rises above $48. D) Any of the above can happen depending upon firm's production decision. E) There is insufficient information to answer the question. Answer: C Diff: 2 Type: MC Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 23) Poultry farmers in 2015 were able to sell cage-free eggs for a price that more than offset the higher costs of raising cage-free chickens. By 2019, though, most of that higher return had been wiped out by the entry of additional farmers into the cage-free egg market, which caused the prices of those eggs to decline. This example indicates that in a competitive market, A) earning an economic profit in the long run is extremely easy. B) earning an economic profit in the long run is extremely difficult. C) it is impossible to earn an economic profit in either the short run or the long run. D) economic profits are only earned in the long run. E) earning an economic profit in the long run is possible depending upon the firms. Answer: B Diff: 2 Type: MC Topic: Profit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking Special Feature: Apply the Concept: The Winding Path to Long-Run Equilibrium in the Egg Market in the United States 24) BlackBerry Limited (formerly known as Research In Motion) had 16,000 apps for BlackBerry devices available in January of 2011. By January of 2012 over 60,000 apps were available, climbing to over 70,000 in February that same year. There were over 105,000 apps by September of 2012. This is an indication that in a competitive market, A) the ease at which a new firm can enter a competitive market is low. B) the ease at which a new firm can enter a competitive market is high. C) entry into the market is blocked. D) entry into the market is restricted in the short run, but becomes easier in the long run. E) firms produce any quantity of output they want in the long run. Answer: B Diff: 2 Type: MC Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 98 Copyright © 2024 Pearson Canada Inc.

25) Assume that the tuna fishing industry is perfectly competitive. Which of the following best characterizes the industry if, as demand for tuna increases, fishing boats have to go farther into the ocean to harvest tuna? A) a constant-cost industry B) an increasing-cost industry C) a decreasing-cost industry D) a fixed-cost industry E) a constant marginal cost industry Answer: B Diff: 3 Type: MC Topic: Increasing-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 26) What of the following would indicate an industry is likely to have rising costs as more firms enter the industry? A) that industry's supplies have unexploited economies of scale B) key inputs are strictly limited in quantity C) there are many unemployed resources that could be used in that industry D) government policy sets a price floor in the industry E) key resources are easily available for the industry Answer: B Diff: 3 Type: MC Topic: Increasing-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 27) If in the long run a firm makes zero profit, it should exit the industry. Answer: FALSE Diff: 2 Type: TF Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 28) A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total cost of $50,000. If the prevailing market price is $48, the number of firms and the industry's output will decrease in the long run. Answer: TRUE Diff: 2 Type: TF Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

29) Suppose there are economies of scale in the production of a specialized memory chip that is used in manufacturing microwaves. This suggests that the microwave industry is a decreasing-cost industry. Answer: TRUE Diff: 2 Type: TF Topic: Decreasing-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 30) In an increasing-cost industry, the long-run supply curve is upward sloping. Answer: TRUE Diff: 1 Type: TF Topic: Increasing-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 31) What is meant by the term "long-run competitive equilibrium"? Answer: Long-run competitive equilibrium refers to the situation in which the entry and exit of firms to and from a market result in the typical firm breaking even. Diff: 1 Type: ES Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 32) What is a long-run supply curve? What does a long-run supply curve look like on a perfectly competitive market graph? Answer: A long-run supply curve shows the relationship in the long run between market price and the quantity supplied. On a perfectly competitive market graph, the long-run supply curve is a horizontal line at the market price. Diff: 2 Type: ES Topic: Market Supply Curve Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

Figure 10.17

33) Refer to Figure 10.17. Use the graph to answer the following questions. a. How can you determine that the figure represents a graph of a perfectly competitive firm? Be specific; indicate which curve gives you the information and how you use this information to arrive at your conclusion. b. What is the market price? c. What is the profit-maximizing output? d. What is total revenue at the profit-maximizing output? e. What is the total cost at the profit-maximizing output? f. What is the profit or loss at the profit-maximizing output? g. What is the firm's total fixed cost? h. What is the total variable cost? i. Identify the firm's short-run supply curve. j. Is the industry in a long-run equilibrium? k. If it is not in long-run equilibrium, what will happen in this industry to restore long-run equilibrium? l. In long-run equilibrium, what is the firm's profit-maximizing quantity?

Answer: a. The perfectly competitive firm is a price taker and therefore faces a perfectly elastic demand curve which is also the MR curve. b. Market price = $40 c. Profit-maximizing output = 200 d. Total revenue = $40 × 200 = $8,000 e. Total cost = ATC × total output = $24 × 200 = $4,800 f. Profit = Total revenue - total cost = $8,000 - 4,800 = $3,200 g. Total fixed cost = AFC × total output = (ATC - AVC) × 150 = $6 × 150 = $900. (Note: fixed cost has the same value at all output rates) h. The total variable cost at the profit-maximizing output level = ($4,800 - 900) = $3,900 i. The firm's short run supply curve is its MC curve above minimum AVC (from point b and above). j. No, the industry is not in a long-run equilibrium because the firm earns an economic profit. k. Some firms will enter the industry, causing the industry supply curve to shift rightward. This causes market price to fall. Entry stops when economic profits are eliminated and all firms break even. l. In the long-run equilibrium, the firm's profit-maximizing quantity = 150, where price will equal marginal cost. Diff: 3 Type: ES Topic: Profit-Maximizing Level of Output Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 34) In the long run, a firm in a perfectly competitive industry will supply output only if its total revenue covers its A) explicit plus its implicit costs. B) fixed costs. C) implicit costs. D) explicit costs. E) variable costs. Answer: A Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

35) Which of the following statements is true? A) A long-run competitive equilibrium can only be achieved in constant-cost industries. B) When an industry achieves a long-run competitive equilibrium, industry output will not change in the future. C) A long-run competitive equilibrium outcome is not economically efficient. D) When an industry reaches a long-run competitive equilibrium, the typical firm in the industry breaks even. E) None of the above. Answer: D Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

Figure 10.18

36) Refer to Figure 10.18. Which panel best represents the perfectly competitive organic produce market in which some firms are experiencing short-run losses and consumers are displaying an increased preference for organic produce? A) Panel A B) Panel B C) Panel C D) Panel D E) Panel A and Panel B Answer: D Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

37) Refer to Figure 10.18. Which panel best represents the perfectly competitive organic produce market's transition to the long run when some firms in the market are earning economic profits? A) Panel A B) Panel B C) Panel C D) Panel D E) Panel A and Panel C Answer: B Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 38) Refer to Figure 10.18. Which panel best represents the perfectly competitive organic produce market in which some firms are earning short-run economic profits, and the Chief Public Health Officer announces that switching from non-organic produce to organic produce will add 5 years to the average life span of consumers? A) Panel A B) Panel B C) Panel C D) Panel D E) Panel B and Panel D Answer: A Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 39) Refer to Figure 10.18. Which panel best represents the perfectly competitive organic produce market in which firms are breaking even economically, organic produce is considered a normal good, and the average income level of consumers is rising? A) Panel A B) Panel B C) Panel C D) Panel D E) Panel A and Panel B Answer: C Diff: 3 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

40) In a perfectly competitive industry, in the long-run equilibrium, A) the typical firm is producing at the output where its long-run average total cost is not minimized. B) the typical firm is earning an accounting profit greater than its implicit costs. C) the typical firm earns zero profit. D) the typical firm is maximizing its revenue. E) the typical firm is earning economic profit. Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 41) A constant-cost, perfectly competitive market is in long-run equilibrium. At present, there are 1,000 firms each producing 400 units of output. The price of the good is $60. Now suppose there is a sudden increase in demand for the industry's product, which causes the price of the good to rise to $64. In the new long-run equilibrium, how will the average total cost of producing the good compare to what it was before the price of the good rose? A) The average total cost will be higher than it was before the price increase since the increase in demand will drive up input prices. B) The average total cost will be lower than it was before the price increase because of economies of scale. C) The average total cost will be higher than it was before the price increase because of diseconomies of scale arising from the increased demand. D) The average total cost will decrease as price increase because some of the cost will be covered from the price increase. E) The average total cost will be the same as it was before the price increase. Answer: E Diff: 3 Type: MC Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 42) A constant-cost industry is an industry in which A) average costs fall as the industry expands output. B) average costs rise as the industry expands output. C) average costs remain constant as the industry expands output. D) input prices rise at a constant rate as firms in the industry use more inputs. E) marginal cost and average cost are always equal at any level of output. Answer: C Diff: 2 Type: MC Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

43) The long-run supply curve for a perfectly competitive, constant-cost industry A) is upward sloping. B) is horizontal. C) is downward sloping. D) is found by adding up the marginal cost curves for all firms in the industry. E) is vertical. Answer: B Diff: 1 Type: MC Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 44) A perfectly competitive firm in a constant-cost industry produces 3,000 units of a good at a total cost of $36,000. The prevailing market price is $15. What will happen to the number of firms in the industry and to the industry's output in the long run? A) The number of firms and the industry's output increase. B) The number of firms and the industry's output decrease. C) The number of firms remains constant and the industry's output increases. D) The number of firms remains constant and the industry's output decreases. E) The number of firms will increase but industry's output will decrease. Answer: A Diff: 2 Type: MC Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 45) A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total cost of $50,000. The prevailing market price is $48. Assuming that this firm continues to produce in the long run, what happens to output level in the long run? A) The firm's output falls. B) The firm's output increases. C) The firm produces the same output level. D) The firm's profit will increase. E) There is insufficient information to answer the question. Answer: B Diff: 2 Type: MC Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

46) If, as a perfectly competitive industry expands, it can supply larger quantities only at a higher longrun equilibrium price, it is A) a constant-cost industry. B) an increasing-cost industry. C) a decreasing-cost industry. D) a fixed-cost industry. E) a high price industry. Answer: B Diff: 2 Type: MC Topic: Increasing-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 47) If, as a perfectly competitive industry expands, it can supply larger quantities at the same long-run market price, it is A) a constant-cost industry. B) an increasing-cost industry. C) a decreasing-cost industry. D) a fixed-cost industry. E) a constant price industry. Answer: A Diff: 2 Type: MC Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 48) To maintain sales in a profitable competitive market, like the market for large pastured eggs, the price of a product A) will usually rise. B) will usually fall. C) will usually remain stable. D) will eventually fall to zero. E) any of the above can happen. Answer: B Diff: 1 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking Special Feature: Apply the Concept: The Winding Path to Long-Run Equilibrium in the Egg Market in the United States

49) What characteristic of a competitive market has made the "long run pretty short" in the market for cage-free eggs? A) few firms in the market B) identical products C) ease of entry D) blocked entry E) none of the above Answer: C Diff: 1 Type: MC Topic: Market Structures Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking Special Feature: Apply the Concept: The Winding Path to Long-Run Equilibrium in the Egg Market in the United States 50) Which of the following best explains the falling price of eggs in the cage-free egg market? A) falling numbers of chickens B) increasing popularity of cage-free eggs C) ease of entry D) a limited supply of cage-free eggs E) all of the above Answer: C Diff: 1 Type: MC Topic: Market Structures Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking Special Feature: Apply the Concept: The Winding Path to Long-Run Equilibrium in the Egg Market in the United States 51) If a firm in a perfectly competitive industry experiences persistent losses, in the long run it should A) shut down temporarily and wait for market conditions to change. B) exit the industry. C) raise its price to cover average total cost. D) continue to operate if it can raise the demand for its product through advertising and quality improvements. E) stop making losses. Answer: B Diff: 2 Type: MC Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

52) Assume that a perfectly competitive market is in long-run equilibrium. Suppose as a result of a health hazard associated with the industry's product, demand decreases drastically. What is the immediate result of this event? A) The market price falls and the typical firm suffers an economic loss. B) The market supply increases to offset the fall in demand. C) The typical firm's average total cost curve shifts downward. D) The typical firm's marginal cost curve shifts to the left. E) The market price rises and the typical firm starts making profit. Answer: A Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking Figure 10.19

The graphs in Figure 10.19 represent the perfectly competitive market demand and supply curves for the apple industry and demand and cost curves for a typical firm in the industry. 53) Refer to Figure 10.19. Which of the following statements is true? A) The current market price is $3 but the firm will be able to increase the price in the future. B) The current market price is $3 but the price will fall in the long-run as a result of a decrease in demand. C) The current market price is $3 but the price will fall in the long-run as new firms enter the market. D) The current market price is $3 but the price will increase in the future as the market demand increases. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills

54) Refer to Figure 10.19. Which of the following statements is true? A) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. New firms will enter the market and shift the market supply curve to the left. B) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit, but it would earn a greater profit if it produced at the lowest point on the ATC curve. C) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. New firms will enter the industry; as a result, the firm will be forced to exit the industry in the long run. D) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. In the long run, it will continue to make profit. E) The firm will produce 30 thousand pounds of apples in the short run and earn an economic profit. In the long run, the firm will break even. Answer: E Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 55) Refer to Figure 10.19. The graphs depict a short-run equilibrium. How will this differ from the longrun equilibrium? (Assume this is a constant-cost industry.) A) Fewer firms will be in the market in the long run than in the short run. B) The price will be higher in the long run than in the short run. C) The market supply curve will be further to the left in the long run than in the short run. D) The firm's profit will be lower in the long run than in the short run. E) The firm's profit will be same in the short run and the long run. Answer: D Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 56) Assume that firms in a perfectly competitive market are earning economic profits. Which of the following statements describes the change in market price and output as a result of the entry of new firms into this market? A) The market demand curve shifts to the right, causing price to rise and market output to increase. B) The market demand curve shifts to the left, causing price to fall and market output to decrease. C) The short-run market supply curve shifts to the right, causing price to fall and total market output to increase. D) The short-run market supply curve shifts to the left, causing price to rise and total market output to decrease. E) All of the above. Answer: C Diff: 2 Type: MC Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 111 Copyright © 2024 Pearson Canada Inc.

57) A firm could continue to operate for years without ever earning a profit as long as it is producing an output where A) MR < ATC. B) ATC > AVC. C) MR > AVC. D) AFC < AVC. E) MR > AFC. Answer: C Diff: 2 Type: MC Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 58) A firm would decide to shut down if its production resulted in A) MR < ATC. B) ATC > AVC. C) AFC > AVC. D) MR < AVC. E) MR < AFC. Answer: D Diff: 2 Type: MC Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 59) After an increase in demand in a constant-cost industry, firms will find themselves with higher average cost curves. Answer: FALSE Diff: 1 Type: TF Topic: Constant-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 60) Competition has driven the economic profits in the video rental business to zero. Surya Bacha, who owns a video rental business, would be better off leaving the industry for another alternative. Answer: FALSE Diff: 1 Type: TF Topic: Profit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

61) In a decreasing-cost industry, the entry of new firms lowers average cost at each level of output. Answer: TRUE Diff: 1 Type: TF Topic: Decreasing-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 62) When firms exit a perfectly competitive industry, the market supply curve shifts to the left. Answer: TRUE Diff: 1 Type: TF Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 63) Assume that the personal computer industry is perfectly competitive. The fact that the price of personal computers over the last decade has fallen despite increases in demand signifies that the industry is a decreasing-cost industry. Answer: TRUE Diff: 2 Type: TF Topic: Decreasing-Cost Industry Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking

Figure 10.20

64) Refer to Figure 10.20. The figure above shows the cost curves of a perfectly competitive firm in the coffee market. Use the graph in Figure 10.20 to answer the following questions. Assume the market price is $3 per pound. a. What is the lowest price at which the coffee grower will supply output in the short run? b. In the diagram, draw the firm's demand curve (label this "MR" for marginal revenue). c. What is the firm's profit-maximizing output? d. Is the firm earning a profit or a loss? Identify the area in the graph that represents the firm's profit or loss. e. Explain how entry or exit will occur in the market to ensure that firms will break even in the long run.

Answer: a. $1.50 per pound. This represents the lowest point on the AVC curve, or the shut-down point. b. See the figure below. c. 225. This is the output where price (MR) equals MC. d. The firm is earning a profit. See the figure below.

e. Above normal profits attract new entrants into the industry, which will shift the industry supply curve to the right and decrease the market price. This entry stops when all economic profits are eliminated and price equals average total cost. Diff: 3 Type: ES Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 65) In the long run, perfectly competitive firms earn zero economic profit. Why do firms enter an industry when they know that in the long run they will not earn any profit? Answer: Even though in the long run firms earn zero profit, in the interim period they can earn economic profits. Breaking even in the long run means that a firm earns a return comparable to what it could earn in an alternative use of their resources. Diff: 2 Type: ES Topic: Break Even Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Reflective Thinking 66) Why would a company continue to operate for many years while never once turning a profit rather than shut down immediately? Using revenue and cost analysis, explain when the company would shut down. Answer: A company would continue to operate rather than shut down so long as it could cover its variable costs. If revenues did not cover all of the firm's variable costs, it would shut down. Diff: 2 Type: ES Topic: Entry and Exit Learning Outcome: 10.5 Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run AACSB: Analytic Skills 115 Copyright © 2024 Pearson Canada Inc.

10.6

Explain how perfect competition leads to economic efficiency

1) Which of the following describes a situation in which a good or service is produced at the lowest possible cost? A) productive efficiency B) allocative efficiency C) marginal efficiency D) profit maximization E) revenue maximization Answer: A Diff: 1 Type: MC Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 2) What is productive efficiency? A) a situation in which resources are allocated to their highest profit use B) a situation in which resources are allocated such that goods can be produced at their lowest possible average cost C) a situation in which resources are allocated such the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it D) a situation in which firms produce as much as possible E) a situation where firms can produce according to their marginal cost Answer: B Diff: 1 Type: MC Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 3) The perfectly competitive market structure benefits consumers because A) firms do not produce goods at the lowest possible price in the long run. B) firms are forced by competitive pressure to be as efficient as possible. C) firms add a much smaller markup over average cost than firms in any other type of market structure. D) firms produce high quality goods at low prices. E) firms produce and sell low quality goods at the lowest possible cost. Answer: B Diff: 2 Type: MC Topic: Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking

4) If the long-run average cost curve is U-shaped, the optimal scale of production from society's viewpoint is A) the minimum efficient scale. B) where maximum economic profit is earned by producers. C) where firm profit is large enough to finance research and development. D) one which guarantees economic profit. E) where the average total cost is still falling. Answer: A Diff: 2 Type: MC Topic: Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 5) Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it? A) productive efficiency B) allocative efficiency C) marginal efficiency D) profit maximization E) revenue maximization Answer: B Diff: 1 Type: MC Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 6) What is allocative efficiency? A) It refers to a situation in which resources are allocated to their highest profit use. B) It refers to a situation in which resources are allocated such that goods can be produced at their lowest possible average cost. C) It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it. D) It refers to a situation in which resources are allocated fairly to all consumers in a society. E) None of the above. Answer: C Diff: 1 Type: MC Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking

7) A perfectly competitive industry achieves allocative efficiency because A) goods and services are produced at the lowest possible cost. B) goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. C) it produces where market price equals marginal production cost. D) firms carry production surpluses. E) firms produce according to the market demand. Answer: B Diff: 2 Type: MC Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking Figure 10.21

8) Refer to Figure 10.21. If the market price is P1, what is the allocatively efficient output level? A) Q0 B) Q1 C) Q2 D) Q3 E) There is no allocatively efficient output level because the firm is incurring a loss. Answer: B Diff: 2 Type: MC Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Analytic Skills

9) Assume that the LCD and plasma television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run? A) Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short run profits because other firms would also innovate. B) The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits. C) This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation. D) The firm will incur losses in the short run, but in the long run it will start earning profits. E) The firm will be able to increase its profits temporarily, but in the long run its profits will be eliminated as other firms copy the innovation. Answer: E Diff: 3 Type: MC Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers 10) In early 2007, Pioneer and JVC, two Japanese electronics firms, each announced that their profits were going to be lower than expected because they both had to cut prices for LCD and plasma television sets. Which of the following could explain why these firms did not simply raise their prices and increase their profits? A) The move to cut prices is probably just a temporary one to gain market share. In the long run the firms will raise prices and be able to increase their profits. B) Most likely, intense competition between these two major producers probably pushed prices down. Thereafter, each feared that it would lose its customers to the other if it raised its prices. C) In perfect competition, prices are determined by the market and firms will keep lowering prices until there are no profits to be earned. D) The firms are still making profits, just not as high as expected so there is room to lower prices until one can force the other out of business. E) None of the above can explain why these firms did not raise prices to increase their profits. Answer: B Diff: 3 Type: MC Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers

11) Writing in the New York Times on the technology boom of the late 1990s, Michael Lewis argues, "The sad truth, for investors, seems to be that most of the benefits of new technologies are passed right through to consumers free of charge." What does Lewis means by the benefits of new technology being "passed right through to consumers free of charge"? A) Firms in perfect competition are price takers. Since they cannot influence price, they cannot dictate who benefits from new technologies, even if the benefits of new technology are being "passed right through to consumers free of charge." B) In perfect competition, price equals marginal cost of production. In this sense, consumers receive the new technology "free of charge." C) In the long run, price equals the lowest possible average cost of production. In this sense, consumers receive the new technology "free of charge." D) In perfect competition, consumers place a value on the good equal to its marginal cost of production and since they are willing to pay the marginal valuation of the good, they are essentially receiving the new technology "free of charge." E) New technologies are a "public good" and everyone can enjoy it free of charge. Answer: C Diff: 3 Type: MC Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers 12) If oranges are sold in a perfectly competitive market, what impact will an increase in the demand for oranges have on consumer surplus in the long run? A) Consumer surplus will fall as the increase in demand drives up prices and profits for firms. B) Consumer surplus will fall as the demand curve shifts to the left, showing the decrease in net benefit of oranges to consumers at every price. C) Consumer surplus will rise as the demand curve shifts to the right, showing the increase in net benefit of oranges at every price and the short-run price increases induces more farmers to grow oranges. D) Consumer surplus will rise, as the demand curve shifts to the right, showing the increase in net benefit of oranges and short-run loses induces farmers to grow crops other than oranges. E) It will have no effect on consumer surplus because in the long run, supply will also increase to match the demand and price will remain the same. Answer: C Diff: 3 Type: MC Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers

13) Without government subsidization, the conversion of farmland in the United Kingdom from conventional to organic production will generally cause a farmer's A) marginal cost and average total cost to decrease. B) marginal cost and average total cost to increase. C) average total cost to increase and marginal cost to decrease. D) marginal cost to increase and average total cost to remain unchanged. E) profits to fall substantially. Answer: B Diff: 2 Type: MC Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 14) A decrease in demand for organic products will ________ a firm's economic profit, and the increase in costs to produce organic produce will ________ a firm's economic profit. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) not change; decrease Answer: D Diff: 1 Type: MC Topic: Profit Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Analytic Skills 15) If a firm in a perfectly competitive industry introduces a lower-cost way of producing an existing product, the firm will be able to earn economic profits in the long run. Answer: FALSE Diff: 2 Type: TF Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 16) Firms in perfect competition produce the productively efficient output level in the short run and in the long run. Answer: FALSE Diff: 2 Type: TF Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Analytic Skills

17) Firms in perfect competition produce the allocatively efficient output in the short run and in the long run. Answer: TRUE Diff: 2 Type: TF Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Analytic Skills 18) What is meant by productive efficiency? How does a perfectly competitive firm achieve productive efficiency? Answer: Productive efficiency refers to a situation in which a good or service is produced at the lowest possible cost, in particular, every good or service is produced up to the point where the last unit is produced where the market price is equal to minimum average total cost. Diff: 2 Type: ES Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking

19) Using two graphs, illustrate how a positive technological change in the market for notebook computers could eliminate short-run economic profit for a firm in that market. On the first graph, use a supply and demand graph to illustrate the positive technological change. On the second graph, use demand, ATC, MC and MR curves to illustrate the elimination of economic profit resulting from the positive technological change. Explain what is taking place in each graph. Answer: On the first graph, supply shifts to the right as a result of the positive technological change, lowering the equilibrium price and increasing the equilibrium quantity. On the second graph, the lower price shifts the demand curve down to where it intersects the ATC curve at its minimum point, eliminating economic profit.

Diff: 2 Type: ES Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers 123 Copyright © 2024 Pearson Canada Inc.

20) Which of the following does not hold true for a perfectly competitive firm in long-run equilibrium? A) Its economic profit will be zero. B) It will minimize average total cost. C) It will charge a price equal to marginal cost. D) Marginal cost will be minimized. E) Average cost will be minimized. Answer: D Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 21) A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean? A) Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit. B) Each firm produces up to the point where all scale economies are exhausted. C) Production occurs at the lowest average total cost. D) Firms use an input combination that minimizes cost and maximizes output. E) All firms are using their resources to their maximum possible use. Answer: A Diff: 2 Type: MC Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 22) New York Times writer Michael Lewis wrote that "The sad truth, for investors, seems to be that most of the benefits... are passed through to consumers free of charge." To which of the following did Lewis refer? A) apple farming in New York state B) the Enron accounting scandal C) the medical screening industry D) new technologies developed in the 1990s E) None of the above. Answer: D Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers

23) When plasma television sets were first introduced, prices were high and few firms were in the market. Later, economic profits attracted new firms and the price of plasma televisions fell. This example illustrates A) a decreasing-cost industry. B) that consumers receive this new technology "free of charge" in the sense that they only have to pay a price for plasma televisions equal to the lowest production cost. C) an industry with a low minimum efficient scale. D) how fickle consumer demands are. E) an increasing-cost industry. Answer: B Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking Special Feature: Solved Problem: How Productive Efficiency Benefits Consumers 24) Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit. This condition is referred to as A) productive efficiency. B) constant returns to scale. C) allocative efficiency. D) perfectly competitive efficiency. E) decreasing returns to scale. Answer: C Diff: 1 Type: MC Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 25) Which of the following describes a difference between allocative efficiency and productive efficiency in a perfectly competitive market? A) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved only in the short run. B) Allocative efficiency is achieved only in the long run. Productive efficiency is achieved in the short run and the long run. C) Allocative efficiency is achieved only in the short run. Productive efficiency is achieved only in the long run. D) Allocative efficiency is achieved in the short run and the long run. Productive efficiency is achieved only in the long run. E) None of the above because they are two names for the same concept. Answer: D Diff: 3 Type: MC Topic: Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking

26) If a perfectly competitive firm achieves productive efficiency, then A) it will raise its price in order to earn an economic profit. B) the price of the good it sells is equal to the benefit consumers receive from consuming the last unit of the good sold. C) it is producing at minimum efficient scale. D) it is producing the good it sells at the lowest possible cost. E) it is producing to its maximum capacity and it cannot produce more than that. Answer: D Diff: 2 Type: MC Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 27) If productive efficiency characterizes a market, A) the marginal cost of production is minimized. B) firms produce the goods that consumers desire most. C) the output is being produced at the lowest possible cost. D) firms use the best technology available to produce the good. E) the good is being produced to the firm's maximum capacity. Answer: C Diff: 1 Type: MC Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 28) A teenaged babysitter is similar to a firm in a perfectly competitive industry in that for both, A) fixed costs are lower than variable costs. B) there are many other suppliers of similar goods or services. C) the implicit costs of production exceed the explicit costs of production. D) average costs of production do not change when their industry expands. E) there are no fixed costs involved in both cases. Answer: B Diff: 1 Type: MC Topic: Characteristics of Perfectly Competitive Firms Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking Special Feature: Economics in Your Life: Are You an Entrepreneur?

29) Being able to label products as organic becomes very important to a number of firms when demand for these products is increasing. The increase in demand allows a firm to A) decrease the quantity supplied and block entry into the market. B) increase supply, which raises the market price. C) charge a higher market price and earn a larger economic profit. D) lower average total cost and marginal cost, thereby increasing economic profit. E) put fancy labels on organic goods to attract more consumers. Answer: C Diff: 1 Type: MC Topic: Profit Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 30) ________ in demand for organic food products in the United Kingdom will decrease a firm's economic profit, and the ________ in cost to grow organic food products in the United Kingdom will decrease a firm's economic profit. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: C Diff: 1 Type: MC Topic: Profit Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 31) Allocative efficiency is achieved in an industry when firms supply those goods and services that provide consumers with a marginal benefit equal to the marginal cost of producing those goods and services. Answer: TRUE Diff: 1 Type: TF Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 32) A perfectly competitive firm in long-run equilibrium produces output at the lowest possible average total cost. Answer: TRUE Diff: 1 Type: TF Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking

33) What is meant by allocative efficiency? How does a perfectly competitive firm achieve allocative efficiency? Answer: Allocative efficiency refers to a state of the economy in which production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. The price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold. Since perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of the last unit produced, allocative efficiency is achieved. Diff: 2 Type: ES Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 34) In long-run competitive equilibrium, the perfectly competitive firm produces where price equals minimum average total cost. a. What is this efficiency criterion called? b. How does it benefit consumers? Answer: a. Productive efficiency b. Productive efficiency means that a product is produced at the lowest possible cost. In other words, the product is produced with a minimum amount of scarce resources. Consumers benefit because society can produce more products with its scarce resources. Diff: 2 Type: ES Topic: Productive Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking 35) Allocative efficiency is achieved when firms supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them. Give three reasons to explain why does this result hold? Answer: The above result holds because: 1. The price of a good represents the marginal benefits consumers receive from the last unit. 2. Firms produce up to the point where price of the good equals the marginal cost of the last unit. 3. Firms produce up to the point where the last unit provides a marginal benefit equals to marginal cost. Diff: 2 Type: SA Topic: Allocative Efficiency Learning Outcome: 10.6 Explain how perfect competition leads to economic efficiency AACSB: Reflective Thinking

Microeconomics, 4Ce (Hubbard) Chapter 11 Monopolistic Competition: The Competitive Model in a More Realistic Setting 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves 1) One reason why the coffee house market is competitive is that A) demand for coffee is very high. B) it is trendy and therefore is likely to have a customer following. C) barriers to entry are low. D) consumption takes place in public. E) all the coffees are special to each specific restaurant. Answer: C Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking Special Feature: Chapter Opener: The Coffee Industry: From Supermarket Cans to Third Wave Coffeehouse 2) The reason that the coffee house market is monopolistically competitive rather than perfectly competitive is because A) consumption of goods takes place in public. B) there are many firms in the market. C) products are differentiated. D) entry into the market is blocked. E) there are only few sellers. Answer: C Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking Special Feature: Chapter Opener: The Coffee Industry: From Supermarket Cans to Third Wave Coffeehouse

3) The key characteristics of a monopolistically competitive market structure include A) many small (relative to the total market) sellers acting independently. B) all sellers sell a homogeneous product. C) barriers to entry are strong. D) sellers have no incentive to advertise their products. Answer: A Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 4) Which of the following characteristics is not common to monopolistic competition and perfect competition? A) Firms act to maximize profit. B) Entry barriers into the industry are low. C) The market demand curve is downward sloping. D) Firms take market prices as given. Answer: D Diff: 2 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 5) Which of the following characteristics is common to monopolistic competition and perfect competition? A) Firms produce identical products. B) Entry barriers into the industry are low. C) Each firm faces a downward-sloping demand curve. D) Firms take market prices as given. Answer: B Diff: 2 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

6) A major difference between monopolistic competition and perfect competition is A) the number of sellers in the markets. B) the degree by which the market demand curves slope downwards. C) that products are not standardized in monopolistic competition unlike in perfect competition. D) the barriers to entry in the two markets. Answer: C Diff: 2 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 7) The key characteristics of a monopolistically competitive market structure include A) few sellers. B) sellers selling similar but differentiated products. C) high barriers to entry. D) sellers acting to maximize revenue. E) firms are price taker. Answer: B Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 8) Which of the following is not an example of a monopolistically competitive market? A) automobile producers B) supermarkets C) video stores D) makers of women's clothing E) wheat farmers Answer: A Diff: 2 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

9) In monopolistic competition there is/are A) many sellers who each face a downward-sloping demand curve. B) a few sellers who each face a downward-sloping demand curve. C) only one seller who faces a downward-sloping demand curve. D) many sellers who each face a perfectly elastic demand curve. E) a few sellers who each face a perfectly elastic demand curve. Answer: A Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 10) Which of the following is true for a firm with a downward-sloping demand curve for its product? A) Price, average revenue, and marginal revenue are all equal. B) Price, average revenue, and marginal revenue are all different. C) Price equals marginal revenue but is lower than average revenue. D) Price equals average revenue but is less than marginal revenue. E) Price equals average revenue but is greater than marginal revenue. Answer: E Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 11) If a firm faces a downward-sloping demand curve, A) the demand for its product must be inelastic. B) it can control both price and quantity sold. C) it must reduce its price to sell more units. D) it will always make a profit. E) it will produce more to sell at a higher price. Answer: C Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

12) A monopolistically competitive firm faces a downward-sloping demand curve because A) it is able to control price and quantity demanded. B) there are few substitutes for its product. C) of product differentiation. D) its market decisions are affected by the decisions of its rivals. E) it has only a few sellers. Answer: C Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills 13) A monopolistically competitive firm will A) charge the same price as its competitors do. B) always produce at the minimum efficient scale of production. C) have some control over its price because its product is differentiated. D) produce an output level that is productively and allocatively efficient. E) have full control over price and quantity simultaneously. Answer: C Diff: 2 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 14) Which of the following is true of a typical firm in a monopolistically competitive industry? A) Product differentiation allows a successful firm to emerge as a market leader in the industry. B) All firms have identical cost structures. C) The more successful firms have an incentive to merge in order to exert greater market power. D) Each firm acts independently. E) All firms determine the price of the good together. Answer: D Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

15) For a monopolistically competitive firm, marginal revenue A) equals the price. B) is greater than the price. C) is less than the price. D) and price are unrelated. E) equals average revenue. Answer: C Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 16) If the demand curve for a firm is downward sloping, its marginal revenue curve A) will lie above the demand curve. B) will lie below the demand curve. C) is the same as the demand curve. D) is horizontal. E) will be upward sloping. Answer: B Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 17) When a monopolistically competitive firm cuts its price to increase its sales, it experiences a gain in revenue due to the A) substitution effect. B) income effect. C) price effect. D) output effect. E) lower competition. Answer: D Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

18) When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the A) substitution effect. B) income effect. C) price effect. D) output effect. E) more competition. Answer: C Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking Table 11.1 Quantity 1 2 3 4 5 6 7 8 9

Price (dollars) $7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50

Total Revenue (dollars) $7.50 14.00 19.50 24.00 27.50 30.00 31.50 32.00 31.50

19) Refer to Table 11.1. What is the marginal revenue of the 3rd unit? A) $6.50 B) $5.50 C) $3.00 D) $1.83 E) $0.50 Answer: B Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills

20) Refer to Table 11.1. The table shows A) an elastic segment of the demand curve. B) an inelastic segment of the demand curve. C) a demand curve with an elastic segment of the demand curve from $7.50 to $6.50 followed by an inelastic segment. D) a demand curve with an inelastic segment of the demand curve from $7.50 to $6.50 followed by an elastic segment. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills 21) Refer to Table 11.1. What portion of the marginal revenue of the 4th unit is due to the output effect and what portion is due to the price effect? A) output effect = $24.00; price effect = $19.50 B) output effect = $6.50; price effect = $2.00 C) output effect = -$0.50; price effect = $5.00 D) output effect = $24.00; price effect = $2.00 E) output effect = $6.00; price effect = -$1.50 Answer: E Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills 22) Refer to Table 11.1. What portion of the marginal revenue of the 5th unit is due to the output effect and what portion is due to the price effect? A) output effect = $3.00; price effect = $0.50 B) output effect = $1.50; price effect = $2.00 C) output effect = $5.50; price effect = -$2.00 D) output effect = $4.00; price effect = -$0.50 E) output effect = $4.00; price effect = $0.50 Answer: C Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills

23) Refer to Table 11.1. When does marginal revenue become negative? A) after the 7th unit is produced B) after the 1st unit is produced C) after the 8th unit is produced D) when the output effect is larger than the price effect E) marginal revenue never becomes negative Answer: C Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills Figure 11.1

24) Refer to Figure 11.1. The marginal revenue from the increase in price from P0 to P1 equals A) the area A. B) the area (B + D - A). C) the area (A - D). D) the area (C - B). E) the area (A - C). Answer: C Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills 9 Copyright © 2024 Pearson Canada Inc.

Figure 11.2

25) Refer to Figure 11.2. The marginal revenue from selling the additional unit Qb instead of Qa equals A) the area (G + H). B) the area (H - E). C) the area (E + F) - (G + H). D) the area G. E) the area (E - G). Answer: B Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills 26) Which of the following statements is true about marginal revenue? A) If marginal revenue is zero, it means that quantity demanded falls to zero when a firm changes its price. B) If marginal revenue is negative, the additional revenue received from selling 1 more unit of the good is smaller than the revenue lost from receiving a lower price on all the units that could have been sold at the original price. C) If marginal revenue is positive, the additional revenue received from selling 1 more unit of the good is smaller than the revenue lost from receiving a lower price on all the units that could have been sold at the original price. D) Marginal revenue increases as price falls and quantity sold increases. E) None of the above is true about the marginal revenue. Answer: B Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 10 Copyright © 2024 Pearson Canada Inc.

27) If a firm faces a negatively sloped demand curve A) marginal revenue is equal to average revenue at the profit maximizing level of output. B) marginal revenue is horizontal at the profit maximizing level of output. C) marginal revenue is greater than price at the profit maximizing level of output. D) marginal revenue equal to price at the profit maximizing level of output. E) marginal revenue is less than price at the profit maximizing level of output. Answer: E Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 28) In monopolistic competition, if a firm produces a highly desirable product relative to its competitors, the firm will be able to raise its price without losing any customers. Answer: FALSE Diff: 1 Type: TF Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 29) When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the income effect and a gain in revenue due to the substitution effect. Answer: FALSE Diff: 1 Type: TF Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 30) If marginal revenue is negative, then the revenue lost from receiving a lower price on all the units that could have been sold at the original price is smaller than the additional revenue from selling one more unit of the good. Answer: FALSE Diff: 2 Type: TF Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

31) What are the most important differences between perfectly competitive markets and monopolistically competitive markets? Answer: In both perfectly competitive and monopolistically competitive industries there are many firms and low barriers to entry. However, while products are identical in perfectly competitive markets, products are similar—but not identical—in monopolistically competitive markets. Diff: 1 Type: SA Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 32) Explain the differences between total revenue, average revenue, and marginal revenue. Answer: Total revenue equals price × quantity; average revenue = (total revenue)/quantity (and also equals price); marginal revenue = (change in total revenue)/(change in quantity). Diff: 1 Type: SA Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

33) Complete the following table. Energy Drinks Consumed per Week 0 1 2 3 4 5 6 7 8 Answer: Energy Drinks Consumed per Week 0 1 2 3 4 5 6 7 8

Price (P) $6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00

Total Revenue Average Marginal (TR) Revenue (AR) Revenue (MR)

Total Revenue Average Marginal (TR) Revenue (AR) Revenue (MR) $0.00 ----5.50 5.50 5.50 10.00 5.00 4.50 13.50 4.50 3.50 16.00 4.00 2.50 17.50 3.50 1.50 18.00 3.00 0.50 17.50 2.50 -0.50 16.00 2.00 -1.50

Diff: 1 Type: SA Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills

34) Which of the following characterizes the market that Intelligentsia competes in? A) All coffeehouses face horizontal demand curves. B) All coffeehouses sell identical products. C) Barriers to entry are low. D) There is a small number of firms. E) The entry of new coffeehouses is blocked. Answer: C Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking Special Feature: Chapter Opener: The Coffee Industry: From Supermarket Cans to Third Wave Coffeehouse 35) In 1995, Emily Mange and Doug Zell helped launch “third wave coffee” when they opened Intelligentsia, a small chain of coffee houses based in Chicago. Intelligentsia claims to be directly sourced to eliminate the need for middlemen. Direct trade provides a means for third wave coffee houses to differentiate themselves from second wave chains such as Starbucks. Can Intelligentsia continue to succeed and expand due to its "direct trade" advantage over its competitors? Answer: The process of converting to "clean food" required a substantial investment, but expansion and success of Panera depends upon how much consumers care about food ingredients for the investment to pay off. If consumers care about "pure food" then Panera's competitors will also start serving "clean food" as well which will reduce the advantage of Panera over other restaurants. This is the reason why monopolistically competitive firms are unable to earn long-run economic profit. Diff: 2 Type: ES Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking Special Feature: Chapter Opener: The Coffee Industry: From Supermarket Cans to Third Wave Coffeehouse 36) A monopolistically competitive market is described as one in which there are A) a few firms producing an identical product. B) a large number of firms selling similar, but not identical, products. C) a few firms producing differentiated products. D) one large firm and many small firms producing identical products. E) a large number of firms selling identical product. Answer: B Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

37) Because the monopolistically competitive firm faces a ________ demand curve for its product, it ________ the price of its output. A) downward-sloping; cannot influence B) horizontal; can influence C) horizontal; cannot influence D) downward-sloping; can influence E) vertical; can influence Answer: D Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 38) Monopolistic competition is a market structure in which A) firms produce and sell products for which there are no close substitutes. B) the demand curve for a typical firm is horizontal. C) firms cannot influence the market price. D) barriers to entry are low. E) identical products are sold. Answer: D Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 39) Which of the following is not a characteristic of monopolistic competition? A) Firms are price takers. B) There are many buyers and sellers. C) Barriers to entry are low. D) Firms sell similar, but not identical, products. E) All of the above are characteristics of monopolistic competition. Answer: A Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

40) Which of the following is not a characteristic of monopolistic competition? A) There are many buyers and sellers. B) There are low barriers to entry. C) Average revenue is equal to price. D) The products sold by all firms are identical. E) All are characteristics of monopolistic competition. Answer: D Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 41) In Canada, the average person mostly patronizes firms that operate in A) perfectly competitive markets. B) monopolistically competitive markets. C) oligopoly markets. D) monopoly markets. E) all of the above. Answer: B Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 42) Which of the following is the best example of a firm that competes in a monopolistically competitive market? A) Canada Post B) BioWare, a video game publisher C) a movie theatre D) an automobile manufacturer E) a wheat farmer Answer: C Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

43) In Ottawa there are many restaurants that specialize in a wide variety of cuisines. Patronage at these restaurants is influenced by factors such as tastes, price, and location. This market is A) perfectly competitive. B) monopolistically competitive. C) oligopolistic. D) monopolistic. E) none of the above. Answer: B Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 44) In Montreal there are hundreds of different nightclubs, each with its own DJ, music style, lighting, drink menu, etc. This market is A) perfectly competitive. B) monopolistically competitive. C) oligopolistic. D) monopolistic. E) none of the above. Answer: B Diff: 1 Type: MC Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 45) When a monopolistically competitive firm lowers its price, one good thing happens to the firm. What is this "one good thing" called? A) the output effect B) the price effect C) the income effect D) the substitution effect E) competition Answer: A Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

46) When a monopolistically competitive firm lowers it price, one bad thing happens to the firm. What is this "one bad thing" called? A) the output effect B) the income effect C) the substitution effect D) the price effect E) monopoly Answer: D Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking Figure 11.3

47) Refer to Figure 11.3. The marginal revenue from one additional unit sold is the sum of the gain in revenue from selling the additional unit and the loss in revenue from having to charge a lower price to sell the additional unit. Based on the diagram in the figure, A) X represents the gain (price effect) and Y the loss (output effect). B) X + Z represents the loss (output effect) and Y the gain (price effect). C) Z represents the gain (output effect) and Y the gain (price effect). D) X represents the loss (price effect) and Y + Z the gain (output effect). E) Y represents the gain (output effect) and X the loss (price effect). Answer: E Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills 18 Copyright © 2024 Pearson Canada Inc.

48) Refer to Figure 11.3. What is the marginal revenue of the sixth unit of output? A) $4 B) $5 C) $9 D) $45 E) $54 Answer: A Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills 49) For the monopolistically competitive firm, A) Price (P) = Marginal Revenue (MR) = Average Revenue (AR). B) P = MR > AR. C) P = AR > MR. D) P > MR = AR. E) P < MR = AR. Answer: C Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 50) The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair. It sells 8 pairs of jeans per day at a price of $90 per pair. The marginal revenue of the eighth pair of jeans is A) $20. B) $80. C) $90. D) $100. E) $700. Answer: A Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills

51) Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm? A) The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies above its demand curve. B) The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve. C) In both perfectly competitive and monopolistically competitive marginal revenue and average revenue curves are the same. D) The monopolistically competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a perfectly competitive firm lies below its demand curve. E) The marginal revenue curve of a monopolistically competitive firm lies below its demand curve; the marginal revenue curve of a perfectly competitive firm lies above its demand curve. Answer: B Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 52) When a firm faces a downward-sloping demand curve, marginal revenue A) must exceed price because the price effect outweighs the output effect. B) is less than price because a firm must lower its price to sell more. C) equals price because the firm sells a standardized product. D) equal price because there so many sellers in the market. E) must exceed price because the output effect outweighs the price effect. Answer: B Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 53) The marginal revenue of a monopolistically competitive firm A) cannot be negative because the price the firm charges will always be greater than zero. B) can be negative if the firm charges a high price. C) is always positive because it is equal price. D) will equal average revenue. E) can be negative if the firm charges a low price. Answer: E Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

54) If a monopolistically competitive firm lowers its price and, as a result, its total revenue decreases, then A) the output effect of the price change was less than the price effect. B) the income effect of the price change was greater than the substitution effect. C) the output effect of the price change was greater than the price effect. D) the firm's demand curve must have decreased. E) the substitution effect of the price change was greater than the income effect. Answer: A Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 55) The demand curve of a monopolistically competitive firm A) is horizontal because the firm must cut its price to sell more. B) is perfectly elastic. C) is downward-sloping because it sells an identical product. D) is downward-sloping because it must cut its price to sell more. E) is same as its marginal revenue curve. Answer: D Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 56) Every firm that has the ability to affect the price of the good or service it sells will A) have a perfectly elastic demand curve. B) have a marginal revenue curve that lies below its demand curve. C) earn a short-run profit but break even in the long run. D) shut down in the short run. E) always earn positive economic profit. Answer: B Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

57) Suppose a monopolistically competitive firm sells 25 units at a price of $10. Calculate its marginal revenue per unit of output if it sells 5 more units of output when it reduced its price to $9. A) $270 B) $20 C) $12 D) $4 E) $2.50 Answer: D Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills 58) Which of the following statements is true? A) The marginal revenue of a monopolistically competitive firm will be positive at high prices and negative at low prices. B) Because the demand curve for a monopolistically competitive firm is downward-sloping, its marginal revenue will be negative. C) The marginal revenue of a monopolistically competitive firm will be always be positive. D) The marginal revenue of a monopolistically competitive firm will be positive at low prices and negative at high prices. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 59) Monopolistically competitive firms face a perfectly elastic demand curve. Answer: FALSE Diff: 1 Type: TF Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 60) New firms are able to enter monopolistically competitive markets because there are low barriers to entry. Answer: TRUE Diff: 1 Type: TF Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

61) Firms in monopolistic competition compete by selling similar, but not identical products. Answer: TRUE Diff: 1 Type: TF Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 62) For a downward-sloping demand curve, marginal revenue decreases as quantity sold increases. Answer: TRUE Diff: 1 Type: TF Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 63) One of the assumptions of monopolistic competition is that firms produce differentiated products. What does this assumption imply about the demand curve facing a representative firm? Answer: Product differentiation is a source of market power. This implies that the monopolistically competitive firm faces a downward-sloping demand curve. Diff: 2 Type: ES Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 64) Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market, but by separate curves for a firm in a monopolistically competitive market? Answer: A perfectly competitive firm faces a horizontal demand curve and does not have to cut the price to sell a larger quantity, so marginal revenue will always be equal to the selling price, which is represented by the demand curve. A monopolistically competitive firm must cut the price to sell a larger quantity, so its marginal revenue curve will be below its demand curve. Diff: 2 Type: ES Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking

65) There are many cattle ranchers in the world, and there are also many Harvey's restaurants in the world. Why, then, does a Harvey's restaurant face a downward-sloping demand curve while a cattle rancher faces a horizontal demand curve? Answer: All cattle ranchers are selling identical goods, but fast food restaurants do not sell identical goods. If a cattle rancher raises his price above the market price, he will lose all of his buyers. A Harvey's restaurant can raise its price without losing all of its buyers because it is selling a product that is not identical to the products sold by other restaurants. Diff: 2 Type: ES Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Reflective Thinking 66) Suppose that if a local Harvey's restaurant reduces the price of a double burger from $5.00 to $4.25, the number of double burgers it sells per day will increase from 4 to 5. Explain the output effect and the price effect resulting from this change. Using a graph, illustrate both the loss in revenue from selling each of the first 4 double burgers for $0.75 less and the additional revenue from selling 1 more double burger. What is the total change in revenue received after this price decrease? Answer: The 1 extra double burger sold is the output effect. The $0.75 cents less that Harvey's receives for each double burger sold at the lower price is the price effect. The total change in revenue resulting from the price decrease is $3.25 - $3.00 = $0.25. Diff: 2 Type: ES Topic: Demand and Marginal Revenue Learning Outcome: 11.1 Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves AACSB: Analytic Skills

11.2

Explain how a monopolistically competitive firm maximizes profit in the short run

1) What is the profit-maximizing rule for a monopolistically competitive firm? A) to produce a quantity that maximizes market share B) to produce a quantity that maximizes total revenue C) to produce a quantity such that marginal revenue equals marginal cost D) to produce a quantity that minimizes average total cost E) to produce a quantity such that price equals marginal cost Answer: C Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 2) A monopolistically competitive firm maximizes profit where A) price = marginal revenue. B) price > marginal cost. C) marginal revenue > average revenue. D) total revenue > marginal cost. E) price = marginal cost. Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 3) Unlike a perfectly competitive firm, for a monopolistically competitive firm A) price ≠ marginal cost for all output levels. B) price ≠ marginal revenue for all output levels. C) price ≠ average revenue for all output levels. D) average revenue ≠ average cost for all output levels. E) marginal revenue = marginal cost at the profit-maximizing output. Answer: B Diff: 3 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking

Table 11.2 Quantity (cases) 1 2 3 4 5 6 7 8 9

Price (dollars) $75 70 65 60 55 50 45 40 35

Total Revenue (dollars) $75 140 195 240 275 300 315 320 315

Total Cost (dollars) $60 85 105 115 130 155 190 230 280

Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 11.2 shows the firm's demand and cost schedules. 4) Refer to Table 11.2. What is the output (Q) that maximizes profit and what is the price (P) charged? A) P = $55; Q = 5 cases B) P = $50; Q = 6 cases C) P = $45; Q = 7 cases D) P = $40; Q = 8 cases E) P = $35; Q = 9 cases Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 5) Refer to Table 11.2. What is Eco Energy's profit? A) $125 B) $140 C) $145 D) $150 E) $165 Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

6) Refer to Table 11.2. What is the marginal profit from producing and selling the 5th case? A) $275 B) $145 C) $90 D) $35 E) $20 Answer: E Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 7) Refer to Table 11.2. What is likely to happen to the product's price in the long run? A) It will fall. B) It will increase. C) It will remain constant. D) It depends on the firm what to do with the price. E) This cannot be determined without information on its long-run demand curve. Answer: A Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

Figure 11.4

Figure 11.4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches. 8) Refer to Figure 11.4. If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged? A) P0 B) P1 C) P2 D) P3 E) Any price between P0 and P1 Answer: C Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 9) Refer to Figure 11.4. What is the total revenue made by the firm? A) P0 × Qa B) P1 × Qa C) P2 × Qa D) P3 × Qa E) It cannot be determined without further information. Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 28 Copyright © 2024 Pearson Canada Inc.

10) Refer to Figure 11.4. What is the total variable cost of production? A) P0 × Qa B) P1 × Qa C) P0 × P2 D) P0 × P1 E) P1 × P3 Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 11) Refer to Figure 11.4. What is the total fixed cost of production? A) P1 × Qa B) (P3 - P0)Qa C) (P3 - P1)Qa D) (P2 - P1) Qa E) That information cannot be determined from the graph. Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 12) Refer to Figure 11.4. What is the area that represents the loss made by the firm? A) the area P0adP3 B) the area P1bcP2 C) the area P0acP2 D) the area P2cdP3 E) the area P1cdP2 Answer: D Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

13) Refer to Figure 11.4. Should the firm represented in the diagram continue to stay in business despite its losses? A) No, it should shut down. B) Yes, its total revenue covers its variable cost. C) No, it is not able to cover its fixed cost. D) Yes, it should increase its revenue by raising its price. E) No, it should exit the market. Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 14) In the short run, a profit-maximizing firm's decision to produce should be guided by whether A) it makes a profit. B) its marginal profit is maximized. C) its total revenue exceeds its fixed cost. D) its total revenue covers its total cost. E) its total revenue covers its variable cost. Answer: E Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 15) Suppose Jason owns a small pastry shop. Jason wants to maximize his profit, and thinking back to the microeconomics class he took in college, he decides he needs to produce a quantity of pastries which will minimize his average total cost. Will Jason's strategy necessarily maximize profits for his pastry shop? A) Yes; since Jason's pastry shop is in a perfectly competitive market, the only way to maximize profit is to produce the quantity where average total cost is minimized. B) Not necessarily; this strategy will only maximize Jason's profit in the long run, but not in the short run. C) No; in order to maximize profit, Jason would never want to produce the quantity where average total cost is minimized. D) Not necessarily; depending on demand, Jason may maximize profit by producing a quantity other than that where average total cost is at a minimum. E) It requires more information to determine whether Jason will maximize profits or not. Answer: D Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking Special Feature: Solved Problem: Does Minimizing Cost Maximize Profit at Apple?

16) If price exceeds average variable cost but is less than average total cost, a firm A) should further differentiate its product. B) should stay in business for a while longer until its fixed costs expire. C) is making some profit but less than maximum profit. D) should shut down. E) should exit the market. Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking Table 11.3 Quantity

Price (dollars)

Total Revenue (dollars)

0 1 2 3 4 5 6 7 8 9 10

$21 20 19 18 17 16 15 14 13 12 11

$0 20 38 54 68 80 90 98 104 108 110

Total Variable Cost (dollars) $0 16 31 45 59 75 93 112 140 180 230

Total Cost (dollars) $50 66 81 95 109 125 143 162 190 230 280

Table 11.3 shows the demand and cost schedules for a monopolistically competitive firm. 17) Refer to Table 11.3. What are the profit-maximizing/loss-minimizing output level and price? A) Q = 0 (firm should not produce) B) Q = 3; P = $18 C) Q = 4; P = $17 D) Q = 5; P = $16 E) Q = 6; P = $15 Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

18) Refer to Table 11.3. What is the amount of the firm's loss at its optimal output level? A) $0 B) $41 C) $45 D) $50 E) $52 Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 19) Refer to Table 11.3. What is its average variable cost of production at its optimal output level? A) $0 (because its optimal output = 0) B) $15 C) $14.75 D) $22 E) $29 Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 20) Refer to Table 11.3. What is the best course of action for the firm in the short run? A) It should shut down. B) It should stay in business because it covers some of its fixed cost. C) It should increase its sales by lowering its price. D) It should exit the market. E) It should not cut its price but it should increase its sales by advertising. Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

21) Refer to Table 11.3. If this firm continues to produce, what is likely to happen to the product's price in the long run? A) It will fall. B) It will increase. C) It will remain constant. D) Firm can choose to set the price wherever it wants. E) It cannot be determined without information on its long-run demand curve. Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 22) Assume price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $23 and marginal cost is $19, then to maximize profits the firm should A) continue to produce the same quantity. B) increase output. C) decrease output. D) shut down. E) exit. Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking

Figure 11.5

23) Refer to Figure 11.5. The candy store represented in the diagram is currently selling Qa units of candy at a price of Pa. Is this candy store maximizing its profit and if it is not, what would you recommend to the firm? A) Yes, it is maximizing its profit by charging the highest price possible. B) No, it is not; since its marginal cost is constant, it should produce and sell as much candy as it can. It should sell Qd units at a price of Pd. C) No, it is not; it should lower its price to Pc and sell Qc units. D) Yes, it is maximizing because its marginal revenue is higher than its marginal cost. E) No, it is not; it should lower its price to Pb and sell Qb units. Answer: E Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 24) For a monopolistically competitive firm, price equals average revenue. Answer: TRUE Diff: 1 Type: TF Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 34 Copyright © 2024 Pearson Canada Inc.

25) For a profit-maximizing monopolistically competitive firm, for the last unit sold, the marginal cost of production is less than the marginal benefit received by a customer from the purchase of that unit. Answer: TRUE Diff: 1 Type: TF Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 26) Consumers in a monopolistically competitive market do not receive any consumer surplus because the price paid for the product exceeds the marginal cost of production. Answer: FALSE Diff: 2 Type: TF Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 27) Assume that price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $111.11 and marginal cost is $118, then to maximize profits the firm should increase its output. Answer: FALSE Diff: 2 Type: TF Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 28) Arturo runs a Robin's Donuts franchise. He is selling 250 iced cappuccinos per week at a price of $2.75. If he lowers the price to $2.70, he will sell 251 iced cappuccinos. What is the marginal revenue of the 251st iced cappuccino? If selling the extra iced cappuccino adds $0.20 to Arturo's costs, what will be the effect on his profit from selling 251 iced cappuccinos instead of 250? Answer: The marginal revenue of the 251st iced cappuccino is ($2.70 × 251) - ($2.75 × 250) = -$9.80. If selling the extra iced cappuccino adds $0.20 to Arturo's costs, and selling 1 extra iced cappuccino decreases his total revenue by $9.80, his profit will decrease by $9.80 + $0.20 = $10.00 Diff: 2 Type: SA Topic: Profit in the Short Run Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

29) Unique to New Brunswick, Beausoleil oysters are known for their perfect, petite shells and are described by Rowan Jacobsen's Geography of Oysters as "ideal starter oysters, with the delightful yeasty aroma of Champagne or rising bread dough." Suppose the following table represents cost and revenue data for a New Brunswick oyster concern. Dozen Oysters Sold Price per Day (P) 0 $15 1 14 2 13 3 12 4 11 5 10 6 9 7 8 8 7 9 6 10 5

Total Revenue (TR) $0 14 26 36 44 50 54 56 56 54 50

Marginal Average Revenue Total Cost Marginal Total Cost (MR) (TC) Cost (MC) (ATC) --$12 ----$14 18 $6 $18.00 12 20 2 10.00 10 21 1 7.00 8 23 2 5.75 6 26 3 5.20 4 30 4 5.00 2 35 5 5.00 0 42 7 5.25 -2 52 10 5.78 -4 78 16 7.80

Profit -$12 -4 6 15 21 24 24 21 14 2 -28

Illustrate this data by graphing the demand, MR, MC, and ATC curves. Identify the profit-maximizing price and quantity, and show the area representing the total profit received. Answer:

Diff: 2 Type: SA Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 36 Copyright © 2024 Pearson Canada Inc.

Figure 11.6

Figure 11.6 shows cost and demand curves for a monopolistically competitive producer of iced tea. 30) Refer to Figure 11.6 to answer the following questions. a. What is the profit-maximizing output level? b. What is the profit-maximizing price? c. At the profit-maximizing output level, how much profit will be realized? d. Does this graph most likely represent the long run or the short run? Why? Answer: a. The profit-maximizing output level is 22. b. The profit maximizing price is $16. c. The profit is $88. d. Since the firm is making a profit, this most likely represents the short run. Diff: 2 Type: SA Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 31) Both monopolistically competitive firms and perfectly competitive firms maximize profits A) by producing where price equals average total cost. B) by producing where marginal revenue equals average revenue. C) by producing where marginal revenue is equal to marginal cost. D) by producing where price equals average variable cost. E) by producing where marginal revenue equals average cost. Answer: C Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 37 Copyright © 2024 Pearson Canada Inc.

32) A monopolistically competitive firm maximizes profit in the short run by producing where A) price is less than marginal cost. B) price is less than marginal revenue. C) price is less than average revenue. D) price is less than average total cost. E) price is greater than marginal cost. Answer: E Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 33) A monopolistically competitive firm chooses A) both the quantity of output to produce and the price at which it will sell its output. B) the price of the product it sells, but market forces determine the quantity it will be able to sell. C) neither the price nor the quantity because they are determined by the market forces of supply and demand. D) the quantity of output to produce, but the price of the product it sells is determined collectively by all firms in the industry. E) the price of the product it sells, but the quantity of output to produce is agreed upon by all firms in the industry. Answer: B Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking

Figure 11.7

34) Refer to Figure 11.7. Suppose MG Computers finds the relationship between the average total cost of producing notebook computers and the quantity of notebook computers produced is as shown by Figure 11.7. MDG Computers will maximize profits if it produces ________ notebook computers per month. A) 100,000 B) 200,000 C) 300,000 D) 400,000 E) Not enough information is given to determine the profit-maximizing quantity. Answer: E Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking Special Feature: Solved Problem: Does Minimizing Cost Maximize Profit at Apple? 35) After selling 1,000 three-ring binders, Tony DiFulvio realizes that the marginal revenue from selling the last binder was less than the marginal cost. From this we can conclude that A) Tony's business earns a short-run economic profit. B) Tony should shut down his business temporarily. C) Tony's profit fell after selling his 1,000th three-ring binder. D) Tony's profit would be greater if he sold an additional three-ring binder. E) Tony's business is incurring huge losses. Answer: C Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 39 Copyright © 2024 Pearson Canada Inc.

Table 11.4 Quantity Sold 0 1 2 3 4 5 6

Marginal Price Total Revenue Revenue $10 $0 ----9 9 8 16 7 21 6 24 5 25 4 24

Total Marginal Cost Cost $2 ----8 13 17 20 22 26

Profit -$2

Table 11.4 lists estimated revenues and costs (per week) for plastic vials (100 vials per box) for the Victoria Biological Supplies Company. Victoria sells plastic vials to university and private research laboratories. 36) Refer to Table 11.4. Based on the data in the table, which of the following statements is true? A) The table summarizes Victoria's short-run, rather than long-run, market for plastic vials. B) Victoria could be either a monopolistically competitive or a perfectly competitive firm. C) Victoria should shut down temporarily. D) Victoria should advertise more in order to increase the demand for plastic vials. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 37) Refer to Table 11.4. Victoria's profit-maximizing quantity sold (Q) and price (P) are A) Q = 2; P = $8. B) Q = 3; P = $7. C) Q = 4; P = $6. D) Q = 5; P = $5. E) Q = 6; P = $4. Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

38) Refer to Table 11.4. Victoria's profit-maximizing output is where A) total profit equals $3. B) marginal revenue and marginal cost both equal $4. C) marginal revenue and marginal cost both equal $3. D) marginal revenue equal $3 and marginal revenue equals $4. E) marginal cost is at its minimum value. Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 39) Refer to Table 11.4. At Victoria's profit-maximizing output, A) profit equals $2. B) total revenue equals $24 and total cost equals $20. C) total revenue equals $25 and total cost equals $22. D) total revenue equals $21 and total cost equals $17. E) total revenue equals $16 and total cost equals $13. Answer: B Diff: 3 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 40) Refer to Table 11.4. Victoria's fixed costs are, A) $0. B) $2. C) $10. D) $20. E) $26. Answer: B Diff: 3 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

41) The profit-maximizing rule for a monopolistically competitive firm is to select the quantity at which A) marginal revenue equals marginal cost. B) average revenue exceeds marginal cost by the greatest amount. C) price equals marginal revenue. D) price equals marginal cost. E) average revenue equals average total cost. Answer: A Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking Figure 11.8

Figure 11.8 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market. 42) Refer to Figure 11.8. Which of the following statements describes the best course of action for the firm depicted in the diagram? A) The firm should exit the industry because its price is less than its average total cost. B) The firm should minimize its losses by producing Qy units and charging a price of P0. C) The firm should minimize its losses by producing Qy units and charging a price of P2. D) The firm should minimize its losses by producing Qy units and charging a price of P3. E) The firm should minimize its losses by producing Qy units and charging a price of P1. Answer: E Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

43) Refer to Figure 11.8. Which of the following is the area that represents the profit or loss experienced by the firm? A) a loss represented by the rectangle P2uvP1 B) a loss represented by the rectangle P2uwP0 C) a loss represented by the rectangle P1vwP0 D) an accounting profit equal to P1vwP0 E) a loss represented by the rectangle P1uwP0 Answer: A Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills Table 11.5 Quantity 1 2 3 4 5 6

Price $18 16 14 12 10 8

Total Cost $14 20 26 32 38 44

Table 11.5 shows the demand and cost data facing a monopolistically competitive producer of canvas bags. 44) Refer to Table 11.5. What are the firm's profit-maximizing or loss-minimizing price and quantity? A) price = $10; quantity = 5 B) price = $12; quantity = 4 C) price = $14; quantity = 3 D) The firm should shut down temporarily. E) This cannot be determined from the information given. Answer: B Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

45) Refer to Table 11.5. At the profit-maximizing or loss-minimizing output level, A) the firm makes a profit of $12. B) the firm incurs a loss equal to its fixed cost. C) the firm makes a profit of $16. D) the firm incurs a loss of $14. E) the firm incurs a loss of $18. Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 46) A monopolistically competitive firm is producing an output level where marginal revenue is greater than marginal cost. What should this firm do to increase its profit or reduce its losses? A) The firm should raise its price. B) The firm should decrease its fixed costs. C) The firm should increase its implicit costs. D) The firm should lower its price. E) It cannot be determined. Answer: D Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 47) Suppose a monopolistically competitive firm's output where marginal revenue equals marginal cost is 66 units and the price corresponding to this quantity is $18. If the average total cost at this output is $16.55, then its total profit is A) $1,188.00. B) $1,092.30. C) $95.70. D) $55.30. E) $1.45. Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

48) If a monopolistically competitive firm is producing 50 units of output where marginal cost equals marginal revenue, total cost is $1,674 and total revenue is $2,000, its average profit is A) $326. B) $40. C) $6.52. D) $1.45. E) impossible to determine without additional information. Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills Figure 11.9

Figure 11.9 shows cost and demand curves for a monopolistically competitive producer of iced tea. 49) Refer to Figure 11.9. What is the profit-maximizing output level? A) 0 cases B) 22 cases C) 24 cases D) 30 cases E) 38 cases Answer: B Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 45 Copyright © 2024 Pearson Canada Inc.

50) Refer to Figure 11.9. What is the firm's profit-maximizing price? A) $12 B) $13 C) $14 D) $16 E) $22 Answer: D Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 51) Refer to Figure 11.9. At the profit-maximizing output level, the firm will A) earn a profit of $176. B) break even. C) earn a profit of $88. D) earn a profit of $60. E) earn a profit of $45. Answer: C Diff: 2 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 52) Refer to Figure 11.9. Based on the diagram, one can conclude that A) some existing firms will exit the market. B) new firms will enter the market. C) the industry is in long-run equilibrium. D) firms achieve productive efficiency. E) firms will shut down temporarily. Answer: B Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

Figure 11.10

53) Refer to Figure 11.10. Which of the graphs in the figure depicts a monopolistically competitive firm that is minimizing its losses? A) Panel A B) Panel B C) Panel C D) Panel A and Panel C E) Panel A and Panel B Answer: C Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 54) Refer to Figure 11.10. Which of the graphs in the figure depicts a monopolistically competitive firm that is earning economic profits? A) Panel A B) Panel B C) Panel C D) Panel A and Panel C E) Panel A and Panel B Answer: E Diff: 1 Type: MC Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills 55) A monopolistically competitive firm should lower its price if its marginal revenue exceeds its marginal cost. Answer: TRUE Diff: 1 Type: TF Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 47 Copyright © 2024 Pearson Canada Inc.

56) If a perfectly competitive firm maximizes short-run profits, its marginal revenue will be positive and less than its price. Answer: TRUE Diff: 1 Type: TF Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 57) A profit-maximizing monopolistically competitive firm produces and sells an allocatively efficient quantity of output. Answer: FALSE Diff: 1 Type: TF Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking 58) Unlike a perfectly competitive firm, a monopolistic competitor does not have a short-run shut-down point. Answer: FALSE Diff: 1 Type: TF Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Reflective Thinking

Figure 11.11

59) Refer to Figure 11.11. Suppose the above graph represents the relationship between the average total cost of producing notebook computers and the quantity of notebook computers produced by MDG Computers. On a graph, illustrate the demand, MR, MC, and ATC curves that would represent MDG Computers maximizing profits at a quantity of 100,000 per month and identify the area on the graph that represents the profit. Answer:

60) Casse-Croûte Wilensky in St. Hyacinthe is famous for its Spécial, a flat grilled kaiser roll sandwich with beef salami and beef bologna, topped with mustard (which the restaurant states is mandatory). Suppose the following table represents cost and revenue data for Casse-Croûte Wilensky. Fill in the columns for TR, MR, MC, ATC, and profit. If Casse-Croûte Wilensky wants to maximize profits, what price should it charge for a Spécial, what quantity should it sell, and what will be the amount of its total profit? Spécials Sold per Day 0 1 2 3 4 5 6 7 8 9 10 Answer: Spécials Sold per Day 0 1 2 3 4 5 6 7 8 9 10

Total Revenue Price (P) (TR) $15 14 13 12 11 10 9 8 7 6 5

Marginal Average Revenue Total Cost Marginal Total Cost (MR) (TC) Cost (MC) (ATC) $12 18 20 21 23 26 30 35 42 52 78

Profit

Total Marginal Average Price Revenue Revenue Total Marginal Total Cost (P) (TR) (MR) Cost (TC) Cost (MC) (ATC) Profit $15 $0 --$12 -----$12 14 14 $14 18 $6 $18.00 -4 13 26 12 20 2 10.00 6 12 36 10 21 1 7.00 15 11 44 8 23 2 5.75 21 10 50 6 26 3 5.20 24 9 54 4 30 4 5.00 24 8 56 2 35 5 5.00 21 7 56 0 42 7 5.25 14 6 54 -2 52 10 5.70 2 5 50 -4 78 16 7.80 -28

To maximize profits, Casse-Croûte Wilensky should produce the quantity where MR = MC, which is 6 Spécials. The price is therefore $9, and the total profit is $54 - 30 = $24. Diff: 2 Type: SA Topic: Short-Run Profit Maximization Learning Outcome: 11.2 Explain how a monopolistically competitive firm maximizes profit in the short run AACSB: Analytic Skills

11.3

Analyze the situation of a monopolistically competitive firm in the long run

1) A monopolistically competitive industry that earns economic profits in the short run will A) continue to earn economic profits in the long run. B) experience the entry of new rival firms into the industry in the long run. C) experience the exit of existing firms out of the industry in the long run. D) experience losses in the long run. E) experience a rise in demand in the long run. Answer: B Diff: 1 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 2) In the long run, if price is less than average cost, A) there is an incentive for firms to exit the market. B) there is profit incentive for firms to enter the market. C) the firm will continue producing. D) the market must be in long-run equilibrium. E) there is no incentive for the number of firms in the market to change. Answer: A Diff: 1 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 3) A monopolistically competitive firm that is earning profits will, in the long run, experience all of the following except A) new rivals entering the market. B) a decrease in demand for its product. C) demand for the firm's product becomes more elastic. D) a decrease in the number of rival products. E) zero economic profit. Answer: D Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking

4) Assuming that the total market size remains constant, a monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing in the long run because A) new entrants into the market are more likely to have cutting edge products. B) as the firm raises its price in the long run, it will lose some customers to new entrants in the market. C) some of its customers have switched to purchasing the products of new entrants in the market. D) its costs of production rise. E) consumers taste has changed. Answer: C Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 5) You are planning to open a new Italian restaurant in your hometown where there are three other Italian restaurants. You plan to distinguish your restaurant from your competitors by offering northern Italian cuisine and using locally grown organic produce. What is likely to happen in the restaurant market in your hometown after you open? A) Your competitors are likely to change their menus to make their products more similar to yours. B) The demand curve facing each restaurant owner shifts to the right. C) The demand curve facing each restaurant owner becomes more elastic. D) The supply of each restaurant owner will increase. E) While the demand curves facing your competitors becomes more elastic, your demand curve will be inelastic. Answer: C Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking Special Feature: Economics in Your Life: Can You Operate a Successful Restaurant? 6) You have just opened a new Italian restaurant in your hometown where there are three other Italian restaurants. Your restaurant is doing a brisk business and you attribute your success to your distinctive northern Italian cuisine using locally grown organic produce. What is likely to happen to your business in the long run? A) Your competitors are likely to change their menus to make their products more similar to yours. B) Your success will invite others to open competing restaurants and ultimately your profits will be driven to zero. C) If your success continues, you will be likely to establish a franchise and expand your market size. D) All the other restaurants will go out of business. E) If you continue to maintain consistent quality, you will be able to earn profits indefinitely. Answer: B Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking Special Feature: Economics in Your Life: Can You Operate a Successful Restaurant?

7) A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry until A) the original firm is driven into bankruptcy. B) the firm's demand curve is perfectly elastic. C) the firm's demand curve is tangent to its average total cost curve. D) the firm exits the market. E) all the firms start making losses. Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 8) In the long run, what happens to the demand curve facing a monopolistically competitive firm that is earning short-run profits? A) The demand curve will shift to the left and become more elastic. B) The demand curve will shift to the left and become less elastic. C) Nothing happens to the demand curve, firm's supply will decrease. D) The demand curve will shift to the right and become more elastic. E) The demand curve will shift to the right and become less elastic. Answer: A Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 9) If a typical monopolistically competitive firm is incurring short-run losses, then A) other more competitive firms will enter the market. B) as some firms leave, the remaining firms will experience an increase in the demand for their products. C) as some firms leave, the demand for the products of the remaining firms will become more elastic. D) the firm will exit the market because it cannot avoid the losses. E) the industry will eventually cease to exist. Answer: B Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking

Figure 11.12

10) Refer to Figure 11.12. What is the monopolistic competitor's profit-maximizing output? A) Q1 units B) Q2 units C) Q3 units D) Q4 units E) Anywhere between Q2 units and Q3 units Answer: B Diff: 1 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 11) Refer to Figure 11.12. What is the monopolistic competitor's profit-maximizing price? A) P1 B) P2 C) P3 D) P4 E) P2 or P3 Answer: D Diff: 1 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 54 Copyright © 2024 Pearson Canada Inc.

12) Refer to Figure 11.12. The firm represented in the diagram A) makes zero economic profit. B) makes zero accounting profit. C) should exit the industry. D) should expand its output to take advantage of economies of scale. E) makes losses. Answer: A Diff: 1 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 13) Refer to Figure 11.12. What is the productively efficient output for the firm represented in the diagram? A) Q1 units B) Q2 units C) Q3 units D) Q4 units E) Q2 units or Q3 units Answer: D Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 14) Refer to Figure 11.12. What is the allocatively efficient output for the firm represented in the diagram? A) Q1 units B) Q2 units C) Q3 units D) Q4 units E) anywhere between Q2 units and Q3 units Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills

15) Refer to Figure 11.12. The diagram depicts a firm A) in a constant-cost industry. B) in an increasing-cost industry. C) in long-run equilibrium. D) that is incurring short-run losses. E) in a perfectly competitive market. Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 16) Refer to Figure 11.12. What is the amount of excess capacity? A) Q4 - Q3 units B) Q4 - Q2 units C) Q3 - Q2 units D) Q3 - Q1 units E) Q4 - Q1 units Answer: B Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 17) Why do most firms in monopolistic competition typically make zero profit in the long run? A) because firms produce differentiated products B) because the lack of entry barriers would compete away profits C) because firms do not produce at their minimum efficient scale D) because the cost of firms increase in the long run E) because the total market is not large enough to accommodate so many firms Answer: B Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking

18) If a monopolistically competitive firm breaks even, the firm A) is earning an accounting profit and will have to pay taxes on that profit. B) is earning zero accounting and zero economic profit. C) should advertise its product to stimulate demand. D) should expand production. E) will exit the market in the long run. Answer: A Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Zero Economic Profit with Zero Accounting Profit Figure 11.13

Figure 11.13 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches. 19) Refer to Figure 11.13. If the diagram represents a typical firm in the designer watch market, what is likely to happen in the long run? A) Some firms will exit the market causing the demand to increase for firms remaining in the market. B) The firms that are making losses will be purchased by their more successful rivals. C) Inefficient firms will exit the market and new cost-efficient firms will enter the market. D) Firms will have to raise their prices to cover costs of production. E) There will be no demand for this firm in the long run. Answer: A Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills

20) While Tim Hortons and Starbucks continue to expand it is getting harder and harder for independent local coffee shops to make a profit. What market structure are local coffee shops in? A) monopoly B) perfect competition C) oligopoly D) monopolistic competition E) monopoly or monopolistic competition Answer: D Diff: 1 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 21) While Tim Hortons and Starbucks continue to expand it is getting harder and harder for independent local coffee shops to make a profit. Why? A) Coffee shops are monopolies and their profits are virtually guaranteed. B) Coffee shops are monopolistically competitive and only economies of scale allow for profits. C) Coffee shops are perfectly competitive meaning that profit is possible only in the long run. D) Coffee shops are in oligopoly market so they try to steal business from one another. E) Coffee shops are monopolistically competitive, the profits of independent local coffee shops attract new entrants like Tim Hortons and Starbucks. Answer: E Diff: 1 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 22) Tim Hortons and Starbucks management understand that coffee shops are monopolistically competitive. How do they intend to continue to earn economic profits? A) Establishing barriers to entry through zoning laws. B) They intend to form a cartel, and dictate the price of coffee. C) They plan to continue business as usual and count on government intervention to set a price floor. D) They believe their brand name is sufficient to keep earning economic profit. E) By constantly innovating and responding to changing market conditions they can prevent their demand curves from becoming highly elastic. Answer: E Diff: 1 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking

23) In theory, in the long run, monopolistically competitive firms earn zero profits. However, in reality there are some ways by which a firm can avoid losing profits. Which of the following is one such way? A) gradually increase the mark up on the goods produced B) lower the price of its products to expand its market share C) try to dominate the market to gain a monopoly power to earn profits indefinitely D) identify new markets and develop products precisely for those markets E) find a market niche and keep it as narrow as possible so as to prevent other producers from entering this market segment Answer: D Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 24) If a monopolistically competitive firm breaks even, the firm is earning as much in this industry as it could in any other comparable industry. Answer: TRUE Diff: 1 Type: TF Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 25) A monopolistically competitive industry that earns economic profits in the short run will be able to expand its market share even if the market size remains constant. Answer: FALSE Diff: 1 Type: TF Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 26) A monopolistically competitive industry that earns economic profits in the short run will face a more elastic demand curve in the long run. Answer: TRUE Diff: 1 Type: TF Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 27) What is the difference between zero accounting profit and zero economic profit? Answer: Economic profits take into account opportunity costs. Accounting profits do not. So, economic profits will typically be smaller than accounting profits. If a firm has zero accounting profits, it will be making an economic loss, while a firm with zero economic profits will have positive accounting profits. Diff: 1 Type: SA Topic: Accounting Profit and Economic Profit Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Zero Economic Profit with Zero Accounting Profit 59 Copyright © 2024 Pearson Canada Inc.

Figure 11.14

28) Refer to Figure 11.14 to answer the following questions. a. What is the profit-maximizing output level? b. What is the profit-maximizing price? c. What is the average total cost at the profit-maximizing output level? d. What area represents the firm's profit? e. At which output level are economies of scale exhausted? f. Does this graph most likely represent the long run or the short run? Why? Answer: a. The profit-maximizing level of output is Q4. b. The profit-maximizing price is P4. c. The ATC at the profit-maximizing output level is P2. d. The firm's profit is represented by area P2P4ed. e. Economies of scale are exhausted at output Q3. f. Since the graph displays a profit, it most likely represents the short run. Diff: 2 Type: SA Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills

Figure 11.15

29) Refer to Figure 11.15. Figure 11.15 depicts a monopolistically competitive barber shop. Use the diagram to answer the following questions. a. Suppose the average variable cost of production is $15 when output equals 110 haircuts and $15.25 when output equals 140 haircuts. If the firm wants to maximize its profit or minimize its losses, how many haircuts will it produce and what price should it charge? Explain your answer. b. Calculate the firm's profit or loss. c. What is likely to happen in this industry over time as it moves to its new long-run equilibrium? d. Suppose the barber shop depicted in the diagram remains in the industry. Is this barber shop likely to produce this same quantity of haircuts as in part (a) in the long run? Answer: a. Output = 110, Price = $21 where by MR = MC. The barber shop will minimize its losses since . b. The economic loss = $440 (total revenue = $21 × 110 = $2,310; total cost = $25 × 110 = $2,750). c. Short-run losses will lead some firms to exit the market. As a result, the demand curve for a firm remaining in the market will shift to the right and become less elastic. Exit continues until economic losses are eliminated and each firm breaks even. d. No, its demand increases and becomes less elastic. It will produce a larger quantity. Diff: 2 Type: ES Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills

30) Tony's Italian Ice is a monopolistically competitive firm. If Tony's earns a profit in the short run, which of the following is most likely to occur? A) New firms that sell Italian ice will enter the market and Tony's cost curves will shift to the left. B) New firms that sell Italian ice will enter the market and Tony's demand curve will shift to the left. C) New firms that sell Italian ice will enter the market and Tony's demand curve will shift to the right. D) New firms that sell Italian ice will enter the market and Tony's demand curve will become more inelastic. E) All the other firms will leave the market because they are unable to produce the quality product as Tony's. Answer: B Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 31) Which of the following describes the relative positions of the demand curve and the average total cost (ATC) curve of a monopolistically competitive firm that earns a profit in the short run? A) In the short run, the firm's demand curve will lie above its ATC curve. The demand curve will be tangent to the ATC curve in the long run. B) In the short run, the firm's demand curve will lie below its ATC curve. The demand curve will be tangent to the ATC curve in the long run. C) In the short run, the firm's demand curve will cross its ATC curve at the ATC curve's lowest point. The demand curve will be above the ATC curve in the long run. D) In the short run, the firm's ATC curve will cross the demand curve at the profit maximizing level of output. The demand curve will be tangent to the ATC curve in the long run. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 32) If firms in a monopolistically competitive industry are making profits in the short run, A) barriers to entry will be erected to keep out rivals. B) some firms will ultimately exit the industry. C) they will resort to advertising wars to help sustain these profits. D) new firms will enter the market. E) they will keep on earning these profits in the long run. Answer: D Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking

33) A monopolistically competitive firm that earns an accounting profit in the short run A) must also earn an economic profit in the short run. B) does not earn enough to earn an economic profit in the short run. C) could earn an economic profit, break even, or suffer an economic loss in the short run. D) could be suffering economic losses in the short run. E) could earn an economic profit or break even, but would not suffer an economic loss in the short run. Answer: C Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Zero Economic Profit with Zero Accounting Profit 34) In the long run, if the demand curve of a monopolistically competitive firm is tangent to its average total cost curve, then A) the firm would break even. B) the firm would shut down temporarily. C) the firm is suffering economic loss. D) the firm would earn enough revenue to cover its variable costs, but not its fixed costs. E) the firm would earn an economic profit. Answer: A Diff: 1 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 35) Which of the following would not occur as a result of a monopolistically competitive firm suffering a short-run economic loss? A) The firm could exit the industry in the long run. B) If the firm does not exit the industry in the long run, its demand curve will shift to the left. C) If the firm does not exit the industry in the long run, its demand curve will shift to the right. D) If the firm remains in the industry in the long run, it will break even. E) It will continue to make losses in the long run. Answer: B Diff: 3 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking

36) The entry and exit of firms in a monopolistically competitive market guarantee that A) marginal revenue equals marginal cost and average total cost is minimized. B) firms can earn economic profits in the long run. C) price equals average total cost in the long run. D) firms can earn economic profits in the short run. E) firms are operating at their maximum capacity. Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 37) When new firms are encouraged to enter a monopolistically competitive market, A) some existing firms must be earning economic profits. B) they do so because there is insufficient product differentiation. C) the demand curve facing an existing firm shifts to the right. D) the marginal cost curve facing an existing firm shifts downwards. E) some existing firms will have to leave the market. Answer: A Diff: 1 Type: MC Topic: Entry and Exit Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 38) If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios best reflects the change a representative firm experiences as the market adjusts to its long-run equilibrium? A) Demand decreases and becomes less elastic. B) Demand decreases and becomes more elastic. C) Demand increases and becomes less elastic. D) Demand increases and becomes more elastic. E) Demand stays the same. Answer: B Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking

39) Long-run equilibrium under monopolistic competition and perfect competition is similar in that A) firms produce at the minimum point of their average cost curves. B) price equals marginal cost. C) firms break even. D) price equals marginal revenue. E) firms earn positive economic profit. Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking Figure 11.16

40) Refer to Figure 11.16. What is the profit maximizing output level? A) Q1 units B) Q2 units C) Q3 units D) Q4 units E) Between Q2 units and Q3 units Answer: D Diff: 1 Type: MC Topic: Profit in the Short Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills

41) Refer to Figure 11.16. What is the output price? A) P4 B) P3 C) P2 D) P1 E) P1 or P3 Answer: A Diff: 1 Type: MC Topic: Profit in the Short Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 42) Refer to Figure 11.16. What is the area that represents the firm's profit? A) profit = 0 B) P4edP2 C) P4eaP1 D) P3baP2 E) P3eaP2 Answer: B Diff: 2 Type: MC Topic: Profit in the Short Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 43) Refer to Figure 11.16. Economies of scale are exhausted at which output level? A) Q1 units B) Q2 units C) Q3 units D) Q4 units E) more than Q1 units Answer: C Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills

44) Refer to Figure 11.16. If the diagram represents a typical firm in the market, what is likely to happen in the long run? A) Some firms will exit the market, causing the demand to increase for firms remaining in the market. B) New firms will enter the market, causing the demand to decrease for existing firms. C) Inefficient firms will exit the market and new cost-efficient firms will enter the market. D) Competition will be intensified as firms strive to make long-run profits. E) All the firms will continue to enjoy positive economic profit in the long run. Answer: B Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 45) Refer to Figure 11.16. If the diagram represents a typical firm in the market, what is likely to happen to its average cost of production in the long run? A) It will probably fall, since the firm must be cost efficient to remain competitive. B) It will probably fall, since the firm will be selling less than its current amount. C) It will probably rise, since the firm will be producing less than its current amount. D) It will probably rise, since its long-run demand is likely to be higher. E) It will reach the minimum efficient scale. Answer: C Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills

Figure 11.17

Figure 11.17 illustrates a monopolistically competitive firm. 46) Refer to Figure 11.17. Which of the following statements describes the firm depicted in the diagram? A) The firm is making no economic profit and will exit the industry. B) The firm is suffering an economic loss by producing at Q0 but will break even if it increases its output to Q1. C) The firm achieves productive efficiency by producing at Q0. D) The firm is in long-run equilibrium and is breaking even. E) The firm is producing at its maximum capacity. Answer: D Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 47) Refer to Figure 11.17. It is possible to lower the average cost of production by expanding output beyond Q0 to Q1. Why wouldn't a firm expand its output to Q1? A) The firm wants to maximize accounting profit rather than economic profit. B) The firm would suffer an economic loss at Q1 while it would break even at Q0. C) The firm's marginal revenue would be negative at Q1. D) Demand is not sufficient for consumers to buy Q1. E) Because it wants to produce at its maximum capacity that has reached at Q0. Answer: B Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills

48) Which of the following is true for a monopolistically competitive firm in long-run equilibrium? A) P = ATC and MR = MC B) P = ATC and P = MC C) P > ATC and P > MR D) P > MR and MC = ATC E) P = ATC = MR = MC Answer: A Diff: 2 Type: MC Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 49) Which of the following will not happen as a consequence of a monopolistically competitive firm suffering economic losses in the short run? A) The firm's demand curve will shift to the right if it stays in business in the long run. B) The firm will exit the industry if it continues to suffer economic losses. C) The firm will break even if it stays in business in the long run. D) The firm will be able to break even. E) In the long run, the firm will be able to charge a price that is greater than its average total cost. Answer: E Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 50) If Amazon is successful with its Amazon Go convenience store concept, these Amazon Go convenience stores A) will likely earn an economic profit in both the short-run and the long-run. B) may very well earn an economic profit in the short-run, but the profit will likely be competed away in the long-run as other firms enter the industry. C) will definitely earn an economic profit in the short-run, but will most likely suffer economic losses in the long-run. D) will likely suffer economic losses in the short-run, but will eventually earn an economic profit in the long-run. E) will likely make profit in the short run but in the long-run they will shut down. Answer: B Diff: 1 Type: MC Topic: Product Differentiation Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytical Thinking Special Feature: Solved Problem: The Profitability of Amazon Go

51) A monopolistically competitive firm that is profitable in the short run will face competition that will eventually eliminate the firm's profits in the long run. But the firm can stave off competition and continue to earn economic profits if A) it can successfully sue its competitors for copyright infringement. B) it can move to another country where there is less competition. C) it can lobby the government to establish a price floor for its product. D) it can find new ways to differentiate its product. E) it is able to charge higher price for its product. Answer: D Diff: 1 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 52) The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run. However, it is possible for a firm to continue to earn economic profits if the firm A) expands its marketing budget. B) adopts new technologies that enable it to lower its cost of production. C) expands its product offerings to appeal to a wider range of consumers. D) reduces its price to expand its market. E) can make its price higher to increase its revenue. Answer: B Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 53) Many restaurant chains, including Chipotle, McDonald's and Tim Hortons, have been moving to reduce or eliminate artificial ingredients in favour of locally grown produce. This strategy leads these restaurants A) to earn zero economic profit in the long run because all the competitors will eventually use similar ingredients. B) to earn positive profits indefinitely. C) to make a cartel or their own and charge whatever price they want. D) to increase their cost of production very high and they will go out of business in the long run. E) to increase their prices to attract high income customers and to portray that their product is very high quality. Answer: A Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills Special Feature: Apply the Concept: Can Third Wave Coffee Houses Remain Profitable?

54) Suppose Apple faces a U-shaped average total cost curve. Will Apple maximize profit by producing at the minimum efficient scale? Briefly explain. Answer: Apple is a monopolistically competitive firm and by producing at the minimum efficient scale, it is not maximizing profit. It should produce where P > MR = MC and this happens at the downward sloping portion of average total cost curve, not at the minimum of average total cost curve. The firm will want to produce with excess capacity in order to charge higher price and keep the profit at the maximum. This type of firms do not have incentive to minimize costs. Diff: 2 Type: ES Topic: Profit Maximization Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills Special Feature: Solved Problem: Does Minimizing Cost Maximize Profit at Apple? 55) When a monopolistically competitive firm breaks even in the long run, this is equivalent to earning a zero economic profit. Answer: TRUE Diff: 2 Type: TF Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 56) When a monopolistically competitive firm breaks even in the long run, this is equivalent to earning a zero accounting profit. Answer: FALSE Diff: 2 Type: TF Topic: Long-Run Equilibrium Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 57) A monopolistically competitive firm can increase its profits beyond the long-run equilibrium breakeven level by deliberately lowering its price to force some of its competitors out of the market. Answer: FALSE Diff: 2 Type: TF Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 58) If some monopolistically competitive firms exit their market after suffering short-run losses, the demand curves of remaining firms will shift to the right. Answer: TRUE Diff: 2 Type: TF Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking

59) What effect does the entry of new firms in a monopolistically competitive market have on the economic profits of existing firms in the market? How might existing firms attempt to counteract this effect? Answer: New firms entering an industry cause the demand curves for the products of existing firms to shift to the left. Existing firms will be able to sell less at every price, so their profits will decline. If existing firms can find new ways to differentiate their products or find new ways to lower their cost of production, they have a better chance of maintaining profits as other firms enter the market. Diff: 2 Type: SA Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Reflective Thinking 60) Sparkle, one of many firms in the market for toothpaste, is in long-run equilibrium. Sparkle has a small market share and has been in business for a long time. a. Identify the market structure in which Sparkle operates. Explain your answer. b. What is Sparkle's profit or loss? Explain your answer. If you cannot determine the profit or loss, explain what information is missing. c. Draw a diagram showing Sparkle's demand curve, marginal revenue curve, average total cost curve, and marginal cost curve. Label your diagram. Answer: a. Monopolistic competition; products are differentiated and there are many sellers. b. Profit = 0 because the firm is in long-run equilibrium. c. See the figure below.

Diff: 3 Type: SA Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills

61) The table below shows the demand and cost data facing Velvet Touches, a monopolistically competitive producer of velvet throw pillows. Quantity

Price

1 2 3 4 5 6 7 8

$30 28 26 24 22 20 18 16

Total Revenue

Marginal Revenue

Total Cost

Marginal Cost

$32 43 53 64 76 90 106 126

Use the data to answer the following questions. a. Complete the Total Revenue (TR), Marginal Revenue (MR) and Marginal Cost (MC) columns above. b. What are the profit-maximizing price and quantity for Velvet Touches? c. Is the firm making a profit or a loss? How much is the profit or loss? Show your work. d. Is this firm operating in the long run or in the short run? Explain your answer. e. If the firm's profit or loss is typical of all firms in the market for throw pillows, what is likely to happen in the future? Will there be more firms or will some existing firms leave the industry? Explain your answer. f. What will happen to the typical firm's profit or loss after all entry/exit adjustments? Answer: a. Total Marginal Marginal Quantity Price Total Cost Revenue Revenue Cost 1 $30 $30 $30 $32 $32 2 28 56 26 43 11 3 26 78 22 53 10 4 24 96 18 64 11 5 22 110 14 76 12 6 20 120 10 90 14 7 18 126 6 106 16 8 16 128 2 126 20 b. Q = 5; P = $22 c. Profit = $(110 - 76 ) = $34 d. The firm is in the short run because it is making profits. In the long run, all economic profits will be eliminated. e. Short-run profits give entrepreneurs an incentive to enter the market and establish new firms. The demand curves for existing firms shift to the left and become more elastic. Entry continues until each firm makes zero economic profit (breaks even). f. Each firm makes zero economic profit (breaks even). Diff: 2 Type: ES Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.3 Analyze the situation of a monopolistically competitive firm in the long run AACSB: Analytic Skills 73 Copyright © 2024 Pearson Canada Inc.

11.4

Compare the efficiency of monopolistic competition and perfect competition

1) How does the long run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry? A) A firm in monopolistic competition will earn economic profits but a firm in perfect competition earns zero profit. B) A firm in monopolistic competition will charge a price higher than the average cost of production but a firm in perfect competition charges a price equal to the average cost of production. C) A firm in monopolistic competition does not take full advantage of its economies of scale but a firm in perfect competition produces at the lowest average cost possible. D) A firm in monopolistic competition produces an allocatively efficient output level while a firm in perfect competition produces a productively efficient output level. E) A firm in monopolistic competition produces at its maximum capacity whereas a perfectly competitive firm produces with excess capacity. Answer: C Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 2) Long-run equilibrium under monopolistic competition is similar to that under perfect competition in that A) firms produce at the minimum point of their average cost curves. B) price equals marginal cost. C) firms earn normal profits. D) price is greater than average total cost. E) price equals marginal revenue. Answer: C Diff: 1 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 3) Which of the following is not a characteristic of long-run equilibrium in a monopolistically competitive market? A) Selling price equals average total cost. B) Production is at minimum average total cost. C) Marginal revenue equals marginal cost. D) Selling price less than average total cost. E) Selling price is greater than marginal cost. Answer: B Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

4) For productive efficiency to hold, A) price must equal the marginal cost of the last unit produced. B) price must equal marginal revenue of the last unit sold. C) average variable cost is minimized in production. D) average total cost is minimized in production. E) marginal cost is less than average total cost. Answer: D Diff: 1 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 5) For allocative efficiency to hold, A) price must equal marginal revenue of the last unit sold. B) price must equal the marginal cost of the last unit produced. C) average variable cost is minimized in production. D) average total cost is minimized in production. E) average cost is more than marginal cost of production. Answer: B Diff: 1 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 6) Is a monopolistically competitive firm productively efficient? A) No, because it does not produce at minimum average total cost. B) Yes, because it produces where marginal cost equals marginal revenue. C) No, because price is greater than marginal cost. D) Yes, because price equals average total cost. E) Yes, because price is less than marginal cost. Answer: A Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 7) Is a monopolistically competitive firm allocatively efficient? A) No, because it does not produce at minimum average total cost. B) Yes, because it produces where marginal cost equals marginal revenue. C) No, because price is greater than marginal cost. D) Yes, because price equals average total cost. E) Yes, because price is greater than average total cost. Answer: C Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

8) If a firm has excess capacity, it means A) that the firm expends too much of its resources on advertising its product without seeing an appreciable increase in sales. B) that the firm is not producing its minimum efficient scale of output. C) that the firm's long-run average cost of producing a given quantity exceeds its short-run cost of producing that same quantity. D) that the firm's quantity supplied exceeds its quantity demanded. E) that firm is producing more than it is able to handle. Answer: B Diff: 2 Type: MC Topic: Excess Capacity Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 9) Economists agree that a monopolistically competitive market structure A) lowers consumer utility because consumers pay a price higher than the marginal cost of production. B) is detrimental to society because it leads to a waste of scarce resources. C) benefits consumers because firms produce products that appeal to a wide range of consumer tastes. D) can eliminate any excess capacity if all firms in the industry devote more funds to differentiating their products. E) is not good for society because it causes firms to benefit at the expense of consumers. Answer: C Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 10) Consumers benefit from monopolistic competition by A) being able to choose from products more closely suited to their tastes. B) paying the lowest possible price for the product. C) paying the same price as everyone else. D) being able to purchase high-quality products at low prices. E) being able to pay less prices for the goods. Answer: A Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

Figure 11.18

11) Refer to Figure 11.18. What is the productively efficient output for the firm represented in the diagram? A) Qf units B) Qg units C) Qh units D) Qj units E) Between Qh units Qj units Answer: D Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills 12) Refer to Figure 11.18. What is the allocatively efficient output for the firm represented in the diagram? A) Qf units B) Qg units C) Qh units D) Qj units E) Between Qg units Qh units Answer: C Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills 77 Copyright © 2024 Pearson Canada Inc.

13) Refer to Figure 11.18. What is the amount of excess capacity? A) Qh - Qf units B) Qj - Qf units C) Qj - Qh units D) Qh - Qg units E) Qj - Qg units Answer: B Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills 14) Refer to Figure 11.18. Suppose the firm is currently producing Qf units. What happens if it increases its output to Qg units? A) Its average cost of production will fall and its profit will rise. B) It will be taking advantage of economies of scale and will be able to lower the price of its product. C) It will move from a zero profit situation to a profit situation. D) It will move from a zero profit situation to a loss situation. E) It will move from a loss situation to a zero profit situation. Answer: D Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills 15) Refer to Figure 11.18. In the long run, why will the firm produce Qf units and not Qg units, which have a lower average cost of production? A) Although its average cost of production is lower when the firm produces Qg units, to be able to sell its output the firm will have to charge a price below average cost, resulting in a loss. B) At Qg, average cost exceeds marginal cost so the firm will actually incur a loss. C) At Qg, marginal revenue is less than average revenue which will result in a loss for the firm. D) The firm's goal is to charge a high price and make a small profit rather than a low price and no profit. E) The firm's objective is to stay away from making losses. Answer: A Diff: 3 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills

Figure 11.19

16) Refer to Figure 11.19. Which of the following statements is true? A) Da represents the long-run demand curve facing a monopolistic competitor in a constant-cost industry while Db depicts the demand curve in the short run. B) Da represents the long-run demand curve facing a monopolistic competitor in a constant-cost industry while Db depicts the long-run demand curve in an increasing-cost industry. C) Da represents the long-run demand curve facing a perfect competitor while Db depicts the long-run demand curve facing a monopolistic competitor. D) Da represents the long-run supply curve in a perfectly competitive, constant-cost industry while Db depicts the long-run demand curve facing a monopolistic competitor in a decreasing-cost industry. E) None of the above. Answer: C Diff: 3 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills

17) Refer to Figure 11.19. The diagram demonstrates that A) in the short run, the monopolistic competitor produces an output Qb, but in the long run, after it adjusts its capacity, it will produce the allocatively efficient output, Qa. B) it is not possible for a monopolistic competitor to produce the productively efficient output level, Qa, because of product differentiation. C) it is possible for a monopolistic competitor to produce the productively efficient output level, Qa, if it is willing to lower its price from Pb to Pa. D) it is possible for the firm to produce with maximum capacity to earn maximum profit. E) in the long run, the monopolistic competitor produces the minimum-cost output level, Qa, but in the short run its output of Qb is not cost minimizing. Answer: B Diff: 3 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills 18) Consumers in monopolistically competitive markets face a trade-off between paying prices greater than marginal costs and purchasing products that are more closely suited to their tastes. Answer: TRUE Diff: 2 Type: TF Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 19) Under perfect competition, we have one firm selling a perfectly unique product for the entire market, whereas under monopolistic competition we have many firms selling differentiated products to the entire market. Answer: FALSE Diff: 1 Type: TF Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 20) In the long-run equilibrium, a monopolistically competitive firm earning normal profit produces the allocatively efficient output level. Answer: FALSE Diff: 1 Type: TF Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

21) Productive efficiency does not hold for a profit-maximizing, monopolistically competitive firm in the long-run equilibrium because the firm operates along the diseconomies-of-scale region of its average total cost curve. Answer: FALSE Diff: 2 Type: TF Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 22) Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare? Answer: No. Although monopolistically competitive firms reduce total economic surplus by producing less than the efficient amount (creating a deadweight loss) they also increase consumer welfare because people are willing to pay more for variety and for products that are more closely suited to their tastes. Consumer welfare can be measured by consumer surplus. Diff: 2 Type: ES Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking Figure 11.20

23) Refer to Figure 11.20 to answer the following questions. a. What is the productively efficient output? b. What is the allocatively efficient output? c. What is the amount of excess capacity? d. Suppose the firm is currently producing 14 units. What happens if it increases output to 17 units? Answer: a. The productively efficient output is 20 units. b. The allocatively efficient output is 19 units. c. The amount of excess capacity is 6 units. d. If the firm increases output to 17 units, it will go from zero profit to a loss. Diff: 2 Type: ES Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills 81 Copyright © 2024 Pearson Canada Inc.

24) In both monopolistically competitive and perfectly competitive industries, A) firms produce products for which there are no close substitutes. B) there are high barriers to entry. C) there are many buyers and sellers. D) firms are price takers. E) marginal revenue equals price. Answer: C Diff: 1 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 25) What is the trade off between perfect competition and monopolistic competition from a social point of view? A) productive efficiency versus allocative efficiency B) long-run profits versus short-run productive efficiency C) differentiated products versus productive efficiency D) profitability versus lower prices E) excess capacity versus efficient scale Answer: C Diff: 1 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 26) In the long run, firms in both monopolistically competitive markets and perfectly competitive markets earn zero economic profits. But, unlike perfectly competitive firms in the long run, monopolistically competitive firms A) charge a price that is greater than average revenue. B) charge a price that is equal to marginal cost. C) do not produce at minimum average total cost. D) charge a price that is equal to average total cost. E) charge a price equals to marginal revenue. Answer: C Diff: 1 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

27) Compared to a perfectly competitive firm, the demand curve facing a monopolistically competitive firm is A) more elastic because there are many close substitutes for the product of a monopolistically competitive firm. B) less elastic because monopolistically competitive firms produce similar, but not identical, products. C) just as elastic because there are many sellers in both markets. D) less elastic because it has to be equal to marginal revenue in the long run. E) more elastic because in the long run, the demand curve is tangent to the firm's average total cost curve. Answer: B Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 28) Which of the following statements is true about monopolistically competitive firms? A) Unlike perfectly competitive firms, monopolistically competitive firms are able to raise their prices without losing all of their customers. B) Like perfectly competitive firms, monopolistically competitive firms are not able to raise prices without losing all of their customers because they face competition from firms selling similar products. C) Like perfectly competitive firms, monopolistically competitive firms maximize their profits by setting price equal to marginal cost. D) Unlike perfectly competitive firms, monopolistically competitive firms face perfectly inelastic demand curves. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 29) Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium? A) Marginal revenue is equal to marginal cost. B) Price is equal to average revenue. C) The firm has excess capacity. D) Price is equal to marginal cost. E) price equals average cost. Answer: D Diff: 1 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

30) In contrast with perfect competition, excess capacity characterizes monopolistic competition. Excess capacity is due to which of the following? A) Monopolistically competitive firms produce at the minimum point on their average total cost curves. B) Monopolistically competitive firms face downward-sloping demand curves. In the long run, firms produce where their demand curves are tangent to their long-run average total cost curves. C) Monopolistically competitive firms produce where marginal revenue is equal to marginal cost. D) Monopolistically competitive markets have low barriers to entry. E) Monopolistically competitive firms produce at the upward sloping portion of average total cost. Answer: B Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 31) Excess capacity is a characteristic of monopolistically competitive firms. What does "excess capacity" mean? A) It means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves. B) It means that firms hire more than the minimum number of workers needed to produce the profitmaximizing level of output. C) It means that firms produce with inefficient combinations of resources. D) It means that firm does not have enough space to accommodate more production. E) It means that firms build plants that are not large enough to achieve minimum efficient scale. Answer: A Diff: 2 Type: MC Topic: Excess Capacity Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 32) Monopolistically competitive firms have downward-sloping demand curves. In the long run, monopolistically competitive firms earn zero economic profits. These two characteristics imply that in the long run, A) monopolistically competitive markets achieve productive efficiency. B) monopolistically competitive markets achieve allocative efficiency. C) monopolistically competitive firms earn economic profits. D) monopolistically competitive firms have excess capacity. E) monopolistically competitive firms have price greater than average total cost. Answer: D Diff: 2 Type: MC Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

33) The statements below compare perfectly competitive (PC) markets and monopolistically competitive (MC) markets. Which statement is correct? A) Productive efficiency is achieved in both PC and MC markets. Allocative efficiency is achieved only in MC markets. B) Allocative efficiency is achieved in both PC and MC markets. Productive efficiency is achieved only in PC markets. C) Productive efficiency and allocative efficiency are both achieved in PC markets. Neither is achieved in MC markets. D) Allocative efficiency is achieved only in PC markets. Productive efficiency is achieved only in MC markets. E) None of the above is correct. Answer: C Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 34) Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive. Which of the following offers the best reason why some economists believe that monopolistically competitive markets are less efficient than perfectly competitive markets? A) In contrast to perfectly competitive markets, neither allocative efficiency nor productive efficiency is achieved in monopolistically competitive markets. B) In contrast to perfectly competitive markets, firms in monopolistically competitive markets earn economic profits in long-run equilibrium. C) In contrast to perfectly competitive markets, firms in monopolistically competitive markets do not produce where price equals average total cost in long-run equilibrium. D) In contrast to perfectly competitive markets, firms in monopolistically competitive markets can charge a price greater than average total cost in the short run. E) All of the above. Answer: A Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

35) Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive. Which of the following offers the best reason why some economists believe that monopolistically competitive markets benefit consumers despite any loss of well-being? A) Although consumers may pay a price greater than marginal cost for a product, the product is produced at the minimum average total cost. B) Although consumers may pay a price greater than marginal cost and the product is not produced at minimum average total cost, they benefit from being able to buy a differentiated product more closely suited to their tastes. C) Consumers pay a price equal to the marginal cost of producing a product, even though it is not produced at the minimum average total cost. D) Consumers are better off choosing from a variety of differentiated products, even though product differentiation causes barriers that restrict entry into monopolistically competitive markets. E) None of the above is a good reason. Answer: B Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 36) In long-run equilibrium, compared to a perfectly competitive market, a monopolistically competitive industry produces a ________ level of output and charges a ________ price. A) higher; lower B) lower; lower C) lower; higher D) higher; higher Answer: C Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 37) The resources monopolistically competitive firms spend on product differentiation ultimately leads to A) increased entry into the industry. B) increased allocative efficiency. C) higher prices for consumers. D) lower prices for consumers. E) increased productive efficiency. Answer: C Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

38) Long-run equilibrium in a monopolistically competitive market is similar to long-run equilibrium in a perfectly competitive market in that in both markets, firms A) produce at the minimum point of their average total cost curves. B) produce where price equals marginal cost. C) break even. D) produce where price equals marginal revenue. E) produce where marginal revenue equals average revenue. Answer: C Diff: 1 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 39) If a monopolistically competitive firm has excess capacity, A) it has exhausted all economies of scale. B) it is producing beyond the minimum efficient scale. C) it is experiencing diseconomies of scale. D) It is producing too much output. E) it is producing an output rate that places it on the negatively sloped portion of its average total cost curve. Answer: E Diff: 2 Type: MC Topic: Excess Capacity Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 40) In what way does long-run equilibrium under monopolistic competition differ from long-run equilibrium under perfect competition? A) Firms in perfect competition achieve productive and allocative efficiency, while firms in monopolistic competition achieve neither allocative nor productive efficiency. B) The only difference is that in a monopolistically competitive market there are many brands to choose from, while in a perfectly competitive market there is one standard product. C) Firms in perfect competition achieve productive efficiency, while firms in monopolistic competition achieve allocative efficiency. D) They are not different in terms of productive or allocative efficiency in the long-run. E) Firms in perfect competition achieve allocative efficiency, while firms in monopolistic competition achieve brand efficiency. Answer: A Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

41) What is the trade-off that consumers face when buying the product of a monopolistically competitive firm? A) Consumers pay higher prices but receive better quality goods compared to the output of perfectly competitive firms. B) Consumers pay a price greater than marginal cost but have the luxury of choices more suited to their tastes. C) Consumers pay higher prices, but the products are produced by highly efficient firms. D) Consumers pay lower prices but have fewer choices. E) They have more choices at lower prices. Answer: B Diff: 2 Type: MC Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 42) Suppose James and Katherine are successful in establishing a profitable market for their "ghost restaurants" in what is a monopolistically competitive industry. In the long run, James and Katherine will most likely find it ________ to remain profitable as they face ________ competition in the "ghost restaurant" market. A) harder; more B) harder; less C) easier; more D) easier; less E) not enough information is given to determine that. Answer: A Diff: 1 Type: MC Topic: Product Differentiation Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytical Thinking Special Feature: Apply the Concept: Are Ghost and Virtual Restaurants the Wave of the Future? 43) Monopolistically competitive firms achieve allocative efficiency but not productive efficiency. Answer: FALSE Diff: 2 Type: TF Topic: Characteristics of Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 44) A monopolistic competitor does not earn profits in the long run unless it can successfully differentiate its product in the minds of its consumers. Answer: TRUE Diff: 1 Type: TF Topic: Monopolistic Competition in the Long Run Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking

45) In the long-run equilibrium, both the perfectly competitive firm and the monopolistically competitive firm produce the output at which MR = MC and charge a price equal to the average total cost of production. Answer: TRUE Diff: 2 Type: TF Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 46) Economists believe that consumers would be better off if markets were perfectly competitive rather than monopolistically competitive. Answer: FALSE Diff: 2 Type: TF Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 47) What is meant by "excess capacity"? How does it relate to consumer utility? Answer: Excess capacity refers to a situation where a firm does not produce at the lowest possible average cost. In other words, economies of scale have not been exhausted. Excess capacity is an inevitable consequence of product differentiation. Firms differentiate their products in order to appeal to consumers' varied tastes. Consumers are, therefore, better off—they have greater utility—than they would be if companies did not differentiate their products. Consumers are willing to pay for the higher costs that result from product differentiation. Diff: 2 Type: ES Topic: Excess Capacity Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 48) "Ghost kitchens" (also known as "virtual kitchens") are growing in numbers in Canada in recent years. They rely on delivery apps and third-party company services such as Uber Eats and Skip the Dishes to handle the delivery of food. Are "ghost restaurants" the wave of future in the restaurant business? Why? Answer: These firms are likely to account for an increasing share of food sales as more people purchase food online and these restaurants are able to quickly respond to changes in consumers tastes. However, these restaurants are facing some obstacles to expand and to compete with fast-casual restaurants which they will have to overcome to seize a large share of the market in the long run. Diff: 2 Type: SA Topic: Product Differentiation Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills Special Feature: Apply the Concept: Are Ghost and Virtual Restaurants the Wave of the Future?

49) Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC), but only the perfectly competitive firm achieves allocative efficiency. Explain why this is the case. Answer: Unlike the perfectly competitive firm, the monopolistically competitive firm faces a downward sloping demand curve, which means that the firm must lower its price to sell additional units of output. As a result, price will always be greater than marginal revenue (P > MR). By contrast, the perfectly competitive firm faces a horizontal demand curve and P = MR. The profit-maximizing rule, MR = MC, applies to all firms but because in perfect competition P = MR the rule can be written as P = MC. A firm achieves allocative efficiency if it charges a price equals to the MC of producing the last unit. This condition is satisfied at the profit-maximizing output for the perfectly competitive firm (since P = MC = MR) but will not hold for the profit maximizing output of monopolistically competitive firm, for which P > MR = MC. Diff: 3 Type: ES Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Reflective Thinking 50) Explain the similarities and differences between the long-run equilibrium for a perfectly competitive firm and a monopolistically competitive firm. Illustrate your answer with a graph demonstrating the long run equilibrium for the two types of firms. Answer:

Refer to the graph above. For both types of firms in long-run, equilibrium output satisfies MR = MC (that is, firms maximize profits), although this condition yields different output levels for the two firms as depicted in the graph. The perfectly competitive firm faces the demand curve Da and produces output Qa, while the monopolistically competitive firm faces demand curve Db and produces a lower output level, Qb. The perfectly competitive firm charges a lower price, Pa, compared to the price the monopolistically competitive firm charges, Pb. However, both firms break even. The perfectly competitive firm achieves both allocative efficiency (P = MC) and productive efficiency (lowest possible average cost). This is not the case for the monopolistic competitor, since its price exceeds the marginal cost of producing the last unit and the output level is not consistent with the lowest average cost. Diff: 3 Type: ES Topic: Comparing Perfect Competition and Monopolistic Competition Learning Outcome: 11.4 Compare the efficiency of monopolistic competition and perfect competition AACSB: Analytic Skills 90 Copyright © 2024 Pearson Canada Inc.

11.5

Define marketing and explain how firms use marketing to differentiate their products

1) A trademark is A) a legal instrument which grants a firm the right to differentiate its product. B) a legal right to position a firm's product in high-traffic public areas such as airports and post offices. C) a patent on a firm's product. D) a legal document that allows the firm to do the business. E) a distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product. Answer: E Diff: 2 Type: MC Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 2) Which of the following is a disadvantage of trademarking a firm's product? A) A trademark differentiates a firm's product. B) A trademark conveys information about the product to the public. C) A trademark may become so widely used to denote a particular type of product that the trademark may no longer be a legally protected brand name. D) A trademark does not affect demand for the firm's product. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 3) CCM has used Sidney Crosby to create the impression that Sidney Crosby hockey equipment is superior to any other hockey equipment. CCM is attempting to A) differentiate Crosby endorsed hockey equipment from other types of hockey equipment. B) lower the marginal cost of producing Crosby endorsed hockey equipment. C) charge higher price by getting attention of Crosby's fans. D) increase its profit by raising the price of Crosby endorsed hockey equipment. E) convince consumers that Crosby endorsed hockey equipment is no different from other hockey equipment favoured by celebrities. Answer: A Diff: 2 Type: MC Topic: Product Differentiation Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking

4) When a credit card company offers different services with its card, like travel insurance for air travel tickets purchased with the credit card or product insurance for items purchased with the card, the credit card company is trying to A) create a barrier to entry for competing firms. B) create a perfectly competitive market in which to sell its credit card. C) do what all the other credit card companies are doing. D) convince customers that its card has greater value than those offered by rival firms. E) shift the demand curve for competing firms to the right. Answer: D Diff: 2 Type: MC Topic: Product Differentiation Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 5) Juicy Couture has been successful in selling women's clothing using an unusual strategy. According to an article in the Wall Street Journal, the key to the firm's strategy is to "limit distribution to maintain the brand's exclusive cachet, even if that means sacrificing sales, a brand-management technique once used only for high-end luxury brands." In 2006, Juicy clothes were sold in only four department stores: Neiman Marcus, Saks, Bloomingdale's, and Nordstrom. In 2006, its sales have more than quadrupled since 2002. Source: Rachel Dodes, "From Track Suits to Fast Track," Wall Street Journal, September 13, 2006. How does limiting the number of stores in which Juicy's products are sold contribute to its success? A) By sacrificing sales, the company was able to focus on producing high quality products. B) It enables Juicy to price its products at a premium and differentiate them from lower priced products. C) It helps establish Juicy's products as luxury items favoured by the very wealthy. D) Maintaining the exclusivity of a product increases the demand for the product. E) It allows Juicy to maintain zero profit in the long run. Answer: B Diff: 3 Type: MC Topic: Product Differentiation Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Analytic Skills 6) Brand management refers to A) picking a brand name for a new product that will attract attention. B) the efforts to maintain the differentiation of a product over time. C) efforts to reduce the cost of production. D) giving impression to consumers that the product is high end. E) selling the right to use a brand name in a particular market. Answer: B Diff: 1 Type: MC Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 92 Copyright © 2024 Pearson Canada Inc.

7) Which of the following statements is true about advertising by a monopolistically competitive firm? A) Since the monopolistic competitor, like the perfect competitor, makes zero profit in the long run, it is a waste of resources to advertise its products. B) Advertising could make the monopolistic competitor's demand more inelastic, but advertising has no effect on a perfect competitor's demand. C) Advertising will be more beneficial if a monopolistic competitor colludes with other firms to advertise the products of the industry as a whole rather than an individual firm's product. D) Monopolistically competitive firms tend to shun advertising because advertising draws attention to the variety of differentiated products available in the industry. E) None of the above is true. Answer: B Diff: 2 Type: MC Topic: Advertising Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 8) Although advertising raises the price of a monopolistic competitor's product, it does confer a benefit to consumers. Which of the following is a benefit to consumers? A) Advertising acts as a barrier to entry. B) Advertising engenders brand loyalty. C) They get the branded products. D) Advertising could provide consumers with useful information about new products and enable them to comparison shop. E) Advertised products tend to be of higher quality so consumers feel special when they consume advertised products. Answer: D Diff: 2 Type: MC Topic: Advertising Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking

9) One of your classmates asserts that advertising, marketing research, and brand management are redundant expenditures because a firm can obtain the same information by simply looking at what customers are already buying. Which of the following is not a response you might offer her? A) Conducting market research is a good way for firms to keep abreast of changing consumer tastes and preferences. B) Advertising and brand management allow a firm to create an entry barrier which will insulate the firm from competition and from undertaking further product innovations. C) Marketing research could allow a firm to identify new market opportunities and at least, in the short run, a firm can make a profit supplying products to this market segment. D) If a firm successfully manages its brand, customers become less price sensitive as they perceive fewer substitutes for the firm's brand. E) None of the above is the desired response. Answer: B Diff: 2 Type: MC Topic: Advertising Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Analytic Skills 10) A successful trademark is one that becomes a generic name for a product as, for example, "Kleenex" has become a generic term for tissues. Answer: FALSE Diff: 2 Type: TF Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 11) In the highly competitive fast-food restaurant market, brand name restaurants have a strong profit incentive to maintain high sanitary conditions and avoid any negative consequences. Answer: TRUE Diff: 2 Type: TF Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 12) What is the difference between the terms "marketing" and "advertising"? Answer: Marketing consists of all the activities that are necessary for a firm to sell a product to a consumer. Marketing is not limited only to advertising. Product placement and defending a brand name can also be included under marketing. Diff: 2 Type: ES Topic: Marketing Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking

13) Draw a graph that shows the impact on a firm's profit when it increases spending on advertising and the increased advertising has no effect on the demand for a firm's product. Answer:

Diff: 2 Type: ES Topic: Advertising Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Analytic Skills 14) Monopolistically competitive firms can differentiate their products A) by producing at minimum efficient scale. B) by producing where marginal revenue equals marginal cost. C) by equating price and average total cost. D) through marketing. E) by equating average revenue and marginal cost. Answer: D Diff: 1 Type: MC Topic: Marketing Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking

15) Which of the following brand names is no longer entitled to trademark protection in Canada? A) escalator B) coca-cola C) CCM D) Bombardier E) Bauer Answer: A Diff: 1 Type: MC Topic: Marketing Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 16) To maximize their profits and defend those profits from competitors, monopolistically competitive firms must A) lobby government to erect barriers to entry in their industries. B) limit foreign competition in their markets by encouraging the government to impose tariffs and other trade restrictions. C) differentiate their products. D) achieve economies of scale. E) charge a price higher than average total cost for better quality products. Answer: C Diff: 1 Type: MC Topic: Product Differentiation Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 17) A franchise is A) a firm that buys and operates a brand-name business in a new market. B) a firm with the legal right to sell a good or service in a particular area. C) a firm with no competitors. D) a family run small business with only one location. E) a branch of a national company. Answer: B Diff: 2 Type: MC Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking

18) Which of the following is true of trademarks? A) A successful trademark is one that becomes a generic name for a product; for example, "Xerox" has become a generic term for making photocopies. B) A successful trademark is one that allows consumers to immediately identify the source or producer of the product. C) If a firm is granted a trademark, then no other firms can legally produce similar products for a given period of time. D) If a firm is granted a trademark, then no other firms can legally sell in the same geographic area for a given period of time. E) All of the above. Answer: B Diff: 2 Type: MC Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 19) ________ describes the actions a firm takes to maintain the differentiation of its product over time. A) Product differentiation B) Brand management C) Aggressive marketing D) Advertising E) Cost minimization Answer: B Diff: 1 Type: MC Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 20) Which of the following can a firm use to defend a successful product's brand name? A) The firm can obtain a patent on the brand name. B) The firm can apply for a trademark to ban other firms from using the product's name. C) The firm can increase the amount it spends on advertising for the product. D) The firm can attempt to copyright the brand name. E) The firm get a patent. Answer: B Diff: 1 Type: MC Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking

21) Firms use two marketing tools to differentiate their products. What are these two tools? A) lobbying and word of mouth B) market research and demand estimation C) brand management and advertising D) consumer surveys and market experiments E) social media and television Answer: C Diff: 1 Type: MC Topic: Marketing Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 22) When a firm has been granted a trademark, which grants legal protection against other firms using the name of the product that has been granted the trademark, the firm A) still faces the possibility that the name will become widely used and no longer associated with a specific company. B) does not have to worry about legally enforcing the trademark; this is the responsibility of the legal system. C) still must apply for a copyright and a patent to ensure that no other firm will use the product's name. D) should also apply for patents so that no other firm can use the same trademark for a specific number of years. E) must spend an annual amount on advertising the product each year; the amount it must spend is negotiated by the firm and the government agency that grants the trademark. Answer: A Diff: 1 Type: MC Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 23) One goal a firm tries to achieve when it advertises a product is to A) make the demand curve for the product more elastic. B) shift the demand curve for the product to the left. C) make the demand curve for the product unitary elastic. D) make the demand curve for the product more inelastic. E) make the demand curve for the product perfectly elastic. Answer: D Diff: 2 Type: MC Topic: Advertising Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking

24) Advertising is an action of a firm that is intended to maintain the differentiation of its product over time. Answer: FALSE Diff: 1 Type: TF Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 25) Marketing refers to all the activities necessary for a firm to sell a product to a consumer. Answer: TRUE Diff: 1 Type: TF Topic: Marketing Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 26) Discuss the role of product differentiation and advertising in monopolistic competition. Answer: Firms acquire market power through product differentiation, distinguishing their products from similar products offered by competitors. Product differentiation promotes market power by convincing consumers that a particular firm's product is superior to the products offered by its rivals. One way to create differentiation is through advertising. Successful advertising increases demand for a firm's product and makes its demand more inelastic. Although advertising increases costs, if the increase in revenue from sales generated by advertising exceeds the cost, the firm's profit will increase. Diff: 2 Type: ES Topic: Advertising Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking 27) Why are many companies concerned about brand management? Answer: Firms are concerned about brand management because maintaining their product's unique identity and good reputation is necessary for stopping competitors from attracting their customers away. Diff: 2 Type: ES Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking

28) Why would an organization as large as Molson Coors (owner of Molson Breweries) incur large legal expenses to try to prevent bars and restaurants from using their trademarked term "I am Canadian" in their advertising? Answer: Molson has spent a great deal of time and money to establish a successful brand name and to get consumers to automatically think of Molson Canadian when they see anyone using the "I am Canadian" slogan. If they did not challenge unauthorized use of the slogan, Molson would not only face the possibility that consumers would think these restaurants and bars were associated with Molson Canadian, but also that other restaurants, bars, or other companies would choose to use the slogan without fear of legal action or retribution. If Molson did not attempt to legally defend its brand, even in the smallest of cases, it could eventually face the possibility of "I am Canadian" no longer being associated with Molson. Diff: 2 Type: ES Topic: Brand Management Learning Outcome: 11.5 Define marketing and explain how firms use marketing to differentiate their products AACSB: Reflective Thinking

11.6

Identify the key factors that determine a firm's success

1) If buyers of a monopolistically competitive product feel the products of different sellers are strongly differentiated, then the demand for each seller's product is A) perfectly inelastic. B) perfectly elastic. C) relatively inelastic. D) relatively elastic. E) unit elastic. Answer: C Diff: 2 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytic Skills 2) Which of the following is an example of a factor that a firm's owners and managers can control in making the firm successful? A) the ability to produce the product at a lower cost B) changing consumer tastes C) a rise in the price of a key input, for example, a rise in the price of oil leads to higher energy costs D) the number of competitors in the market E) charging a price as high as possible Answer: A Diff: 2 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking

3) A firm that successfully differentiates its product or lowers its average cost of production creates A) value for its customers. B) entry barriers into its market. C) a perfectly inelastic demand curve for its product. D) economies of scale. E) problem for its competitors. Answer: A Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking 4) Before the COVID-19 pandemic, the restaurant industry did not experience economies of scale, but after the pandemic, larger restaurants started to exhibit economies of scales. One of the reasons for this change is that A) Larger restaurants were able to charge much higher prices after the pandemic based on their size. B) Larger restaurants reduced their profits by reducing their prices to attract more customers. C) Customers were reluctant to eat in small restaurants where tables are usually crowded together. D) Smaller restaurants were not able to survive after the COVID-19 pandemic. E) People started to order meals online from small restaurants only. Answer: C Diff: 2 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytic Skills Special Feature: Apply the Concept: Can Mom and Pop Business Survive the COVID-19 Pandemic? 5) Some economists and policymakers are concerned that the effects of the pandemic might lead to a permanent reduction in the number of small firms. The textbook used which of the following terms to illustrate this type of firm? A) Tim Hortons B) Franchises C) Mom and pop businesses D) Publicly owned enterprises E) Private corporations Answer: C Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking Special Feature: Apply the Concept: Can Mom and Pop Business Survive the COVID-19 Pandemic?

6) JoJo's Cigar Bar is attempting to set itself apart from its competition by marketing to single women. This is an example of A) defending a brand name. B) blocking entry into the market. C) legally enforcing a trademark. D) product differentiation. E) gender discrimination. Answer: D Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking Figure 11.21

7) Refer to Figure 11.21. Tim Hortons has expanded its menu to include sandwiches and hot breakfast items. Which of the graphs in the figure above reflects this? A) Panel A B) Panel B C) Panel C D) both Panel A and Panel B E) either Panel A or Panel B Answer: A Diff: 2 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytic Skills Special Feature: Apply the Concept: Can Mom and Pop Business Survive the COVID-19 Pandemic?

8) Refer to Figure 11.21. If Tim Hortons is successful at luring away competitors' customers with its new menu items, what will be the effect on Tim Hortons' demand and marginal revenue curves? A) They will both shift to the right. B) They will both shift to the left. C) They will both become equal. D) Demand will shift to the left and marginal revenue will shift to the right. E) Demand will shift to the right and marginal revenue will shift to the left. Answer: A Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytic Skills Special Feature: Apply the Concept: Can Mom and Pop Business Survive the COVID-19 Pandemic? 9) If buyers of a monopolistically competitive product feel the products of different sellers have few differences between them, then the demand for each seller's product will be relatively elastic. Answer: TRUE Diff: 2 Type: TF Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking 10) A monopolistically competitive firm can convince buyers that its product has value by differentiating its product to suit consumers' preferences. Answer: TRUE Diff: 2 Type: TF Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking 11) How might a monopolistically competitive firm continually earn economic profit greater than zero? Answer: A monopolistically competitive firm can continually earn economic profit greater than zero only if it always stays one step ahead of the competition. Diff: 2 Type: ES Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking

12) How would a marketing campaign directed at single women improve the chances of success at a place like a cigar bar? Answer: By marketing to single women, a cigar bar would be attempting to differentiate itself from competing cigar bars by attracting new customers, in this case single women, who may believe their needs are not being met by the competition. Also, by marketing to single women, the cigar bar may have a better chance of attracting more single men if the men know that the bar attracts single women. If the cigar bar is successful with its marketing effort, it stands a better chance of earning economic profits. Diff: 2 Type: ES Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking 13) The most important of the factors that make a firm successful and that can be controlled by the firm's owners and managers are A) the establishment of trademarks for its products and the aggressive defense of those trademarks. B) lobbying government to erect or enforce entry barriers in its markets, and marketing its products as widely as possible. C) the differentiation of its products and the production of products at a lower average cost than competing firms. D) the selection of the prices of its products and the selection of the most productive and loyal employees. E) the location of the business that can attract the larger number of consumers. Answer: C Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking 14) A firm cannot control all of the factors that allow it to make economic profits. Which of the following is an example of an uncontrollable factor? A) product differentiation B) input prices C) producing at a lower average total cost than competing firms D) hiring competent managers E) All of the above. Answer: B Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking

15) Some factors that allow firms to make economic profits are beyond its control. All but one of the following is an uncontrollable factor. Which factor is controllable? A) input prices B) consumer tastes C) chance events D) product differentiation E) None of the above. Answer: D Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking 16) According to some economists, after the pandemic, we may see franchised firms replacing mom and pop businesses. Which names are used as examples of franchises in the textbook? A) Domino's B) Pizza Hut C) Tim Hortons D) A and B E) B and C Answer: C Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking Special Feature: Apply the Concept: Can Mom and Pop Business Survive the COVID-19 Pandemic? 17) Competition in the restaurant industry benefits consumers by leading firms to offer somewhat different versions of the same product and entry of new firms leads to zero economic profits. What type of market structure do restaurants fall in? A) Perfectly competitive. B) Natural monopoly. C) Price discriminating monopoly. D) Monopolistically competitive. E) Monopoly. Answer: D Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking Special Feature: Economics in Your Life: Can You Operate a Successful Restaurant?

18) In a monopolistically competitive market, a successful new restaurant A) can earn economic profits in the long run if it uses barriers to restrict entry by new restaurants. B) will earn zero economic profit in the long run because of free entry, but competition will lead restaurants to offer different versions of the same product. C) will face high entry barriers because of health and safety regulations to which all restaurants are subject. D) must obtain a trademark to ensure that it will break even in the long run. E) will earn economic profit as long as it stays in business. Answer: B Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking 19) Which of the following statements is true? A) Input prices are one of the success factors that firms can control. B) Consumers will buy a product only if its price is below that of its competitors. C) Consumers will buy a product only if it meets a need not met by competing products. D) Sheer chance can play a significant role in the success or failure of a business. E) None of the above. Answer: D Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking

Figure 11.22

20) Refer to Figure 11.22. Which of the graphs in the figure above reflects the decline in sales that Starbucks experienced as a result of increased competition from companies like McDonald's and Dunkin' Donuts? Assume that as a result of the competition, Starbucks began to experience an economic loss. A) Panel A B) Panel B C) Panel C D) either Panel A or Panel B E) either Panel A or Panel C Answer: C Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytic Skills 21) Refer to Figure 11.22. If Starbucks is successful at luring away competitors' customers with its chain of health and wellness stores, what will be the effect on Starbucks' demand and marginal revenue curves? A) They will both shift to the right. B) They will both shift to the left. C) Demand will shift to the left and marginal revenue will not change. D) Demand will shift to the right and marginal revenue will not change. E) Nothing will happen to the demand curve and marginal revenue curve will shift to the right. Answer: A Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytic Skills

22) During and following the COVID-19 pandemic, many restaurants found it necessary to make changes in their operations, including printing one-time-use paper menus, installing better ventilation systems, and cleaning more frequently. These changes would likely cause the long-run average cost curve in the restaurant industry to A) shift up. B) shift down. C) not change. D) flatten. E) become steeper. Answer: A Diff: 2 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytical Thinking Special Feature: Apply the Concept: Can Mom and Pop Business Survive the COVID-19 Pandemic? 23) If the COVID-19 pandemic resulted in increased costs for restaurants, this would likely ________ efficient scale in the restaurant industry. A) increase B) decrease C) not change D) eliminate E) ruin Answer: A Diff: 2 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytical Thinking Special Feature: Apply the Concept: Can Mom and Pop Business Survive the COVID-19 Pandemic? 24) The increased costs restaurants experienced during and after the COVID-19 pandemic likely increased minimum efficient scale in the restaurant industry. Achieving this new minimum efficient scale would likely A) be harder for large restaurants than for small restaurants. B) be harder for small restaurants than for large restaurants. C) be equally difficult for both large and small restaurants. D) be easily achievable for both large and small restaurants. E) have no impact on smaller restaurants at all. Answer: B Diff: 2 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytical Thinking Special Feature: Apply the Concept: Can Mom and Pop Business Survive the COVID-19 Pandemic?

25) During and following the COVID-19 pandemic, many customers were reluctant to eat in small restaurants where tables are crowded together, and some customers chose to avoid restaurants completely, choosing instead to prepare more meals at home. These factors would likely ________ because they are able to sell only a smaller quantity of meals per week. A) push smaller restaurants further down their average cost curves. B) push smaller restaurants further up their average cost curves. C) flatten the average cost curves for smaller restaurants. D) make the average cost curves for smaller restaurants turn negative. E) not affect the average cost curves for smaller restaurants. Answer: B Diff: 1 Type: MC Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Analytical Thinking Special Feature: Apply the Concept: Can Mom and Pop Business Survive the COVID-19 Pandemic? 26) The ability to engage in product differentiation is one of the factors a manager or owner of a firm can control in order to create value for consumers. Answer: TRUE Diff: 1 Type: TF Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking 27) If a firm can produce a product at a lower average cost than its competitors, it stands a better chance of earning economic profit. Answer: TRUE Diff: 1 Type: TF Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking 28) What are the key factors that determine the profitability of a firm in a monopolistically competitive market? Answer: A monopolistically competitive firm's profitability depends on its ability to differentiate its products (especially to make them seem more desirable than competitors' products) and to produce its product at a lower average cost than competing firms. Diff: 2 Type: ES Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking

29) Explain the significance of brand management to a firm that has differentiated its product. Comment specifically on the importance of obtaining a trademark. Answer: The owner or manager of a firm that has been successful in differentiating its product knows that its success will lead other firms to copy the new or improved product. In a market with no barriers to entry, this is inevitable. The firm can use brand management to postpone the time when its profits will vanish. Brand management can take the form of advertising and obtaining a trademark. A trademark is a legal means used to protect a product's name. But it is not enough for a firm to obtain the trademark; it must ensure that the trademarked name does not become so widely used that it becomes used for similar products that the firm does not produce. This is why Coca-Cola sends employees to restaurants and bars to make sure that another cola is not served when a customer asks "for a Coke." If such steps are not taken, the trademark will eventually be ineffective. Diff: 2 Type: ES Topic: Factors that Determine Success Learning Outcome: 11.6 Identify the key factors that determine a firm's success AACSB: Reflective Thinking

Microeconomics, 4Ce (Hubbard) Chapter 12 Oligopoly: Firms in Less Competitive Markets 12.1

Show how barriers to entry explain the existence of oligopolies

1) Apple's response to Spotify's entry into the music industry has been A) to stop selling music to consumers entirely (exit the industry). B) to reduce the prices for downloading songs in its iTunes store. C) to launch its own music streaming service. D) to begin legal challenges to Spotify's right to be in the music industry. E) to do nothing because Apple has its own market, no one can take it. Answer: C Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking Special Feature: Chapter Opener: Apple, Spotify, and the Music Streaming Revolution 2) Which of the following is not part of an oligopolist's business strategy? A) meeting worker health and safety standards required of all firms B) deciding the level of total output of a new product C) determining the amount of advertising a new product needs D) setting the product's price after considering what rivals will do E) All of the above are oligopolist's business strategies. Answer: A Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking Special Feature: Chapter Opener: Apple, Spotify, and the Music Streaming Revolution 3) An oligopolistic industry is characterized by all of the following except A) existence of entry barriers. B) the possibility of reaping long run economic profits. C) firms pursuing aggressive business strategies, independent of rivals' strategies. D) production of standardized products. E) decisions are based on other firm's decisions. Answer: C Diff: 1 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

4) An oligopoly firm is similar to a monopolistically competitive firm in that A) both firms face the prisoner's dilemma. B) both operate in a market in which there are entry barriers. C) both firms have market power. D) both have a tension between cooperation and self-interest. E) both firms are in industries characterized by an interdependent firm. Answer: C Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 5) An oligopolist differs from a perfect competitor in that A) there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power. B) firms in an oligopoly do not produce homogeneous products while firms in perfect competition do. C) the market demand curve for a perfectly competitive industry is perfectly elastic but it is downwardsloping in an oligopolistic industry. D) there are long-run profits in perfect competition while there are losses in oligopolies in the long run. E) there are no entry barriers in perfect competition but there are entry barriers in oligopoly. Answer: E Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 6) Which of the following is the best example of an oligopolistic industry? A) the beef market B) the pharmaceutical industry C) public education D) the wheat market E) the beauty products industry Answer: B Diff: 1 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

7) All of the following are examples of oligopolistic markets except A) the broadcasting industry. B) aircraft manufacture. C) University bookstores. D) Microsoft. E) seafood restaurant chains. Answer: E Diff: 1 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 8) A characteristic found only in oligopolies is A) break even level of profits. B) long run profits. C) interdependence of firms. D) independence of firms. E) products that are slightly different. Answer: C Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 9) Producing a homogeneous product occurs in which of the following industries? A) oligopoly, monopolistic competition and perfect competition B) perfect competition only C) oligopoly and perfect competition D) oligopoly only E) monopolistic competition and perfect competition Answer: C Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 10) Producing a differentiated product occurs in which of the following industries? A) oligopoly, monopolistic competition and perfect competition B) monopolistic competition only C) oligopoly only D) perfect competition only E) monopolistic competition and oligopoly Answer: E Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

11) A four-firm concentration ratio measures A) the fraction of an industry's sales accounted for by the four largest firms. B) the production of any four firms in an industry. C) the fraction of output produced by first four firms in an industry. D) how the four largest firms became so concentrated. E) the fraction of employment of the four largest firms in an industry. Answer: A Diff: 1 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 12) If an industry is made up of five identical firms, the four-firm concentration ratio is A) 5%. B) 20%. C) 50%. D) 80%. E) 100%. Answer: D Diff: 2 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills 13) The value of the four-firm concentration ratio that many economists consider indicative of the existence of an oligopoly in a particular industry is A) anything greater than 10 percent. B) anything greater than 20 percent. C) anything greater than 30 percent. D) anything greater than 40 percent. E) anything greater than 70 percent. Answer: D Diff: 1 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

14) Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of competition in an industry? A) Concentration ratios do not include sales in Canada by foreign firms. B) Concentration ratios are calculated for the national market, even though the competition in some industries is mainly local. C) Concentration ratios assign weights to only the four largest firms in an industry. D) Concentration ratios do not address the fact that competition sometimes exists between firms in different industries. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 15) Which of the industries below has the highest four-firm concentration ratio in Canada? A) clothing B) pharmaceutical products C) sugar D) shoes E) petroleum products Answer: C Diff: 2 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 16) The Department Stores industry is highly concentrated. What does this mean? A) There are many large stores such as Hudson Bay Company, Target, and Giant Tiger/Tigre Géant, in this industry. B) There are only four big Department Stores. C) A few large stores account for a significant portion of industry sales. D) There is cut-throat competition in this industry because there are no entry barriers. E) The sales volume in this industry is consistently high. Answer: C Diff: 2 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

17) Oligopolies are difficult to analyze because A) the firms are so large. B) demand and cost curves do not exist for these types of industries. C) because everyone is trying to cheat others. D) how firms respond to a price change by a rival is uncertain. E) oligopolies are a recent development so economists have not had time to develop models. Answer: D Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills 18) In an oligopoly market A) the pricing decisions of all other firms have no effect on an individual firm. B) individual firms pay no attention to the behaviour of other firms. C) advertising of one firm has no effect on all other firms. D) one firm's pricing decision affects all the other firms. E) firms are freely producing the quantity and choosing the price they want. Answer: D Diff: 1 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 19) An oligopolist's demand curve is A) identical to that of a perfect competitive firm. B) identical to that of a monopolistically competitive firm. C) vertical on a price quantity diagram. D) perfectly elastic. E) unknown because a response of firms to price changes by rivals is uncertain. Answer: E Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 20) Marginal revenue for an oligopolist is A) identical to the demand for the firm's product. B) same as price and average revenue. C) difficult to determine because the firm's demand curve is typically unknown. D) downward sloping beneath the firm's demand curve. E) horizontal on a price-quantity diagram. Answer: C Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

21) Which of the following is not a reason why government officials are willing to impose entry barriers? A) to raise revenue B) to encourage innovation which may improve the standard of living in the long run C) to increase economic efficiency D) to promote an equitable distribution of income E) All of the above are reason to impose entry barriers. Answer: D Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 22) Interdependence of firms is most common in A) monopolistically competitive industries. B) monopolistic industries. C) monopolistically competitive and oligopolistic industries. D) perfectly competitive industries. E) oligopolistic industries. Answer: E Diff: 1 Type: MC Topic: Interdependence Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 23) Oligopolies exist and do not attract new rivals because A) of competition. B) of barriers to entry. C) there is no profit margin. D) the firms keep profits and prices so low that no rivals are attracted. E) there can be no product differentiation. Answer: B Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 24) An example of a barrier to entry is A) product differentiation. B) high profits. C) superior technological knowledge. D) high average cost. E) increasing marginal costs. Answer: C Diff: 2 Type: MC Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

25) Which of the following is important in determining the extent of competition in an industry? A) the minimum level of short-run average total costs of production B) the minimum efficient scale of production relative to market demand C) whether or not the industry product is differentiated or standardized D) the level of market demand for the industry's product E) all of the above Answer: B Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 26) Economies of scale can lead to an oligopolistic market structure because A) if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms. B) only large firms are allowed to enter this market. C) if economies of scale are insignificant, only a few firms are able to produce at the low costs achieved by the big established firms. D) a few firms can force rivals to produce at low levels of output. E) a few firms can use high profits to keep out new entrants. Answer: A Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills 27) A reason why there is more competition among restaurants than among large discount department stores is that A) restaurants have to cater to a variety of consumer tastes while department stores do not. B) unlike department stores, restaurants have to abide by government sanitation rules. C) unlike restaurants are specialized in different types of food to attract different consumers. D) unlike department stores, restaurants do not have significant economies of scale. E) restaurants have more elastic demand for their product compared to department stores. Answer: D Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills

28) One reason why, in the last four decades, the number of new auto makers in the world has been very small compared to the past is that A) the automobile cannot be improved upon in any way by new producers. B) new auto makers cannot obtain necessary inputs to produce new cars. C) governments restrict who can produce automobiles. D) new producers cannot match the economies of scale of existing auto makers. E) there are barriers to entry in the market. Answer: D Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills 29) The Potash Corporation of Saskatchewan (PotashCorp) was able to block competition through A) economies of scale. B) public monopoly. C) ownership of an essential input. D) government-imposed barriers. E) differentiating its product. Answer: C Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 30) Patents, tariffs and quotas are all examples of A) government-imposed barriers. B) economic regulations that increase efficiency. C) restrictions on production of a good. D) entry barriers that improve a country's standard of living. E) entry barriers that protect consumers. Answer: A Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 31) Which of the following is not necessarily a consequence of occupational licensing laws? A) They restrict competition. B) Consumers pay higher prices for the services of licensed professions. C) They result in a higher quality of service. D) They result in efficient production. E) They ensure that licensed professionals meet some minimum qualifications. Answer: C Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 9 Copyright © 2024 Pearson Canada Inc.

32) An oligopolistic industry is characterized by a few large firms acting independently. Answer: FALSE Diff: 1 Type: TF Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 33) Monopolistic competition differs from oligopoly in that in monopolistic competition, firms act independently while in oligopoly, firms act interdependently. Answer: TRUE Diff: 1 Type: TF Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 34) An entry barrier exists when firms in an industry charge the lowest price possible for their products. Answer: FALSE Diff: 1 Type: TF Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 35) If economies of scale are significant, the typical firm will not reach the minimum point on its long-run average cost curve until it has produced a large fraction of industry sales. Answer: TRUE Diff: 2 Type: TF Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 36) Occupational licensing is an example of an entry barrier that improves a country's standard of living. Answer: FALSE Diff: 1 Type: TF Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 37) The barrier to entry that allowed Alcoa to make persistent economic profits was ownership of an essential input. Answer: TRUE Diff: 1 Type: TF Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

38) What is an oligopoly? Give two examples of oligopolistic industries in Canada. Answer: Oligopoly is a market structure in which a small number of interdependent firms compete. Examples include cigarettes, beer, the airline industry, computer manufacturers, and the aluminum can industry. Diff: 1 Type: SA Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 39) How does the demand curve for an oligopoly firm differ from the demand curves for firms in competitive market structures? Answer: The demand curve facing a perfectly competitive firm is horizontal at the prevailing market price. In other words, the perfect competitor does not influence market price; rather it takes the price as given. A firm in oligopoly can influence market price and therefore face a downward-sloping demand curve. But not much else can be said about its demand curve because firms in oligopoly are interdependent, that is, each firm reacts to its rivals' behaviours, or at least, to what it thinks its rivals will do. Consequently, it is difficult to determine an individual oligopolist's demand curve. Diff: 2 Type: SA Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills 40) What is meant by the term "government-imposed barrier to entry"? Why would a government be willing to impose barriers to entering an industry? Answer: Government imposed barriers to entry are government-issued restrictions which keep new firms from entering an industry. One reason governments are willing to erect barriers to entering an industry is that these barriers may improve the standard of living in the long run; for example, granting patents encourages the development of new products and technologies. Another reason is that firms do favours for politicians who enact such provisions (for example, contributing to campaigns). Diff: 2 Type: SA Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 41) What do Apple, Microsoft, BlackBerry, and Dell have in common? A) Each achieved a dominant position in its industry because it owned a key input in the production of its product. B) The industry in which each firm competes is an oligopoly because of government-imposed barriers to entry. C) Each company was founded in the same year. D) They are in monopolistic competition. E) The profitability of each firm depends on its interactions with other firms. Answer: E Diff: 1 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills Special Feature: Chapter Opener: Apple, Spotify, and the Music Streaming Revolution 11 Copyright © 2024 Pearson Canada Inc.

42) Which of the following is not part of an oligopolist's business strategy? A) deciding on how to manage relations with suppliers B) choosing what new technologies to adopt C) selecting which new markets to enter D) independently setting a product's price without consideration of its rivals' pricing policies E) All of the above are part of an oligopolist's strategy. Answer: D Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking Special Feature: Chapter Opener: Apple, Spotify, and the Music Streaming Revolution 43) Oligopoly differs from perfect competition and monopolistic competition in that A) barriers to entry are lower in oligopoly industries than they are in perfectly competitive and monopolistically competitive industries. B) demand and marginal revenue curves are more useful for analyzing oligopoly than they are for analyzing perfect competition and monopolistic competition. C) because oligopoly firms often react when other firms in their industry change their prices, it is difficult to know what the oligopolist's demand curve looks like. D) the concentration ratios of oligopoly industries are lower than they are for perfectly competitive and monopolistically competitive firms. E) it produces too little output but superior quality goods which is not possible in perfect competition or monopolistic competition. Answer: C Diff: 1 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 44) We can draw demand curves for firms in perfectly competitive and monopolistically competitive industries, but not for oligopoly firms. The reason for this is A) there are no barriers to entry in perfectly competitive and monopolistically competitive industries. There are high barriers to entry in oligopoly industries. B) we can assume that the prices charged by perfectly competitive and monopolistically competitive firms have no impact on rival firms. For oligopoly this assumption is unrealistic. C) that perfectly competitive and monopolistically competitive firms are price takers. Oligopoly firms are price makers. D) perfectly competitive and monopolistically competitive firms sell standardized products. Oligopoly firms sell differentiated products. E) oligopoly always has consumers who buy its product so it does not need a demand curve. Answer: B Diff: 3 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

45) When large firms in oligopoly markets cut their prices, A) rival firms will also cut their prices to avoid losing sales. B) rival firms will not change their prices because most of their customers have signed contracts that commit them to doing business with the same firms for the life of their contracts. C) we don't know for sure how rival firms will respond. D) rival firms will take advantage and make their prices further higher to increase profit. E) rival firms will not cut their prices because they fear that the federal government will accuse them of collusion. Answer: C Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 46) The fraction of an industry's sales that are accounted for by the largest firms is called A) the four-firm competition ratio. B) the four-firm concentration ratio. C) the four-firm industry ratio. D) the four-firm oligopoly ratio. E) the four-firm input ratio. Answer: B Diff: 1 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 47) A four-firm concentration ratio measures A) the extent to which industry sales are concentrated among the four largest firms in the industry. B) the price elasticity of demand among the four largest firms in an industry. C) the number of firms in an industry. D) the price elasticity of demand in an industry. E) how much cost will be saved if the number of firms stay four in an industry. Answer: A Diff: 1 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

48) As a measure of competition in an industry, concentration ratios have several flaws. One of these flaws is that concentration ratios A) assume that all industries have low barriers to entry. B) assume that a ratio less than 40 percent means an industry is perfectly competitive. C) assume there are only four firms in an industry. D) never work because it is unlikely to have only four firms in an industry. E) are calculated for the national market, even though competition in some industries is mainly local. Answer: E Diff: 2 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 49) Which of the following is not a characteristic of oligopoly? A) the ability to influence price B) a small number of firms C) low barriers to entry D) similar goods E) interdependent firms Answer: C Diff: 1 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 50) Which of the following is not a barrier to entry? A) an inelastic demand curve B) economies of scale C) ownership of a key input D) a patent E) copyright Answer: A Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

51) Economies of scale will create a barrier to entry in an oligopoly industry when A) a firm's minimum efficient scale occurs where long-run average total costs are constant. B) the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a large fraction of total industry sales. C) the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a small fraction of total industry sales. D) the industry's four-firm concentration ratio is less than 40 percent. E) a firm's marginal cost is constant. Answer: B Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 52) If economies of scale are relatively important in an industry, the typical firm's A) marginal cost curve will decline continuously until it reaches minimum efficient scale. B) long-run average cost curve will begin rising before it reaches minimum efficient scale. C) long-run average cost curve will reach a minimum at a level of output that leaves room for a large number of firms to enter the industry. D) marginal cost curve will be perfectly elastic. E) long-run average cost curve will reach a minimum at a level of output that is a relatively large fraction of total industry sales. Answer: E Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 53) A patent is an example of A) how ownership of a key input creates a barrier to entry. B) a government-imposed barrier to entry. C) occupational licensing. D) a right to form oligopoly. E) how market failure can lead to oligopoly. Answer: B Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

54) PotashCorp, the Potash Corporation of Saskatchewan, controls most of the world's supply of potash. What type of entry barrier was responsible for PotashCorp's position in the potash industry? A) ownership of a key input B) a government-imposed barrier C) a patent on the manufacture of aluminum D) economies of scale E) all of the above Answer: A Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 55) Which of the following is not an example of a government-imposed entry barrier? A) patents B) copyrights C) occupational licensing D) tariffs and barriers to international trade E) competition bureau or antitrust legislation Answer: E Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 56) Consider a U-shaped long-run average cost curve that has a minimum efficient scale at 6,000 units of output. In this case, this industry would be A) perfectly competitive if the market quantity demanded is 20,000 units. B) monopolistically competitive if the market quantity demanded is 12,000 units. C) experiencing economies of scale. D) an oligopoly if the market quantity demanded is 18,000 units. E) an oligopoly if the four-firm concentration ratio is more than 10 percent. Answer: D Diff: 1 Type: MC Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

57) If economies of scale are relatively unimportant in an industry, the typical firm's long-run average total cost curve will reach a minimum at a level of output that is a ________ fraction of total industry sales. The industry will be ________. A) large; competitive B) large; an oligopoly C) small; monopoly D) small; competitive E) small; an oligopoly Answer: D Diff: 2 Type: MC Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 58) A patent is a government-imposed entry barrier because A) it allows a firm to achieve economies of scale. B) it is a key input owned by the firm that is granted the patent. C) it limits the quantity of a good that can be imported into a country. D) it gives the firm right to produce a product indefinitely without any competition. E) it gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented. Answer: E Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 59) One type of government-imposed barrier to entry gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented. This entry barrier is known as A) a copyright. B) a patent. C) diseconomies of scale. D) an exclusive marketing agreement. E) a tariff. Answer: B Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

60) The De Beers Company blocked competition A) in the diamond market by controlling the output of most of the world's diamond mines. B) by lobbying the government to seek a government imposed barrier. C) by controlling the supply of most of the world's high-quality bauxite, the mineral used to produce aluminum. D) in the market for fresh and frozen cranberries because it controls about 80 percent of the cranberry crop. E) because it has lower costs of producing than other department stores due to economies of scale. Answer: A Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 61) Of all barriers to entry, the most important are those that are due to A) ownership of a key input. B) patents. C) economies of scale. D) government-imposed barriers. E) the Herfindahl-Hirschman Index. Answer: C Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 62) Which industry has the highest four-firm concentration ratio in Canadian industry? A) clothing B) printing C) pharmaceutical products D) shoes E) beer Answer: E Diff: 1 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

63) Which government agency publishes four-firm concentration ratios? A) the Bank of Canada B) the Competition Bureau C) Finance Canada D) Statistics Canada (StatsCan) E) the Ministry of Finance (provincial) Answer: D Diff: 1 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 64) The profit-maximizing level of output and the profit-maximizing price for an oligopolist cannot be calculated when we don't know A) what the concentration ratio for the oligopolist's industry is. B) what the minimum efficient scale in the oligopolist's industry is. C) the demand curve and the marginal revenue curve of the oligopolist. D) how many other firms are in the market. E) the type of barrier to entry that exists in the oligopolist's industry. Answer: C Diff: 2 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 65) Because of the shortcomings of concentration ratios, some economists prefer another measure of competition called A) the Competition Index. B) the Marginal Revenue-Marginal Cost Index. C) the Economic Profit Index. D) the Oligopoly Index. E) the Herfindahl-Hirschman Index. Answer: E Diff: 1 Type: MC Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

66) Ocean Spray is considered to be an oligopoly firm because, until the 1990s, it faced little competition in the market for fresh and frozen cranberries. Why? A) Ocean Spray had a patent on the production of cranberries that gave the company the exclusive right to market its product for 20 years. The 20-year period ended in the 1990s. B) Until the 1990s, Ocean Spray controlled almost the entire supply of cranberries. C) Ocean Spray was able to achieve significant economies of scale in the production of cranberries. Beginning in the 1990s, other firms finally achieved economies of scale as well, but Ocean Spray still controls about 80 percent of the cranberry market. D) The Canadian government imposed a high tariff on cranberry imports. During the 1990s the tariff was eliminated, but Ocean Spray still controls about 80 percent of the cranberry market. E) Ocean Spray was making losses so no other firm had an incentive to join the market. Answer: B Diff: 3 Type: MC Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 67) The people firms hire to attempt to convince provincial legislators, territorial legislators and members of Parliament to pass laws that are favourable to the economic interests of the firms are called A) economic advisors. B) legislative assistants. C) government bureaucrats. D) lobbyists. E) consultants. Answer: D Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 68) Doctors and lawyers in every province and territory need a licence to practice. This is an example of A) consumer protection laws. B) consumer advocacy. C) skilled labour. D) occupational licensing. E) ownership of a key input. Answer: D Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

69) The justification for occupational licensing laws is that they protect the public from incompetent practitioners (for example, lawyers and medical doctors), but the laws also result in A) higher prices and restrictions on the number of people who can enter the professions affected by the laws. B) government's full control. C) economies of scale. D) ownership of a key input. E) an increase in the amount of output required to achieve minimum efficient scale. Answer: A Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 70) A consequence of the quota that has been imposed on the importation of sugar into Canada is A) consumers are protected from eating unsafe products made from cheap imported sugar. B) competition in the Canadian sugar market is reduced. C) consumers are paying more money to buy local sugar and are not able to enjoy imported sugar. D) the cost of producing cereal, chocolate, and candy products in Canada is reduced. E) the market for sugar in Canada has become monopolistically competitive rather than oligopolistic. Answer: B Diff: 1 Type: MC Topic: Government-Imposed Barriers Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 71) If firms are protected by substantial barriers to entry, short-run profits can turn into long-run profits. Answer: TRUE Diff: 1 Type: TF Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 72) The four-firm concentration ratio of the Canadian banking industry is over 77 percent. Most economists would consider this industry an oligopoly. Answer: TRUE Diff: 1 Type: TF Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 73) The most important barrier to entry is economies of scale. Answer: TRUE Diff: 1 Type: TF Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

74) Because of the flaws of the concentration ratio as a measure of the extent of competition in an industry, some economists prefer another measure of competition, the Herfindahl-Hirschman Index. Answer: TRUE Diff: 2 Type: TF Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 75) In an oligopoly, minimum efficient scale is likely to occur at a level of output that is a large fraction of industry sales. Answer: TRUE Diff: 2 Type: TF Topic: Economies of Scale Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 76) The tobacco products industry has a four-firm concentration ratio of 60 percent. Is this enough information to classify the industry as an oligopoly? Is a high concentration ratio evidence that an industry is not competitive? Answer: Most economists classify an industry with a four-firm concentration ratio greater than 40 percent as an oligopoly; therefore, the tobacco industry would be considered an oligopoly. But the concentration ratio is a flawed measure of the extent of competition in the tobacco industry. For example, concentration ratios do not include sales in Canada by foreign firms, so to the extent that foreign firms sell tobacco in Canada, the concentration ratio understates the degree of competition in this industry. Also, since concentration ratios are calculated for the national market, regional or local competition is ignored. Concentration ratios are useful for providing a general idea of the extent of competition in an industry. Diff: 2 Type: ES Topic: Concentration Ratio Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills 77) Firms in an oligopoly are said to be interdependent. What does this mean? Answer: Interdependence among firms means that the decisions and business strategies of each firm have a significant impact on the decisions, strategies, and profits of the other firms in the oligopoly industry. Diff: 1 Type: ES Topic: Interdependence Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking

78) Most economists are concerned about entry barriers. Why is this so important to them? Answer: Entry barriers enable a firm to earn long-run profits. Furthermore, when there are entry barriers in a market, the industry output does not achieve allocative or productive efficiency, resulting in deadweight losses. Diff: 3 Type: ES Topic: Barriers to Entry Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Reflective Thinking 79) Why Apple's iTunes could not lead to an indefinite profit despite offering the music at a very low cost of $0.99 a song. Answer: Initially consumers were thrilled by Apple's offer through iTunes, however, by 2015, many consumers started switching from buying individual songs to streaming from YouTube and other sites without purchasing them. Many other companies started providing other more attractive plans. In order to stay in the market and keep getting a share of the profit Apple has to continuously look at its competitors and provide better quality and low price product while operating as an oligopoly. Diff: 3 Type: ES Topic: Business Strategy Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills Special Feature: Chapter Opener: Apple, Spotify, and the Music Streaming Revolution 80) There are relatively few firms in the industry of providing online music, what should each of the firms like Apple, Spotify, Google and Amazon should do to keep their place in the market? Answer: Online music is an oligopoly industry, hence in order to keep its place in the market, each firm should continually react to other firms' actions or risk a substantial decline in its sales. This is called strategic interaction among firms. Diff: 3 Type: ES Topic: Business Strategy Learning Outcome: 12.1 Show how barriers to entry explain the existence of oligopolies AACSB: Analytic Skills Special Feature: Chapter Opener: Apple, Spotify, and the Music Streaming Revolution

12.2

Use game theory to analyze the strategies of oligopolistic firms

1) The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called A) Nash equilibrium. B) the prisoner's dilemma. C) game theory. D) competition. E) dominant strategy equilibrium. Answer: C Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 2) Which of the following economists did not help to develop game theory analysis? A) Adam Smith B) John Nash C) John von Neumann D) Oskar Morgenstern E) None of the above Answer: A Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 3) A set of actions that a firm takes to achieve a goal, such as maximizing profits, is called A) a business strategy. B) a firm's objective. C) a payoff matrix. D) the Porter's Competitive Forces plan. E) game theory. Answer: A Diff: 1 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

4) All of the following are characteristics of game theory except A) rules that determine what actions are allowable. B) payoffs that are the results of the interaction among players' strategies. C) strategies that players employ to attain their objectives. D) interdependence among players. E) independence among players. Answer: E Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 5) A market comprised of only two firms is called a A) competitive market. B) duopoly. C) two firms oligopoly. D) monopoly. E) monopolistically competitive market. Answer: B Diff: 1 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 6) Suppose we want to use game theory to analyze how an oligopolist selects its optimal price. The cells of the payoff matrix show A) the profit that each producer can expect to earn by pursuing a single strategy. B) the profit that each producer can expect to earn from every combination of strategies by the firms in the market. C) the strategy that a firm must pursue to earn various levels of profit. D) the expected profits of rival firms. E) minimum and maximum profits that firms can achieve by cooperating with each other. Answer: B Diff: 2 Type: MC Topic: Payoff Matrix Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

7) A dominant strategy A) is one that is the best for a firm, no matter what strategies other firms use. B) is one that a firm is forced into following by government policy. C) involves colluding with rivals to maximize joint profits. D) involves deciding what to do after all rivals have chosen their own strategies. E) involves cheating after agreeing with the other party. Answer: A Diff: 1 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 8) A Nash equilibrium is A) reached when an oligopoly's market demand and supply intersect. B) reached when each player chooses the best strategy for himself and for the group. C) reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group. D) an equilibrium comprising non-dominant strategies only. E) reached when each player decides to cooperate. Answer: C Diff: 1 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 9) Collusion between two firms occurs when A) the firms independently pursue strategies that could hurt each other. B) firms explicitly or implicitly agree to adopt a uniform business strategy. C) the firms announce that each will match its rival's market price. D) firms act altruistically to bring about the economically efficient outcome. E) firms decide to work independent of others in order to maximize their profits. Answer: B Diff: 1 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 10) What is a prisoner's dilemma? A) a game that involves no dominant strategies B) a game in which prisoners are stumped because they cannot communicate with each other C) a game in which players act in rational, self-interested ways that leave everyone worse off D) a game in which players collude to outfox authorities E) none of the above Answer: C Diff: 1 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 26 Copyright © 2024 Pearson Canada Inc.

11) The prisoner's dilemma illustrates A) how oligopolists engage in implicit collusion under strategic situations. B) why firms will not cooperate if they behave strategically. C) why firms have an incentive to cheat on agreements. D) why prisoners have an incentive not to cooperate with police. E) how cooperation in strategic situations lead to the economically efficient market outcome. Answer: B Diff: 2 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Misunderstand Why Each Firm Ends Up Charging a Price of $9.99 12) What is the dominant strategy in the prisoner's dilemma? A) Each prisoner confesses because this is the rational action to pursue. B) Do nothing in the hope that the other prisoner will also do nothing. C) Do not confess because the other prisoner will most likely confess. D) Each prisoner stays silent because this action leads them to least punishment. E) There is no dominant strategy. Answer: A Diff: 2 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Misunderstand Why Each Firm Ends Up Charging a Price of $9.99 13) Which of the following statements about the prisoner's dilemma is false? A) The prisoner's dilemma in a one-shot game leads to a noncooperative, equilibrium outcome. B) The prisoner's dilemma in repeated games could lead to cooperation especially if there is some enforcement mechanism that punishes a player who does not cooperate. C) Players caught in a prisoner's dilemma act in selfish ways that lead to an equilibrium that is suboptimal. D) The prisoner's dilemma game can never reach a Nash equilibrium as long as players do not cooperate. E) None of the above. Answer: D Diff: 3 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

14) Which of the following is an example of a way in which a firm in oligopoly can escape the prisoner's dilemma? A) producing more of its product B) advertising that it will match its rival's price C) agreement among firms D) reneging on a previous tacit agreement with rival firms to charge identical high prices E) ignoring the pricing decisions of the other firms Answer: B Diff: 2 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 15) Consider two oligopolistic industries selling the same product in different locations. In the first industry, firms always match price changes by any other firm in the industry. In the second industry, firms always ignore price changes by any other firm. Which of the following statements is true about these two industries, holding everything else constant? A) Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. B) Market prices are likely to be lower in the first industry where firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes. C) Market prices are likely to be the same in both markets because they are both oligopolistic markets. D) No conclusions can be drawn about the pricing behaviour under these very different firm behaviours. E) All of the above. Answer: A Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 16) A game in which each player adopts its dominant strategy A) will not lead to an equilibrium. B) must be a cooperative game. C) is game theory. D) could result in a Nash equilibrium. E) can never result in a Nash equilibrium. Answer: D Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

Table 12.1

Table 12.1 shows the payoff matrix for London Drugs and BestBuy from every combination of pricing strategies for the popular PlayStation 4. At the start of the game, each firm charges a low price and each earns a profit of $7,000. 17) Refer to Table 12.1. Is the current strategy in which each firm charges the low price and earns a profit of $7,000 a Nash equilibrium? If not, why and what is the Nash equilibrium? A) No, it is not a Nash equilibrium because each firm can do better by charging the high price. The Nash equilibrium occurs when each firm charges the high price and earns a profit of $10,000. B) No, the current situation is not a Nash equilibrium; it is a dominant strategy equilibrium. There is no Nash equilibrium in this game. C) No, the current situation is not a Nash equilibrium. The Nash equilibrium for each firm is to have the other charge a high price and for the firm in question charge a low price. D) No, it is not a Nash equilibrium because each firm can do better by keeping the same price and attracting more buyers. $10,000 is a Nash equilibrium. E) Yes, the current situation is a Nash equilibrium. Answer: E Diff: 2 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 18) Refer to Table 12.1. For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000? A) Yes, the firms can implicitly collude and agree to charge a higher price. B) No, there is no incentive for each firm to consider any other strategy. C) No, any other strategy hurts consumers. D) Yes, each firm can implicitly agree to increase output and not to deviate from a low price. E) More information is required to determine the answer. Answer: A Diff: 2 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

19) Refer to Table 12.1. Suppose London Drugs and BestBuy both advertise that they will match the lowest price offered by any competitor. What is the purpose of such a strategy? A) to signal to each other not to charge below the current low price B) to signal to each other that they will not hesitate to initiate a price war C) to signal to each other that they intend to charge the high price D) to signal to each other to share the market equally E) None of the above. Answer: C Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 20) Refer to Table 12.1. Suppose pricing PlayStations is a repeated game in which London Drugs and BestBuy will be selling the game system in competition over a long period of time. In this case, what is the most likely outcome? A) a noncooperative equilibrium in which each firm charges the high price B) a cooperative equilibrium in which each firm charges the high price C) a noncooperative equilibrium in which each firm charges the low price D) a cooperative equilibrium in which each firm charges the low price E) None of the above. Answer: B Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Economics in Your Life: If You Were Managing a Walmart, Would You Cut the Price of a PlayStation 4? 21) Which policy is most likely to lead to collusion over prices for air travel within Canada? A) Foreign airlines are prevented from offering flights between locations in Canada. B) Foreign airlines are permitted to fly into any Canadian international airport. C) Intense competition for landing slots at Toronto's Pearson International Airport. D) The entry of New Leaf airlines into the domestic (within Canada only) market. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Airlines in North America Colluding?

22) There are currently two major firms in the Canadian market for domestic air travel, Air Canada and WestJet. How would significant growth in Porter (a smaller airline) impact the market? A) It would make explicit collusion on prices less difficult. B) It would make implicit collusion on prices less difficult. C) It would make the industry monopolistically competitive. D) It would make implicit collusion on prices more difficult. E) It would make explicit collusion on prices more difficult. Answer: D Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Airlines in North America Colluding? 23) In most business situations where firms compete, often they can escape the prisoner's dilemma and reach the most profitable outcome. Which of the following is a reason for this? A) Firms engage in aggressive advertising to overcome the barriers to loyalty. B) Most games are one-shot games so firms learn from their mistakes. C) Most games are repeated games and firms can employ retaliation strategies against those who do not cooperate. D) Firms are constantly improving their products and anticipating changing consumer tastes. E) All of the above. Answer: C Diff: 2 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

Table 12.2

LimoZeenz and AirPorter and are the only two airport shuttle and limousine rental service companies in the mid-sized town of Shady Shores. Each firm must decide on whether to offer its customers a mid-week discount for airport transportation. Table 12.2 shows the payoff matrix for profits earned by each company based on either offering or not offering the discount. 24) Refer to Table 12.2. Is there a dominant strategy for LimoZeenz and if so, what is it? A) No, its outcome depends on what AirPorter does. B) Yes, LimoZeenz should offer the mid-week discount. C) Yes, LimoZeenz should not offer the mid-week discount. D) Yes, LimoZeenz' dominant strategy is to collude with AirPorter. E) Both companies work independently and hence there is no dominant strategy. Answer: C Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Solved Problem: Is Offering a University Student Discount a Prisoner's Dilemma for Apple and Spotify? 25) Refer to Table 12.2. Is there a dominant strategy for AirPorter and if so, what is it? A) No, its outcome depends on what LimoZeenz does. B) Yes, AirPorter should offer the mid-week discount. C) Yes, AirPorter should not offer the mid-week discount. D) Yes, AirPorter's dominant strategy is to collude with LimoZeenz. E) Both companies work independently and hence there is no dominant strategy. Answer: A Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Solved Problem: Is Offering a University Student Discount a Prisoner's Dilemma for Apple and Spotify?

26) Refer to Table 12.2. Let's suppose the game starts with each firm offering the mid-week discount so that LimoZeenz earns a profit of $6,000 and AirPorter earns a profit of $12,000. Is there an incentive for any one firm to stop offering the mid-week discount? A) No, neither firm has an incentive to stop offering the discount. B) Yes, both firms have an incentive to stop offering the discount. C) Yes, AirPorter has an incentive to stop offering the discount, but LimoZeenz does not. D) Yes, LimoZeenz has an incentive to stop offering the discount, but AirPorter does not. E) More information is required to determine the incentive. Answer: D Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Solved Problem: Is Offering a University Student Discount a Prisoner's Dilemma for Apple and Spotify? 27) Refer to Table 12.2. What is the Nash equilibrium in this game? A) There is no Nash equilibrium. B) LimoZeenz offers the discount, but AirPorter does not. C) AirPorter offers the discount, but LimoZeenz does not. D) Both LimoZeenz and AirPorter do not offer the discount. E) Both offer the discount. Answer: C Diff: 2 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Solved Problem: Is Offering a University Student Discount a Prisoner's Dilemma for Apple and Spotify? 28) Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor? A) The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact. B) The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same. C) The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion. D) The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available. E) Each firm will have an incentive to secretly charge lower price than competitor by offering an additional 10% on the competitor's price. Answer: B Diff: 3 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

29) In an oligopoly, firms can increase their market power by A) selling to buyers who have market power. B) pursuing dominant strategies. C) cheating the competitors. D) colluding to set prices. E) undertaking heavy advertising expenditure. Answer: D Diff: 2 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 30) If firms in the house painting industry in a city sign a contract outlining a pricing plan, they are involved in A) price competition. B) a legal form of business contract in the United States. C) collusion. D) price regulation. E) perfect competition. Answer: C Diff: 1 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 31) Collusion A) is rampant in perfect competition as all firms charge the same price. B) reduces market concentration in an industry. C) among firms is difficult to maintain because it eliminates long-run economic profit. D) is not possible for the firms cheating each other. E) is more difficult when there are many firms producing differentiated products in an industry. Answer: E Diff: 2 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

32) Airlines often engage in last-minute price cutting to fill remaining empty seats on a flight because this practice will generally A) prevent rival airlines from competing in that market. B) increase firm's profit over and above what they get on average. C) increase marginal revenue more than marginal cost. D) maximize marginal revenue. E) discourage rivals from matching price cuts. Answer: C Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Apply the Concept: Are Airlines in North America Colluding? 33) There is much evidence to suggest that airlines are more likely to match price cuts than price increases. Which of the following best explains this evidence? A) The law of demand, which states that an increase in price leads to a decrease in quantity demanded. B) No one airline wants to be the first to renege on a tacit collusive agreement in which all airlines implicitly agree to match price cuts but not price increases. C) An airline fears that if it does not match a price cut, its sales may fall considerably but if it does not match a price increase, it will be able to attract customers away from its rivals. D) Airlines have different costs of production and therefore it is more difficult to agree on a price increase than on a price decrease. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Apply the Concept: Are Airlines in North America Colluding? 34) A cartel is A) a temporary storage facility for automobiles. B) a group of firms that enter into an informal agreement to fix prices to maximize joint profits. C) a group of monopolistically competitive firms that want to work together. D) a group of firms that enter into a formal agreement to fix prices to maximize joint profits. E) an example of a group of firms that collectively regulate a competitive industry. Answer: D Diff: 1 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

35) What is the incentive for a firm to join a cartel? A) to be able to earn profits in the long run but not in the short run B) to gain all the consumer surplus by selling exactly at a price consumers are willing to pay C) to be able to earn larger profits than if it was not part of the cartel D) to completely insulate itself from competition E) to produce a larger amount of output than if it was not part of the cartel Answer: C Diff: 2 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 36) A member of a cartel like OPEC has an incentive to A) argue for larger production quotas for each member of the cartel. B) agree to a low cartel production level and then produce more than its quota. C) abide by its individual production quota. D) produce too much so that no one else can think of entering the cartel. E) support equal production quotas for each member. Answer: B Diff: 2 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 37) In which of the following cartels is total cartel profit likely to be the highest? A) a cartel made up of equal sized firms each producing different quantities of a differentiated product B) a cartel made up of firms of various sizes each producing different quantities of a homogeneous product C) a cartel made up of firms of various sizes each producing the same quantity of a differentiated product D) a cartel made up of identical firms each producing the same quantity of a homogeneous product E) cartel profit will always be the higher than non-cartel situations Answer: D Diff: 2 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 38) Each member of OPEC can increase its income by selling more oil than its output quota because A) by selling more at OPEC's cartel price, a member will automatically earn more income. B) price stays the same as they sell more. C) each member's demand is more elastic than the total demand for oil. D) the demand for oil is inelastic so total revenue increases. E) the demand for oil is perfectly elastic. Answer: C Diff: 3 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 36 Copyright © 2024 Pearson Canada Inc.

Table 12.3

Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 12.3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota. 39) Refer to Table 12.3. Is there a dominant strategy for Saudi Arabia and, if so, what is it? A) Yes, the dominant strategy is to produce a high output. B) Yes, the dominant strategy is to produce a low output. C) No, there is no dominant strategy. D) Yes, there is a dominant strategy because Saudi Arabia has more reserves so it can decide without knowing about Nigeria. E) Yes, it has a dominant strategy depending on what Nigeria does. Answer: B Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 40) Refer to Table 12.3. Is there a dominant strategy for Nigeria and, if so, what is it? A) Yes, it has a dominant strategy depending on what Saudi Arabia does. B) No, there is no dominant strategy. C) No, there is no dominant strategy for Nigeria because it is smaller producer than Saudi Arabia. D) Yes, the dominant strategy is to produce a low output. E) Yes, the dominant strategy is to produce a high output. Answer: E Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

41) Refer to Table 12.3. What is the Nash equilibrium in this game? A) In the Nash equilibrium, both Saudi Arabia and Nigeria produce a low output and earn a profit of $100 million and $20 million respectively. B) In the Nash equilibrium, both Saudi Arabia and Nigeria produce a high output and earn a profit of $60 million and $20 million respectively. C) In the Nash equilibrium, Saudi Arabia produces a low output and earns a profit of $80 million, and Nigeria produces a high output and earns a profit of $30 million. D) All of the above are Nash equilibrium in different situations. E) There is no Nash equilibrium. Answer: C Diff: 2 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 42) Refer to Table 12.3. Which of the following statements is true? A) The Nash equilibrium is a noncooperative, dominant strategy equilibrium. B) The Nash equilibrium is a cooperative equilibrium. C) The Nash equilibrium is a collusive equilibrium. D) There is no Nash equilibrium in this game because each party pursues its dominant strategy. E) More information is required to find the Nash equilibrium. Answer: A Diff: 2 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 43) OPEC periodically meets to agree to restrict the cartel's oil output, and yet almost every member of OPEC produces more than its own output quota. This suggests that OPEC has A) a cooperative equilibrium. B) a noncooperative equilibrium. C) perfect competition. D) new potential entrants. E) a threat of substitute goods. Answer: B Diff: 2 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

44) OPEC members regularly exceed their agreed production quotas. In 2014, Saudi Arabia dramatically increased its output, and the price of oil fell by more than 50 percent. Which of the following is a reason why Saudi Arabia would have increased production? A) to lower prices for Saudi consumers B) to punish over production by other OPEC members C) to reduce the revenue the Saudi government gets from oil production D) to encourage new countries to join OPEC E) none of the above Answer: B Diff: 2 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 45) An equilibrium in which each player chooses its best strategy given the strategies chosen by the other players is called a Nash equilibrium. Answer: TRUE Diff: 1 Type: TF Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 46) The equilibrium in the prisoner's dilemma is a dominant strategy Nash equilibrium. Answer: TRUE Diff: 2 Type: TF Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 47) A prisoner's dilemma leads to a noncooperative equilibrium. Answer: TRUE Diff: 2 Type: TF Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 48) A member of a cartel earns more profits by producing more than its quota and selling at a price higher than the cartel's price. Answer: FALSE Diff: 2 Type: TF Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

49) Collusion would be common in an oligopoly and a monopolistically competitive industry. Answer: FALSE Diff: 1 Type: TF Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 50) Explain the difference between a cooperative equilibrium and a noncooperative equilibrium in game theory. Answer: A cooperative equilibrium is one in which players in a game cooperate to increase their mutual payoff. A noncooperative equilibrium is one in which players don't cooperate but pursue their own selfinterest. Diff: 2 Type: SA Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 51) On August 21, 1995, the Canadian Radio-Television Telecommunications Commission (CRTC) decided to end its ban on television and radio liquor advertisement. The ban on hard liquor advertising had been in effect since before the creation of the CRTC in 1968. Did the lifting of this ban likely increase or decrease the profits of hard liquor companies? Briefly explain. Answer: If advertising is a prisoners' dilemma, then lifting the ban on advertising hard liquor on television and radio likely decreased the profits of hard liquor companies following the lifting of the ban. Diff: 2 Type: SA Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Solved Problem: Is Offering a University Student Discount a Prisoner's Dilemma for Apple and Spotify? 52) Explain why OPEC is caught in a prisoner's dilemma. Answer: If every member of OPEC cooperates and produces the low output level dictated by its quota, prices will be high, and the cartel will earn large profits. Once the price has been driven up, however, each member has an incentive to stop cooperating and to earn even higher profits by increasing output beyond its quota. Thus, it is rational for an individual member to unilaterally increase output to maximize its earnings. But if no country sticks to its quota, total oil output will increase, and collective profits will decline. Diff: 3 Type: SA Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

53) Explain how collusion makes firms better off. Given the incentives to collude, briefly explain why every industry does not become a cartel. Answer: Collusion makes firms better off because if they act as a single entity, like a monopoly, they can reduce output, increase prices, and increase profits. Among the reasons that every industry doesn't become a cartel are that the high profits caused by collusion will induce new firms to enter the industry; because each member of the cartel has an incentive to "cheat" on the collusive agreement, earning the highest profit by producing more than its share when everyone else sticks with the collusive agreement; and because collusion is illegal in the United States and many other countries. Diff: 2 Type: SA Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 54) Assume that two interior design companies, Alistair and Baine, are competing for customers and if they both advertise, they would each earn $30 million in profits. If neither advertises, they each earn $50 million in profits. If one advertises and the other doesn't, the firm that advertises earns $40 million in profit while the other earns $20 million in profit. a. Present the information above in the form of a payoff matrix. Let Baine be the row player and Alistair the column player. b. Does each firm have a dominant strategy and if so what is it? c. What is the Nash equilibrium? Answer: a. Please see the table below.

b. No, there is no dominant strategy for each firm. c. There are two possible Nash equilibria: one, in which each advertises and earns a profit of $30 million and two, in which each does not advertise and earns a profit of $50 million. Diff: 2 Type: SA Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

55) Consider two single-malt whiskey distillers, Laphroaig and Knockando. If they advertise, they can both sell more whiskey and increase their revenue. However, the cost of advertising more than offsets the increased revenue so that each distiller ends up with a lower profit than if they do not advertise. On the other hand, if only one advertises, that distiller increases its market share and also its profit. a. Construct a payoff matrix using the following hypothetical information: If neither distiller advertises: each earns a profit of $35 million per year. If both advertise: each earns a profit of $20 million per year. If one advertises and the other does not: the distiller who advertises earns a profit of $50 million and the distiller who does not advertise earns a profit of $9 million. b. If the two distillers agree to coordinate their strategies, what is the outcome? Answer: a. The payoff matrix:

b. If the two distillers agree to coordinate their strategies, then they would choose not to advertise. Diff: 2 Type: ES Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

Table 12.4

56) Refer to Table 12.4. Suppose the payoff matrix in the above figure represents the payoffs to Saudi Arabia and Yemen for the production of oil. Saudi Arabia and Yemen must decide how much oil to produce. Since the demand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the world's largest and lowest cost producer, is able to influence market price; it has an incentive to keep output low. Yemen, on the other hand, is a relatively high cost producer with much smaller reserves. Assume Saudi Arabia now decides to try to further influence the oil market by offering to pay Yemen $25 million to produce a low output. a. Create a new payoff matrix that reflects Saudi Arabia's willingness to pay Yemen $25 million to produce a low output. b. What is the dominant strategy for each country in this new game? c. What is the new Nash equilibrium? Answer: a. See payoff matrix below. b. The dominant strategy for both countries is to produce a low output. c. The Nash equilibrium has both countries producing a low output

Diff: 3 Type: ES Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 57) Game theory was developed in the 1940s by John von Neuman, a mathematician, and an economist named A) John Nash. B) John Maynard Keynes. C) Oskar Morgenstern. D) Milton Friedman. E) A. W. Phillips. Answer: C Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 43 Copyright © 2024 Pearson Canada Inc.

58) An oligopoly between two firms is called A) a biopoly. B) an oligopoly; there are no special terms used for oligopolies with different numbers of firms. C) a dual-firm oligopoly. D) a cartel. E) a duopoly. Answer: E Diff: 1 Type: MC Topic: Characteristics of Oligopoly Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 59) ________ is the study of how people make decisions in situations in which attaining their goals depends on their interactions with others. A) Game theory B) Dominant strategy C) Oligopoly D) Competitive analysis E) Strategic analysis Answer: A Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 60) In economics, ________ is the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms. A) decision theory B) game theory C) dominant strategy D) market structure analysis E) profit analysis Answer: B Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

61) The approach economists use to analyze competition among oligopolists is called A) marginal analysis. B) profit analysis. C) game theory. D) oligopoly theory. E) competition among the few. Answer: C Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 62) Economists use game theory to analyze oligopolies because A) real markets are too complicated to analyze without using games. B) it is more enjoyable for economists and students to learn by playing games. C) game theory helps us to understand why interactions among firms are crucial in determining profitable business strategies. D) game theory is useful in understanding the actions of firms that are price takers. E) oligopolies are tricky and can be only understood using game theory. Answer: C Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 63) In game theory, the three key characteristics of a game are A) rules, strategies, and payoffs. B) risks, rewards, and penalties. C) rules, regulations, and payoffs. D) winners, losers, and rules. E) none of the above. Answer: A Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

64) All games share three characteristics. Two of these characteristics are rule and strategies. What is the third characteristic called? A) competition B) collusion C) results D) cartels E) payoffs Answer: E Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking Table 12.5

Rogers and Bell both offer wireless internet services. Each must decide whether to adopt a higher speed internet service standard to compete for customers. High speed internet is more expensive to offer than standard speed. If one firm decides to offer high speed and the other does not, then the firm with the faster internet will increase its subscriber base and its profit. Table 12.5 shows the payoff matrix for this internet speed game. 65) Refer to Table 12.5. If Rogers assumes that Bell will offer high speed internet, what should it do? A) Rogers should keep standard speed and allow Bell to incur the higher cost. B) Rogers should also offer high speed internet. C) Rogers should try to convince Bell to stop providing high speed internet. D) Rogers should standard internet. E) Being a duopolist, Rogers is not affected by Bell's choices because it has a secure 50 percent market share. Answer: B Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

66) Refer to Table 12.5. Does Rogers have a dominant strategy and if so, what is it? A) Yes, Rogers should offer high speed internet. B) Yes, Rogers should keep offering standard internet. C) There are two dominant strategies: if Bell offers high speed, then Rogers's best bet is to keep offer standard internet, but if Bell offers standard internet then Rogers should offer high speed internet. D) No, there is no dominant strategy. E) Rogers should make an agreement with Bell to form a cartel and make decisions together. Answer: A Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 67) Refer to Table 12.5. Does Bell have a dominant strategy and if so, what is it? A) Yes, Bell should offer high speed internet. B) Yes, Bell should offer standard internet. C) There are two dominant strategies: if Rogers offers high speed internet, then Bell's best bet is to offer standard internet, but if Rogers does offers standard internet then Bell should offer high speed internet. D) No, there is no dominant strategy. E) Bell will be benefited by making a cartel with Rogers. Answer: A Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 68) Refer to Table 12.5. What is the Nash equilibrium in this game? A) There is no Nash equilibrium. B) Bell offers high speed, but Rogers offers standard internet. C) Rogers offers high speed, but Bell offers standard internet. D) Both stop providing high speed internet. E) Both Rogers and Bell offer high speed internet. Answer: E Diff: 2 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

69) Refer to Table 12.5. How are the firms in this internet speed game caught in a prisoner's dilemma? A) They are not in a prisoner's dilemma because there is one clear strategy for each. B) They would be more profitable if they refrained from increasing internet speed but each fears that if it does not offer high speed internet, it will lose customers. C) Since each firm is uncertain about the other's behaviour, each will adopt a wait-and-see attitude, which results in no increase in market share and no new customers. D) Only the first mover is caught in a prisoner's dilemma because the second has a chance to observe and respond. E) They both know that it is better to provide high speed internet so they both do that. Answer: B Diff: 2 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 70) A set of actions that a firm takes to achieve a goal is the definition of a A) business plan. B) profit maximization. C) business strategy. D) business prospectus. E) business goal. Answer: C Diff: 1 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 71) A situation in which each firm chooses the best strategy given the strategies chosen by other firms is called a A) Nash equilibrium. B) cartel. C) dominant strategy. D) collusion. E) payoff matrix. Answer: A Diff: 2 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

72) Collusion occurs when A) a firm chooses a level of output to maximize its own profit. B) two firms' price and output decisions come into conflict. C) all firms in the market decide unanimously to charge a higher price and then cheat on the agreement. D) there is an agreement among firms to charge the same price or otherwise not to compete. E) firms refuse to follow their price leaders. Answer: D Diff: 1 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 73) An agreement among firms to charge the same price or otherwise not to compete is called A) a payoff matrix. B) a subgame-perfect equilibrium. C) a Nash equilibrium. D) monopoly. E) collusion. Answer: E Diff: 1 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 74) A table that shows the possible payoffs each firm earns from every combination of strategies by all firms is called A) an earnings table. B) a payoff table. C) a payoff matrix. D) a business plan. E) a strategic matrix. Answer: C Diff: 1 Type: MC Topic: Payoff Matrix Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 75) A dominant strategy is A) an equilibrium where each firm chooses the best strategy, given the strategies of other firms. B) a strategy chosen by two firms that decide to charge the same price or otherwise not to compete. C) a strategy that is obviously the best for each firm that is a party to a business decision. D) a strategy that is better for the firm if other firms abide by the agreement. E) a strategy that is the best for a firm no matter what strategies other firms use. Answer: E Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 49 Copyright © 2024 Pearson Canada Inc.

76) Who won a Nobel Prize in economics for his work in the development of game theory? A) John von Neuman B) Oskar Morgenstern C) Milton Freedman D) John Nash E) Howard Schultz Answer: D Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 77) Two firms would sometimes be better off if they got together and agreed to charge a high price, rather than to compete and risk having to charge a lower, competitive price. What is the greatest deterrent to this strategy? A) The firms may find that the price they charge is greater than the price that would maximize their profits. B) An agreement by firms to charge high prices is illegal. The government can fine the firms and send their managers to jail. C) One of the firms may decide to lower its price and take business away from the firm that charged the high price. D) Consumers may resent having to pay high prices and not buy from either of the firms. E) All of the above. Answer: B Diff: 3 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 78) An equilibrium in a game in which players pursue their own self-interest is called A) a Nash equilibrium. B) a cooperative equilibrium. C) a general equilibrium. D) a noncooperative equilibrium. E) a prisoner's dilemma. Answer: D Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

79) When an oligopoly market is in Nash equilibrium, A) firms have colluded to set their prices. B) firms will not behave as profit maximizers. C) a firm will not take into account the strategies of its rivals. D) firms have no interest in what other firms are doing. E) a firm will choose its best pricing strategy, given the strategies that it observes other firms have taken. Answer: E Diff: 1 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 80) The Brooks Appliance Store and the Lefingwell Appliance Store (both are located in the same city of Brooks, Alberta) each sell an identical washer-dryer. The owner of each store considered offering the washer-dryer for $700, but decided on a price of $500. If this is a Nash equilibrium, we can conclude that A) each store owner feared charging the higher price would result in being undercut by the other store charging the lower price. B) the owners of the stores feared that charging $700 could be used as evidence of collusion. C) charging $500 was the most profitable strategy for each store, regardless of what price was charged by the other store. D) the stores charge $500 because if they charge $700 they fear losing many customers. E) the stores were less concerned about making a profit from the washer-dryers than they were with attracting customers who would also buy other appliances. Answer: C Diff: 2 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Misunderstand Why Each Firm Ends Up Charging a Price of $9.99 81) eBay is an online auction site where more than 200 million items are auctioned annually. What type of auctions are run on eBay? A) noncooperative auctions B) second-price auctions C) third party auctions D) cooperative auctions E) double-blind auctions Answer: B Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

82) A Team Canada windbreaker worn by Olympic gold medalist swimmer Penny Oleksiak was auctioned on eBay. The three highest bidders and their bids were: Trogdor CurlingFan306 Bid-Tastic1991

$5,000 $4,900 $4,200

What price did Trogdor have to pay for the Sandra Schmirler windbreaker? A) $4,200 B) $4,700 (the average of the three highest bids) C) $4,900 D) $5,000 E) $9,900 Answer: C Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 83) A ________ is a game in which pursuing dominant strategies results in noncooperation that leaves all parties worse off. A) prisoner's dilemma B) cooperative equilibrium C) first-price auction D) zero-sum game E) monopoly game Answer: A Diff: 1 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 84) Why does a prisoner's dilemma lead to a noncooperative equilibrium? A) because each player had agreed before the game started to minimize the harm that he can inflict on the other players B) because each player is uncertain how other players will play the game C) because players must choose from a limited number of non-dominant strategies D) because each rational player has a dominant strategy to play a certain way, regardless of what other players do E) because of all of the above Answer: D Diff: 2 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

85) Prisoner's dilemma games imply that cooperative behaviour between two people or two firms always breaks down. But reality teaches us that people and firms often cooperate successfully to achieve their goals. Why do the results from prisoner's dilemma games fail to predict real world results? A) Prisoner's dilemma games do not prevent people or firms from reneging on agreements, which often occurs in real word situations. B) The prisoner's dilemma does not apply to most business situations that are repeated over and over. C) Most real world situations involve more than two people or firms; the prisoner's dilemma is only applicable to situations that involve two parties. D) Prisoner's dilemma games predict the behaviour of people and firms that engage in illegal activity; most people and firms do not resort to illegal activity. E) None of the above is a reason of why prisoner's dilemma fail to predict real world results. Answer: B Diff: 2 Type: MC Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking Special Feature: Solved Problem: Is Offering a University Student Discount a Prisoner's Dilemma for Apple and Spotify? Table 12.6

Ming and Henri each run one of the two dry cleaning facilities in the town of Bathurst, New Brunswick. Both consider offering free pickup and delivery services. Table 12.6 shows the payoff matrix containing the expected quarterly profits for each firm. 86) Refer to Table 12.6. Does Ming have a dominant strategy? If yes, what is it? A) Yes, Ming's dominant strategy is to offer free pickup and delivery. B) No, Ming does not have a dominant strategy — his best outcome depends on what Henri does. C) No, Ming does not have a dominant strategy, his best outcome will depend on his own costs. D) Yes, Ming's dominant strategy is to not offer free pickup and delivery. E) Yes, Ming's dominant strategy is to wait to see what Henri does first. Answer: A Diff: 3 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

87) Refer to Table 12.6. Does Henri have a dominant strategy? If yes, what is it? A) Yes, Henri's dominant strategy is to not offer free pickup and delivery. B) Yes, Henri's dominant strategy is to offer free pickup and delivery. C) No, Henri does not have a dominant strategy, his best outcome depends upon his own costs. D) No, Henri does not have a dominant strategy — his best outcome depends on what Ming does. E) Yes, Henri's dominant strategy is to wait and see what Ming does first. Answer: B Diff: 3 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 88) Refer to Table 12.6. What is the Nash equilibrium in this game? A) There is no Nash equilibrium. B) Ming offers free pickup and delivery, but Henri does not. C) Henri offers free pickup and delivery, but Ming does not. D) Both Ming and Henri offer free pickup and delivery. E) They are both deciding independently of each other so there cannot be a Nash equilibrium. Answer: D Diff: 3 Type: MC Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 89) An equilibrium in a game in which players pursue their own self-interests and do not cooperate is called a A) cartel equilibrium. B) monopolistically competitive equilibrium. C) noncooperative equilibrium. D) prisoner's dilemma equilibrium. E) dominant strategy equilibrium. Answer: C Diff: 1 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 90) A cooperative equilibrium results when firms A) choose the best strategy regardless of what other players do. B) choose the strategy that maximizes the total game payoff. C) are operating in a competitive market. D) choose the strategy that minimizes the payoff to other players. E) choose a strategy by random chance. Answer: B Diff: 1 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 54 Copyright © 2024 Pearson Canada Inc.

Table 12.7

There are two modular home manufacturers in Prince Edward Island, Sturdy Homes (S) and My Haven (M). Sturdy Homes has been in the market for a long time and must now compete with newcomer, My Haven. Suppose that Sturdy Homes believes that My Haven will match any price it sets. Use Table 12.7 to answer the following question and assume throughout that Sturdy Homes believes that My Haven will match any price it sets. 91) Refer to Table 12.7. What price will Sturdy Homes charge and what profit does Sturdy Homes expect to make? A) price = $8,000; expected profit = $7 million B) price = $8,000; expected profit = $4 million C) price = $10,000; expected profit = $5 million D) price = $12,000; expected profit = $6 million E) price = $12,000; expected profit = $3 million Answer: C Diff: 3 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 92) Which of the following explains why two firms, Apex and Bongo, would engage in implicit collusion, rather than explicit collusion? A) Implicit collusion allows Apex to increase its profits at the expense of Bongo without Bongo knowing that collusion has occurred; if Apex engages in explicit collusion, Bongo will realize collusion has taken place and retaliate against Apex. B) Implicit collusion is less costly to both firms than explicit collusion; therefore, profits will be greater for both firms if they engage in implicit collusion. C) Explicit collusion is illegal; if the managers of Apex and Bongo engage in implicit collusion they may be within the law. D) Implicit collusion always has an enforcement mechanism that forces both firms to collude; explicit collusion does not have an enforcement mechanism. E) They can engage in any kind of collusion based on their own preferences, both are the same. Answer: C Diff: 2 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 55 Copyright © 2024 Pearson Canada Inc.

93) Which of the following is an example of implicit collusion? A) product differentiation B) a retaliation strategy C) a second-price auction D) a dominant strategy E) price leadership Answer: E Diff: 2 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 94) A form of implicit collusion where one firm in an oligopoly announces a price change that is matched by other firms in the same industry is A) "follow the leader" pricing. B) price leadership. C) retaliation pricing. D) "tit-for-tat" pricing. E) dominant strategy. Answer: B Diff: 1 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 95) Which of the following best explains why airlines often cut their ticket prices at the last minute in order to fill the remaining empty seats on their flights? A) Fixed costs in the airline industry are very high, but the marginal cost of flying one more passenger is very low. B) Airlines receive a subsidy from the government for each flight that is fully booked and departs on time. C) Cutting prices makes the airlines more popular with their customers, who may fly with the same airline in the future as the result of buying low-price tickets. D) Transport Canada ranks each airline based on the percentage of flights that are fully booked. These rankings affect the decisions of firms to use a particular airline to fly their employees to business meetings. E) All of the above. Answer: A Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills Special Feature: Apply the Concept: Are Airlines in North America Colluding?

96) The Organization of Petroleum Exporting Countries (OPEC) controls about 75 percent of the world's proven oil reserves. Economists refer to OPEC as a cartel because A) OPEC is a monopoly, but it is located outside of the boundaries of any one country. This is the definition of a cartel. B) this is the term used for an oligopoly that is controlled by national governments rather than private firms. C) it is a group of firms that collude to restrict output to increase prices and profits. D) this is the term economists use to describe an oligopoly that sells a standardized product, such as oil, rather than a differentiated product, such as automobiles. E) all OPEC firms have formed a monopoly within their own specific country. Answer: C Diff: 1 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 97) Since 1972, the world price of oil has been largely determined by OPEC, which controls about 75 percent of the world's proven oil reserves. Since 1972, the price of oil A) has fluctuated. OPEC's situation is an example of a prisoner's dilemma. B) remained high because OPEC was controlling the world market. C) has risen slowly, but steadily. Members of OPEC fear that if they raise the price of oil too quickly, this will lead oil-buying nations to accuse OPEC of price gouging, which is illegal under international law. D) fell steadily through the 1970s, then rose continually. OPEC's actions are an example of implicit collusion. E) has been tied by OPEC to the rate of inflation in the United States. If, for example, the rate of inflation is 5 percent in one year, OPEC will raise the price of oil by 5 percent the next year. Answer: A Diff: 2 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 98) Collusion makes firms better off because if they act as a single entity (a cartel), they can reduce output and increase their prices and profits. But some cartels have failed and others are unstable. Which of the following is a reason why cartels often break down? A) Most cartels do not have a dominant strategy. B) Each members has an incentive to cheat on other members. C) When a cartel is profitable, the amount of competition it faces increases. D) Members of a cartel may resent having to share their profits equally. E) Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement. Answer: E Diff: 2 Type: MC Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

Table 12.8

Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 12.8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts. 99) Refer to Table 12.8. If the firms act out of individual self-interest, which prices will they select? A) Both firms will select a high price. B) Brawny Juice will select a high price, Power Fuel will select a low price. C) Brawny Juice will select a low price, Power Fuel will select a high price. D) Both firms will select a low price. E) Each will decide on the basis of their own cost conditions to choose a low price or a high price. Answer: D Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 100) Refer to Table 12.8. Which of the following is true? A) Power Fuel's dominant strategy is to select a low price. B) Brawny Juice's dominant strategy is to select a high price. C) Power Fuel does not have a dominant strategy. D) Brawny Juice does not have a dominant strategy. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

101) Refer to Table 12.8. If Brawny Juice selects a high price, what is Power Fuel's best strategy and what will Power Fuel earn as a result of this strategy? A) Power Fuel will select a low price and earn $8 million. B) Power Fuel will select a low price and earn $16 million. C) Power Fuel will select a high price and earn $12 million. D) Power Fuel will select a high price and earn $16 million. E) Power Fuel will select a low price and earn $4 million. Answer: B Diff: 2 Type: MC Topic: Business Strategy Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 102) Refer to Table 12.8. If the firms cooperate, what prices will they select? A) Both firms will select a low price. B) Brawny Juice will select a high price, Power Fuel a low price. C) Both firms will select a high price. D) Brawny Juice will select a low price, Power Fuel a high price. E) They will not cooperate. Answer: C Diff: 2 Type: MC Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 103) Refer to Table 12.8. If the two firms collude, is there an incentive for either to cheat on the collusion agreement? A) No, neither firm can gain by cheating. B) In collision, it is illegal to cheat. C) Yes, but only Brawny Juice is in a position to gain by cheating. D) Yes, but only Power Fuel is in a position to gain by cheating. E) Yes, either firm can gain if it alone cheats. Answer: E Diff: 2 Type: MC Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 104) Natural resource cartels such as OPEC are inherently unstable because their members operate with excess capacity and have an incentive to cheat on their output quotas. Answer: TRUE Diff: 2 Type: TF Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

105) Because many business situations are repeated games, firms may be able to avoid the prisoner's dilemma and implicitly collude to keep prices high. Answer: TRUE Diff: 2 Type: TF Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 106) Firms are more likely to find themselves in a prisoner's dilemma in sequential games as opposed to simultaneous games. Answer: FALSE Diff: 2 Type: TF Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 107) A fundamental assumption in game theory is that players do not interact with each other. Answer: FALSE Diff: 1 Type: TF Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 108) In a Nash equilibrium, all players select non-dominant strategies. Answer: FALSE Diff: 1 Type: TF Topic: Nash Equilibrium Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 109) Price leadership is a form of explicit collusion where one firm in an oligopoly announces a price change and expects all other firms to follow suit. Answer: FALSE Diff: 2 Type: TF Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 110) What is the difference between explicit collusion and implicit collusion? Answer: Explicit collusion involves making an agreement about not competing. In implicit collusion, no formal agreement is reached, but firms tacitly avoid competing with each other. Diff: 2 Type: SA Topic: Collusion Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking

111) Why do economists refer to the pricing strategies of oligopoly firms as a prisoner's dilemma game? Answer: A prisoner's dilemma is a game in which pursuing dominant strategies results in a noncooperative equilibrium that leaves everyone worse off than they would be if they could achieve the cooperative equilibrium. The outcome of noncooperative pricing (competition, in other words) will leave firms worse off than if they cooperated and set higher prices. Diff: 3 Type: SA Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Reflective Thinking 112) Explain why member firms of a cartel like OPEC have incentives to agree to a low cartel production level and then produce more than their quota. Answer: A low cartel production level results in a high market price for oil. Thereafter, each firm has an incentive to unilaterally cheat on the agreement by producing beyond its quota. Of course, ultimately if everyone cheats then the price of oil will fall, but at least for a while some members will earn higher profits than they would have if they had adhered to their quotas. Diff: 3 Type: SA Topic: Cartels Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills 113) On April 30, 1980 the Quebec Consumer Protection Act banned all advertising of fast food aimed at children under the age of 13. Did this ban likely increase or decrease the profits of fast food companies in Quebec in 1980? Briefly explain. Answer: If advertising is a prisoner's dilemma, then a ban on advertising likely increased the companies' profits following the advertising ban. Diff: 2 Type: SA Topic: Prisoner's Dilemma Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

Table 12.9

114) Refer to Table 12.9. Saudi Arabia and Yemen must decide how much oil to produce. Since the demand for oil is inelastic, relatively low production rates drive up prices and profits. Saudi Arabia, the world's largest and lowest cost producer, is able to influence market price; it has an incentive to keep output low. Yemen, on the other hand, is a relatively high cost producer with much smaller reserves. Use the payoff matrix in Table 12.9 to answer the following questions. a. What is the dominant strategy for Saudi Arabia? b. What is the dominant strategy for Yemen? c. What is the Nash equilibrium? Answer: a. Saudi Arabia's dominant strategy is to produce a low output. b. Yemen's dominant strategy is to produce a high output. c. The Nash equilibrium has Saudi Arabia producing a low output and Yemen a high output. Diff: 3 Type: ES Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

115) There are two firms in the residential paint industry, Cool Shades (C) and Warm Hues (W). They collude to share the market equally. They jointly set a monopoly price and split the quantity demanded at that price. Here are their options: i. They continue to collude (no cheating) and make $12 million each in profits. ii. One firm cheats and the other does not. The firm that cheats makes a profit of $14 million whereas the firm that doesn't makes a profit of $9 million. iii. They both cheat and each firm makes a profit of $7 million. a. Construct a payoff matrix for these two firms. b. How does this situation relate to the prisoner's dilemma? c. If each firm acted noncooperatively, how much profit would each make? d. Are the firms better off colluding (with no cheating) or competing? Explain. Answer: a. The payoff matrix:

b. With a prisoner's dilemma, cooperative behaviour—each prisoner standing firm without admitting to anything—leads to the best outcome for each player. But each player stands to gain by cheating. Similarly, in this case, each firm has the potential to make a profit of $14 m ($2 m above the outcome with collusion) if it unilaterally increases output. But if both acted on this incentive, then each ends up with only $7 m in profit. This outcome is inferior to cooperation. c. Each firm has the potential to make a profit of $14 m if one cheats and the other does not. But if both cheat, then profits fall to $7 m each. d. If they colluded (no cheating), each firm stands to make $12 m, an outcome which is superior to the cheating outcome. Diff: 3 Type: ES Topic: Game Theory Learning Outcome: 12.2 Use game theory to analyze the strategies of oligopolistic firms AACSB: Analytic Skills

12.3

Use sequential games to analyze business strategies

1) In a decision tree, the difference between a decision node and a terminal node is that A) at a decision node all participants are free to make individual decisions but at a terminal node they must agree on a collective decision. B) at a decision node all participants make the same decision, while at a terminal node different players may make different decisions. C) at a decision node, a decision must be made while a terminal node shows the payoff. D) at a decision node, an agreement is made while a terminal node is the breach of agreement. E) at a decision node a decision must be made, while at a terminal node the final decision must be made. Answer: C Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking

Figure 12.1

Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche. 2) Refer to Figure 12.1. Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market? A) In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters. B) No, it should keep the same price and work to capitalize on its brand loyalty. C) No, lowering the price will reduce Lexus's profit so it should not do it regardless of BMW's entry. D) Yes, it will drive BMW out of the market. E) No, because BMW will enter the market regardless of Lexus' decision about its price. Answer: D Diff: 3 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking Special Feature: Solved Problem: Is Deterring Entry Always a Good Idea?

3) Refer to Figure 12.1. If Lexus lowers its price, will this deter BMW from entering the market? A) Yes, because BMW stands to lose $100 million if it competes with Lexus. B) Yes, because BMW will make a smaller profit than Lexus if it chooses to compete. C) No, because they both have their brands loyalty in the market. D) No, because BMW will still make a profit of $120 if it competes with Lexus. E) No, because BMW will be able to break Lexus' first mover advantage. Answer: A Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking Special Feature: Solved Problem: Is Deterring Entry Always a Good Idea? 4) In a subgame perfect equilibrium, A) the first mover has an advantage over other players. B) the last mover has an advantage over other players. C) each player's strategy constitutes a Nash equilibrium at every subgame of the original game. D) each player has the same response as the others at every subgame of the tree. E) each player has leaned the lesson and decided never to cheat again. Answer: C Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking

Figure 12.2

The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed Internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (DSL). Suppose the government is considering a proposal to delay one firm's entry into the market on the grounds that it wants to prevent "harmful" competition. Figure 12.2 shows the decision tree for this game. 5) Refer to Figure 12.2. If the government delays Gigacom's entry and Xenophone moves first, is a threat by Gigacom that it will provide DSL service if Gigacom provides cable service a credible threat? A) No, because Gigacom will lose $4.5 million in profits if it carries out its threat. B) Yes, because Gigacom's DSL service will drive Xenophone out of business. C) No, because as a second mover, it has no choice but to abide by the choices of the first mover. D) Yes, Xenophone stands to lose $3 million in profit. E) No, because Xenophone will make more profit being the first entrant. Answer: A Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills

6) Refer to Figure 12.2. If the government delays Gigacom's entry and Xenophone moves first, what is the likely outcome in the market? A) Both offer Internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million. B) Both offer DSL Internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million. C) Xenophone offers DSL Internet service and earns a profit of $5 million while Gigacom offer Internet service via cable line and earns a profit of $6.5 million. D) Xenophone offers Internet service via cable line and earns a profit of $4 million while Gigacom offers DSL Internet service and earns a profit of $4.5 million. E) Xenophone offers cable service and earns $6 million while Gigacom offers DSL and earns $4.5 million. Answer: B Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills 7) Refer to Figure 12.2. Now suppose that the government delays Xenophone's entry and Gigacom moves first, what is the likely outcome in the market? A) Both offer Internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million. B) Xenophone offers cable service and earns $6 million while Gigacom offers DSL and earns $4.5 million. C) Both offer DSL Internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million. D) Xenophone offers DSL Internet service and earns a profit of $5 million while Gigacom offer Internet service via cable line and earns a profit of $6.5 million. E) Xenophone offers Internet service via cable line and earns a profit of $4 million while Gigacom offers DSL Internet service and earns a profit of $4.5 million. Answer: A Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills

Figure 12.3

Rainbow Writer (RW) is a small online company selling a highly rated software package for printing colour labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 12.3 shows the decision tree for the Rainbow Writer-Odeon bargaining game. 8) Refer to Figure 12.3. How will Rainbow Writer respond to Odeon's two possible offers? A) Rainbow Writer will reject either offer. B) Rainbow Writer will only accept an offer of $30 per copy of the software package. C) Rainbow Writer will only accept an offer of $40 per copy of the software package. D) Rainbow Writer will accept either offer. E) More information is required to determine the decision of Rainbow Writer. Answer: C Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills

9) Refer to Figure 12.3. What is the equilibrium outcome in this game and is this a subgame-perfect equilibrium? A) Odeon's offer of $40 per copy of the software package is accepted, and this is a subgame-perfect equilibrium. B) In the equilibrium, Odeon offers $40 per copy of the software package and is accepted, but this is not a subgame-perfect equilibrium. C) In the equilibrium, Odeon offers $30 per copy of the software package and is rejected, and this is a subgame-perfect equilibrium. D) There is no equilibrium in this game. E) More information is required to determine the equilibrium outcome. Answer: B Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills

Figure 12.4

Rainbow Writer (RW) is a small online company selling a highly rated software package for printing colour labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its Web site. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs, has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. Figure 12.4 shows the decision tree for the Rainbow Writer-Odeon bargaining game. 10) Refer to Figure 12.4. How will Rainbow Writer respond to Odeon's two possible offers? A) Rainbow Writer will reject either offer. B) Rainbow Writer will only accept an offer of $30 per copy of the software package. C) Rainbow Writer will only accept an offer of $40 per copy of the software package. D) Rainbow Writer will accept either offer. E) More information is required to determine the decision of Rainbow Writer. Answer: D Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills

11) Refer to Figure 12.4. What is the equilibrium outcome in this game and is this a subgame-perfect equilibrium? A) In the equilibrium, neither offer is accepted as Rainbow Writer holds out for a better deal. The two rejection outcomes are subgame-perfect equilibria. B) Either offer of $30 or $40 per copy of the software package is accepted, but only an offer of $30 per copy is a sub-game perfect equilibrium. C) Either offer of $30 or $40 per copy of the software package is accepted, and these two equilibria are subgame-perfect equilibria. D) Either offer of $30 or $40 per copy of the software package is accepted, but these are not are subgameperfect equilibria. E) More information is required to determine the equilibrium. Answer: B Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills 12) Refer to Figure 12.4. In a real world situation involving Rainbow Writer and Odeon, what scenario below might permit Rainbow Writer to rationally refuse an offer from Odeon of $40 per copy of the software package? A) Odeon is also negotiating with Swift colours, Rainbow Writer's chief rival. B) Odeon is considering new distribution outlets for its products. C) Odeon's competitors are also interested in bundling Rainbow Writer's software. D) Odeon hires a software developer to begin developing its own proprietary colour labeling software. E) None of the above. Answer: C Diff: 3 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills 13) In a sequential game, one firm will act first and then other firms will respond. Answer: TRUE Diff: 1 Type: TF Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 14) Decision trees can only be used to analyze sequential games. Answer: FALSE Diff: 1 Type: TF Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking

15) A subgame is a simultaneous game embedded in a sequential game. Answer: FALSE Diff: 1 Type: TF Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 16) What is a sequential game? How are decision trees used to analyze sequential games? Answer: In a sequential game one player (firm) acts first, and then other players respond. A decision tree allows players to map out how the other player(s) will respond to their actions, finding the action that yields the highest payoff. Diff: 2 Type: ES Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking Figure 12.5

17) Refer to Figure 12.5 Use the decision tree to determine whether Microsoft should deter Toshiba from entering the market for electronic book readers (e-readers). Assume that each firm must earn a 20% return on investment to break even. Explain Microsoft's decision process. Answer: If Microsoft charges $249 for its e-reader, Toshiba will not enter the market because the rate of return represents an economic loss. If Microsoft charges $99, Toshiba will enter the market because it will earn a return that represents an economic profit. Because these low prices will substantially increase the market for e-readers, Microsoft will actually earn a higher return of 32%, splitting the market with Toshiba at a lower price than it would have earned having the market to itself at the higher price. In this case, charging a lower price has a higher payoff for Microsoft, even given that Toshiba will enter the market. Diff: 2 Type: SA Topic: Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills Special Feature: Solved Problem: Is Deterring Entry Always a Good Idea? 73 Copyright © 2024 Pearson Canada Inc.

Figure 12.6

18) Refer to Figure 12.6. Uniquest, Inc. is a company that provides PCs with Internet access and touchsensitive screens to hotels. Suppose the Hard Rock Hotel and Casino in Las Vegas informs Uniquest that it is considering installing these systems in its hotel rooms. The Hard Rock expects to be able to charge higher prices for these rooms if it installs Uniquest's systems in its rooms. The two companies begin bargaining over what price the Hard Rock will pay Uniquest for its systems, and the decision tree shown above illustrates this bargaining game. Note that the profit figures listed in the decision tree are additional profits for the Hard Rock and total profits for Uniquest. a. Suppose the Hard Rock offers Uniquest $1,200 per system. Will Uniquest accept or reject this offer? Why? b. Suppose the Hard Rock offers Uniquest $800 per system. Will Uniquest accept or reject this offer? Why? c. Suppose Uniquest attempts to obtain a favourable outcome from the bargaining by telling the Hard Rock it will reject an $800-per-system offer. If the Hard Rock does not believe the threat is credible, what will it do? Why? What will Uniquest do? Why? d. Is there a sub-game perfect equilibrium in this situation? Explain. Answer: a. If the Hard Rock offers Uniquest $1,200 per system, Uniquest will accept the offer because its total profit will increase from $1 million to $1.6 million. b. If the Hard Rock offers Uniquest $800 per system, Uniquest will accept the offer because its total profit will increase from $1 million to $1.2 million. c. If the Hard Rock does not believe the threat is credible, it will offer $800 per system and Uniquest will accept the offer, because its profit will still increase from $1 million to $1.2 million. d. A sub-game perfect equilibrium does exist, and it occurs if the Hard Rock offers $800 per system. If the Hard Rock offers $800 per system, neither the Hard Rock nor Uniquest can make itself better off by changing its decision at any decision node. If the Hard Rock changed its decision and offered $1,200 per system, its additional profit would decline. If Uniquest changed its decision and rejected the $800 offer, its total profit would decline. Diff: 3 Type: SA Topic: Deterring Entry Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills 74 Copyright © 2024 Pearson Canada Inc.

19) In many business situations, one firm will act first and then other firms will respond. To help analyze these types of situations economists use A) retaliation games. B) follow-the-leader-games. C) sequential games. D) bargaining games. E) dominant strategy. Answer: C Diff: 1 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 20) All of the following are ways existing firms can deter the entry of new firms into an industry except A) continuously producing new and improved products. B) earning less than maximum profit. C) advertising products aggressively. D) lowering prices. E) threatening to raise prices. Answer: E Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 21) Sequential games are used to analyze A) firms that are subject to the prisoner's dilemma. B) cartels. C) second-price auctions. D) barriers to entry. E) situations in which one firm acts and other firms respond. Answer: E Diff: 1 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking

22) A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision? A) a decision tree B) a decision matrix C) a payoff matrix D) a sequential matrix E) an either-or graph Answer: A Diff: 1 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 23) Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms. A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes. What are these points called? A) option points B) decision nodes C) option matrix D) either-or terminals E) decision options Answer: B Diff: 1 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 24) When Walmart decides to build a new retail store in a town, it will decide to build a large store rather than a small store if the large store is expected to earn a greater economic profit. What other motive would Walmart have for choosing to build a large store? A) A larger store will help Walmart maintain its position as the leading retail company in the world more than a smaller store would. B) A larger store will give Walmart greater political influence in the community. C) A larger store may deter entry into the town by a rival firm. D) A larger store will provide employment to more people and will allow the store to get subsidies from the government. E) Because of economies of scale, the average total cost of production is less for a larger store than a smaller store. Answer: C Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills Special Feature: Solved Problem: Is Deterring Entry Always a Good Idea?

25) Sequential games are often used to analyze which two types of business strategies? A) whether to invest in research and development and whether to offer employees an early retirement package B) deciding to merge with another firm and deciding how much to spend on an advertising campaign C) deciding to end production of an unprofitable product and deciding to shut down temporarily D) barriers to entry and pricing decisions E) deterring entry by another firm and bargaining between firms Answer: E Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking Figure 12.7

A few years ago Netflix (N) pioneered an online DVD rental service. Le SuperClub Vidéotron (V), a brick and mortar DVD/video rental company, waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service. At this point, Netflix had to decide whether or not to lower its subscription price in order to deter Le SuperClub Vidéotron's entry into the market. Figure 12.7 shows the decision tree for the Netflix-Le SuperClub Vidéotron entry game. 26) Refer to Figure 12.7. If Netflix lowers its price, will this deter Le SuperClub Vidéotron from setting up an online DVD rental service? A) Yes, because Le SuperClub Vidéotron stands to lose $1 million if it competes with Netflix. B) Yes, because Le SuperClub Vidéotron will make a smaller profit than Netflix if it chooses to compete. C) No, because Le SuperClub Vidéotron will make a profit if it competes with Netflix. D) No, because Le SuperClub Vidéotron will make zero economic profit if it competes with Netflix. E) No, because Le SuperClub Vidéotron will make a larger profit than Netflix if it chooses to compete. Answer: C Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills 77 Copyright © 2024 Pearson Canada Inc.

27) Refer to Figure 12.7. Does it make sense for Netflix to lower its price in order to deter Le SuperClub Vidéotron's entry into the online DVD rental market? A) Yes, because Netflix stands to make a profit of $7 million by lowering its price and keeping Le SuperClub Vidéotron out of the market. B) No, because Netflix will make a higher profit by keeping its subscription price unchanged, whether Le SuperClub Vidéotron enters the market or not. C) Yes, because it is always profitable to remain a monopoly. D) No, because Le SuperClub Vidéotron will enter the market regardless of Netflix's decision about its subscription price. E) More information is required to determine the answer. Answer: B Diff: 3 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills 28) What is a subgame? A) It is one that begins at any node of the tree, including the game itself. B) It is one that begins at any decision node of the tree except the first decision node. C) It is one that begins at the first node and ends at the terminal node. D) It is one that starts at the final decision node of the tree. E) It is a simultaneous game embedded in a sequential game. Answer: A Diff: 1 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 29) Why are decision trees useful to managers who plan business strategies? A) Decision trees explain the level of concentration in an industry. B) Decision trees can be used to increase the amount of product differentiation; this enables managers to charge higher prices for their products. C) Decision trees provide a systematic way of thinking through the implications of a strategy. D) Using a decision tree always leads to a dominant strategy. E) Decision trees provide costs and benefits for each strategy on the way to the terminal node. Answer: C Diff: 2 Type: MC Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 30) A subgame-perfect equilibrium is a Nash equilibrium in which no player can make himself better off by changing his decision at any decision node. Answer: TRUE Diff: 2 Type: TF Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 78 Copyright © 2024 Pearson Canada Inc.

31) The prisoner's dilemma is used to analyze business situations in which one firm acts first and then other firms respond. Answer: FALSE Diff: 2 Type: TF Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Reflective Thinking 32) Explain why selling output at a price below that at which marginal revenue equals marginal cost (MR = MC) might serve to deter entry of a potential competitor. Answer: If a potential entrant is unsure about the existing firm's marginal cost, it might believe that the firm is maximizing profits at its chosen price and quantity combination and will conclude that profits are low in the industry. As a result, the potential entrant might believe it cannot compete with the existing firm. Alternatively, the potential entrant might view the low profits as inadequate incentive to enter the industry. Diff: 3 Type: ES Topic: Sequential Games and Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills

Figure 12.8

33) Refer to Figure 12.8. Use the decision tree to determine whether Panago should deter Pizza Pizza from entering the market for pasta salad. Assume that each firm must earn a 25% return on investment to break even. Explain Panago's decision process. Answer: If Panago charges $7.49 for its pasta salad, Pizza Pizza will enter the market because the rate of return represents an economic profit. If Panago charges $4.99, Pizza Pizza will not enter the market. By charging $4.99, Panago deters Pizza Pizza entry into the market and earns a return on investment of 30%, which is better than the return of 28% it would earn by charging the higher price and having Pizza Pizza enter the market. Diff: 2 Type: SA Topic: Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills Special Feature: Solved Problem: Is Deterring Entry Always a Good Idea?

Figure 12.9

34) Refer to Figure 12.9. Uniquest, Inc. is an American company that provides PCs with Internet access and touch-sensitive screens to hotels. Suppose the Four Seasons Hotels and Resorts, a Canadian luxury hotel chain, informs Uniquest that it is considering installing these systems in its hotel rooms. The Four Seasons expects to be able to charge higher prices for these rooms if it installs Uniquest's systems in its rooms. The two companies begin bargaining over what price the Four Seasons will pay Uniquest for its systems, and the decision tree shown above illustrates this bargaining game. Note that the profit figures listed in the decision tree are additional profits for the Four Seasons and total profits for Uniquest. a. Suppose the Four Seasons offers Uniquest $1,200 per system. Will Uniquest accept or reject this offer? Why? b. Suppose the Four Seasons offers Uniquest $800 per system. Will Uniquest accept or reject this offer? Why? c. Suppose Uniquest attempts to obtain a favourable outcome from the bargaining by telling the Four Seasons it will reject an $800-per-system offer. If the Four Seasons does not believe the threat is credible, what will it do? Why? What will Uniquest do? Why? d. Is there a sub-game perfect equilibrium in this situation? Explain. Answer: a. If the Four Seasons offers Uniquest $1,200 per system, Uniquest will accept the offer because its total profit will increase from $1 million to $1.6 million. b. If the Four Seasons offers Uniquest $800 per system, Uniquest will reject the offer because its total profit would decrease from $1 million to $800,000. c. If the Four Seasons does not believe the threat is credible, it will offer $800 per system and Uniquest will reject the offer because its profit would decrease form $1 million to $800,000. d. A sub-game perfect equilibrium does exist, and it occurs if the Four Seasons offers $1,200 per system. If the Four Seasons offers $1,200 per system, neither the Four Seasons nor Uniquest can make itself better off by changing its decision at any decision node. If the Four Seasons changed its decision and offered $800 per system, Uniquest would reject the offer and the Four Seasons would earn no additional profit. If Uniquest changed its decision and rejected the $1,200 offer, its total profit would decline. Diff: 3 Type: SA Topic: Business Strategy Learning Outcome: 12.3 Use sequential games to analyze business strategies AACSB: Analytic Skills 81 Copyright © 2024 Pearson Canada Inc.

12.4

Use the five competitive forces model to analyze competition in an industry

1) Which of the following is not among Porter's competitive forces? A) power of buyers B) threat of competition from substitute goods producers C) power of suppliers D) threat of new entrants E) changing consumer tastes Answer: E Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 2) Which of the following is most likely to exert the bargaining power of a buyer? A) Chapters purchases books from publishers for sale in its online stores. B) Walmart, the world's largest discount store, seeks vendors to supply products made exclusively for its stores. C) Ground beef producers seek to purchase cattle from ranchers. D) Gap Inc. merger with Old Navy and Banana Republic for its online store. E) Cowgirl Creamery, a small cheese producer, seeks a dairy farm for its organic milk supplies. Answer: B Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 3) As word processing on personal computers expanded, sales of typewriters began to disappear. Which of Porter's competitive forces does this event demonstrate? A) the threat of competition from new entrants B) bargaining power of suppliers C) bargaining power of buyers D) competition from existing firms E) competition from substitute goods or services Answer: E Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking

4) As tablet computing and smart phones became popular ways of accessing the internet sales of desktop computers fell dramatically Which of Porter's competitive forces does this change demonstrate? A) the threat of competition from new entrants B) bargaining power of suppliers C) bargaining power of buyers D) competition from existing firms E) competition from substitute goods or services Answer: E Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 5) Blackberry was one of the first smart phones on the market. It no longer makes phones at all. Which of Porter's competitive forces does this event demonstrate? A) the threat of competition from new entrants B) bargaining power of suppliers C) bargaining power of buyers D) competition from existing firms E) competition from substitute goods or services Answer: A Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 6) According to an article in the Wall Street Journal, "The big car makers are pushing a wide array of new technology into production, responding to relentless competitive pressure, rising energy prices and consumer demand for better safety." Source: Joseph B. White, "Ford, GM Eye Shift in Buying Habits," Wall Street Journal, May 22, 2006. Which of Porter's competitive forces does this statement allude to? A) the threat of competition from new entrants B) competition from foreign auto manufacturers C) power of buyers D) competition from existing firms within the industry E) competition from substitute products from outside the industry Answer: D Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Analytic Skills

7) The larger the number of firms in an industry, A) the easier it is to implicitly collude to fix prices. B) the more intense the rivalry among firms. C) the less intense the rivalry among firms. D) the greater the need for a price enforcement mechanism. E) the larger the potential number of market segments. Answer: B Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 8) According to Porter's Five Competitive Forces Model, which kinds of products are most likely to limit the ability of firms in an industry to raise prices? A) differentiated products that target a small subsegment of the industry B) substitutable products produced by firms in different industries C) products that suit the majority of consumers' tastes D) similar products produced by similar industries in low-cost countries E) complementary products produced by different firms in the same industry Answer: B Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 9) In Porter's Five Competitive Forces model, "competition from substitute goods or services" refers to A) substitute products that come from outside the industry. B) products that suit the majority of consumers' tastes. C) substitute products that come from domestic competitors in the same industry. D) substitute products that come from foreign competitors in the same industry. E) competition from producers of substitutes who outsource their production. Answer: A Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 10) The bargaining power of suppliers increases if A) the cost of switching suppliers is relatively low. B) there are only a few competitors to the supplier. C) there is only one buyer of their product. D) the input in question is not a critical component of production. E) the input supplied is relatively standardized. Answer: B Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 84 Copyright © 2024 Pearson Canada Inc.

11) The bargaining power of buyers increases if A) there are many large buyers. B) the input in question has few substitutes. C) the input in question is not a critical component of production. D) there is only one seller. E) there is variation in the quality of inputs among suppliers. Answer: C Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 12) For years economists believed that market structure explained the ability of some firms to earn economic profits. Today, economists and business strategists put greater emphasis on A) the number of years a firm has been in business and the average price of the products sold by the firm. B) the number of countries in which a firm conducts business and the number of employees the firm has in each country. C) the characteristics of individual firms and the strategies their managements use to continue to earn economic profits. D) nature of competition a firm is facing in the market to determine the profitability of a firm. E) the size of a firm relative to the industry average and the number of firms in the domestic industry. Answer: C Diff: 3 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Large Firms Live Forever? 13) The bargaining power of buyers increase if the input in question is not a critical component of production. Answer: TRUE Diff: 3 Type: TF Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 14) A supplier of paper napkins to the fast food industry is unlikely to have significant bargaining power. Answer: TRUE Diff: 1 Type: TF Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking

15) Competition from substitute goods is more of a threat when switching costs are high. Answer: FALSE Diff: 1 Type: TF Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 16) In the 1930s and 1940s, the Technicolor company was able to leverage its bargaining power over the movie industry because Technicolor was the sole producer of cameras and films needed to produce colour films. Answer: TRUE Diff: 2 Type: TF Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 17) List the competitive forces in the five competitive forces model. Answer: The five competitive forces are 1) competition from existing firms, 2) the threat of competition from new entrants, 3) the threat of substitute goods or services, 4) the bargaining power of buyers, and 5) the bargaining power of suppliers. Diff: 2 Type: ES Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 18) In Michael Porter's five competitive forces model, what do the competitive forces determine? Answer: The five competitive forces determine the level of competition in an industry. Diff: 1 Type: ES Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 19) What happens to the profit a car company makes on each car sold if it offers cash rebates to customers? What happens to the company's profit per car if it offers zero percent financing? How might a car company decide which of these strategies to use? Answer: Offering cash rebates and offering zero percent financing will each decrease profits. Offering cash rebates or zero percent financing will, effectively, increase the average total cost for the company. In deciding which of these strategies to use, the firms will probably assess consumer demand to see which of these two approaches consumers prefer. Diff: 2 Type: ES Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking

20) A large majority of the personal computers (PCs) in Canada use an operating system purchased from Microsoft. Microsoft's relationship with PC manufacturers is an example of which of Porter's competitive forces? A) the threat from new entrants B) the bargaining power of suppliers C) the competition from existing firms D) the bargaining power of buyers E) competition from substitute goods or services Answer: B Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 21) The five competitive forces model was developed by A) Michael Porter. B) A. W. Phillips. C) John Nash. D) Michael Spence. E) Porter Smith. Answer: A Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 22) Which of the following is not one of the five competitive forces? A) the threat from potential entrants B) the bargaining power of buyers C) the firm's ability to differentiate its product D) the competition from existing firms E) the bargaining power of suppliers Answer: C Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking

23) Assume that the four-firm concentration ratio in an industry is 85 percent. Which of the following statements uses one of the five competitive forces to argue that this industry may be more competitive than its concentration ratio suggests? A) The high concentration may be due to patents owned by the largest firms but competition will increase when patent rights expire. B) If high concentration is the result of large firms owning much of the available supply of a key input, the industry will become more competitive when new sources of the input are discovered by other firms. C) Even though concentration is high, large firms in the industry may act competitively by spending large sums on advertising. D) The threat of entry into this industry can cause firms in the industry to lower their prices and profits in order to deter entry. E) None of the above. Answer: D Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 24) Which of the following statements is generally true? A) Rivalry is less, the larger the number of firms in an industry. B) The smaller the number of firms in an industry, the greater the rivalry. C) The larger the number of firms in an industry, the greater the rivalry. D) The degree of rivalry in an industry is largely independent of the number of firms. E) All of the above. Answer: C Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 25) A supplier of an input is unlikely to have bargaining power if A) the input supplied is specialized. B) many firms can supply the input. C) there are so many buyers of the product. D) it is the sole supplier of the input. E) it has a patent on the input. Answer: B Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking

26) In 2011, the Educational Testing Service (ETS) charged $49 to take the Scholastic Aptitude Test (SAT) but $160 to take the Graduate Record Exam (GRE). One reason for this difference in price is A) more people took the SAT than the GRE in 2011. B) the GRE is a longer test with more questions. C) on average, those who take the GRE have higher incomes than those who take the SAT. D) the ETS faces competition in the market for the SAT but no competition for the GRE. E) more people were interested in taking GRE than SAT. Answer: D Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Analytic Skills 27) By the 21st century, few people purchased printed encyclopedias. Which of the following competitive forces best explains this? A) competition from substitutes B) competition from existing firms C) the bargaining power of buyers D) the bargaining power of suppliers E) the threat from potential entrants Answer: A Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 28) For years, economists believed that market structure explained the ability of some firms to earn economic profits. For example, firms in industries with little competition and high barriers to entry would earn higher profits than firms in competitive industries with low entry barriers. Which of the following has caused economists to question this explanation and seek other explanations for why firms are profitable? A) Studies have shown that, on average, firms in competitive industries earn higher profit rates than firms in industries with little competition. B) In recent years new technologies have increased the potential entry of new firms in industries with high entry barriers. C) Studies have shown that firms in industries that have little competition and high entry barriers are not very profitable. Economists conclude from this that some competition is necessary in order to force firms to lower their costs and develop products that satisfy new consumer demands. D) The market structure explanation fails to explain how firms in the same industry can have very different levels of profit. E) All of the above. Answer: D Diff: 3 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Large Firms Live Forever?

29) In recent years, online bookseller Chapters.Indigo.ca has lowered its profits by offering some of its customers free shipping and building more warehouses to hold its inventories. Which of the following explains Chapters.Indigo.ca's actions? A) Chapters.Indigo.ca feared government regulation if its profits were too high. B) Chapters.Indigo.ca took these actions to deter entry into its market by new online booksellers. C) Chapters.Indigo.ca took these actions to compete more effectively with existing online booksellers. D) Chapters.Indigo.ca took these actions to compete with suppliers or substitute goods. E) Chapters.Indigo.ca was forced to take these actions because of the bargaining power of its suppliers. Answer: C Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 30) An example of a supplier that used its bargaining power to charge high prices to its customers is A) Walmart, which required many of its suppliers to alter their distribution systems to accommodate Walmart's need to control the flow of goods to its stores. B) the firms that supply paper napkins to McDonald's restaurants. C) the Technicolor Company, the sole producer of cameras and film that movie studios needed to produce colour movies in the 1930s and 1940s. D) the publishers of the Encyclopedia Britannica. E) All of the above are examples of suppliers' bargaining power. Answer: C Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 31) Prices of PlayStation 4 game systems are similar at almost every large retailer and little price competition occurs among these retailers. An explanation for this is A) retailers are all price takers. B) retailers have lobbied governments to allow them to collude legally to set the prices of certain products. C) pricing PlayStation 4 game systems is a repeated game. Over a long period of time a cooperative equilibrium has been reached where retailers charge high prices for these systems. D) retailers are in a prisoner's dilemma, which causes them to all charge the same price for PlayStation 4 game systems. E) It is a low profit product so retailers don't seek high profit by selling it. Answer: C Diff: 2 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking Special Feature: Economics in Your Life: If You Were Managing a Walmart, Would You Cut the Price of a PlayStation 5?

32) Intel's introduction of the "Ultrabook," which the company hopes will successfully rival Apple's MacBook Air, best describes which of the five competitive forces? A) the bargaining power of buyers B) the threat from potential entrants C) competition from substitute goods or services D) competition from existing firms E) the bargaining power of sellers Answer: D Diff: 1 Type: MC Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 33) Competition in the form of advertising, better customer service, or longer warranties can also reduce profits by raising costs. Answer: TRUE Diff: 2 Type: TF Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 34) According to Porter's Five Competitive Forces Model, similar products produced by different firms within the industry affects a firm's ability to raise prices far more than substitutable products produced outside the industry. Answer: FALSE Diff: 2 Type: TF Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking 35) Does the strength of each of the five competitive forces from Michael Porter's model remain constant over time? Briefly explain. Answer: The strength of these forces changes over time. For example, a small supplier might grow into a virtual monopolist—as happened to IBM in its dealings with Microsoft. Diff: 2 Type: ES Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking

36) The four-firm concentration ratio in the breakfast cereal industry in Canada is 78 percent. How does the five competitive forces model provide better insight into the degree of competition in the breakfast cereal industry than just observing the concentration ratio? Answer: The concentration ratio only measures the market share of the largest firms in an industry; it does not describe the degree of competition among the existing firms (one of the five forces), which may come in the form of advertising, service, price, etc. The concentration ratio does not assess the threat firms in the breakfast cereal industry face from potential entrants (another of the five forces) into their market. Existing firms may keep their prices low in order to discourage new firms from entering. The concentration ratio cannot be used to evaluate any of the other three competitive forces—competition from substitute goods (for example, frozen breakfast foods), and the bargaining powers of buyers and suppliers. Diff: 2 Type: ES Topic: The Five Competitive Forces Model Learning Outcome: 12.4 Use the five competitive forces model to analyze competition in an industry AACSB: Reflective Thinking

Microeconomics, 4Ce (Hubbard) Chapter 13 Monopoly and Competition Policy 13.1

Define monopoly

1) To enter a local cable television market, a firm needs a licence from the CRTC. This is an example of A) a government-imposed barrier. B) monopoly due to control of a resource. C) a natural monopoly. D) the government maintaining consistent standards in the broadcast industry. E) tax on a business. Answer: A Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking Special Feature: Chapter Opener: Do Firms Always Compete? 2) Gas stations will sometimes cooperate to act as if they were a monopoly, this is because A) monopolies earn the greatest economic profit. B) there are few penalties imposed when firms behave like monopolies. C) monopoly pricing is always the outcome of competition. D) government regulation requires these firms to operate as if they were a monopoly. E) this gives them economies of scale. Answer: A Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking Special Feature: Chapter Opener: Do Firms Always Compete? 3) Tickets to Toronto Maple Leafs games regularly sell out, despite a relatively high price. The Phoenix Coyotes have struggled financially for years. What is an economic reason why the National Hockey League would prevent the Coyotes from moving to the greater Toronto area? A) The commissioner of the league is from the southern U.S. B) The Toronto City Council refuses to grant permission. C) The National Hockey League understands that a new team in Toronto could reduce the Maple Leafs' profits. D) A second team in Toronto would be too confusing for fans. E) More information is required to determine the answer. Answer: C Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking

4) A monopoly is a seller of a product A) with many substitutes. B) without a close substitute. C) with a perfectly inelastic demand. D) without a well-defined demand curve. E) with a well-defined demand curve. Answer: B Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 5) If we use a narrow definition of monopoly, then a monopoly is defined as a firm A) that has been granted special production rights by the government. B) that can ignore the actions of all other firms because it produces a superior product compared to its rivals' products. C) that can ignore the actions of all other firms because it produces a product for which there are no close substitutes. D) that has the largest market share in an industry. E) that has only a few competitors. Answer: C Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 6) Which of the following is the best example of a monopoly if we use a broader definition of monopoly? A) Spuds McKenzie, a wealthy potato farmer in Prince Edward Island B) Cheap Gas, one of two gasoline stations in a large rural community C) Sushi NOW!, the only Japanese restaurant in the small town of Rouleau D) Zippie Rentals, a sports car rental service in the downtown Calgary area E) Jack n Jill Water, a big company that supplies drinking water in Toronto area Answer: C Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking

7) In Hamilton, Ontario there are three very popular supermarkets: Superstore, Fortinos, and Sobeys. While Sobeys remains open twenty-four hours a day, Superstore and Fortinos close at 11 pm. Which of the following statements is true? A) Sobeys is a monopoly all day because it produces a service that has no close substitutes. B) Sobeys has a monopoly at midnight but not during the day. C) Sobeys can ignore the pricing decisions of the other two supermarkets. D) Sobeys probably has a higher markup to compensate for its higher cost of production. E) None of the above. Answer: B Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 8) A monopoly is characterized by all of the following except A) there are only a few sellers each selling a unique product. B) entry barriers are high. C) there are no close substitutes to the firm's product. D) the firm has market power. E) the firm has downward sloping demand curve. Answer: A Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 9) Peet's Coffee and Teas produces some flavourful varieties of Peet's brand coffee. Is Peet's a monopoly? A) Yes, there are no substitutes to Peet's coffee. B) No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes. C) Yes, Peet's is the only supplier of Peet's coffee in a market where there are high barriers to entry. D) No, Peet's is not a monopoly because there are many branches of Peet's. E) Yes, because Peet's sell a unique coffee variety that is their specialty. Answer: B Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking

10) In 2016, Netflix was the only major movie and television streaming service in Canada. Netflix even produces its own programs which aren't available on any other service. Yet Netflix is not considered a monopolist. Why not? A) Netflix is not earning any profits. B) The Competition Bureau or the CRTC have no authority over Netflix. C) There are many close substitutes for the services Netflix offers. D) Netflix has such a large cost advantage over its competitors that it is not behaving like a monopoly. E) Everything is available on YouTube for free so nobody wants to pay for Netflix. Answer: C Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 11) A firm that has the ability to control to some degree the price of the product it sells A) is also able to dictate the quantity purchased. B) faces a demand curve that is inelastic throughout the range of market demand. C) is a price maker. D) faces a perfectly inelastic demand curve. E) is likely a bigger company than its competitors in the market. Answer: C Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 12) A monopolist faces A) a perfectly elastic demand curve. B) a perfectly inelastic demand curve. C) a horizontal demand curve. D) a downward-sloping demand curve. E) an upward sloping demand curve. Answer: D Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking

13) Compared to a monopolistic competitor, a monopolist faces A) a more elastic demand curve. B) a more inelastic demand curve. C) a more elastic demand curve at higher prices and a more inelastic demand curve at lower prices. D) a demand curve that has a price elasticity coefficient of zero. E) a perfectly inelastic demand curve. Answer: B Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 14) A monopoly differs from monopolistic competition in that A) a monopoly has market power while a firm in monopolistic competition does not have any market power. B) a monopoly can never incur a loss, but a firm in monopolistic competition can. C) in a monopoly there are significant entry barriers, but there are low barriers to entry in a monopolistically competitive market structure. D) a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces an elastic demand curve. E) monopoly cannot earn profits in short run while a monopolistic competitor can. Answer: C Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 15) Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly? A) Each must lower its price to sell more output. B) Each sets a price for its product that will maximize its revenue. C) Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost. D) Each maximizes profits by producing a quantity for which price equals marginal cost. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking

16) Consider the following characteristics: a. a market structure with barriers to entry b. demand curves that are easily identified c. firm cannot make zero profits in the long run d. firm can reap long-run profits Which of the characteristics in the list above are shared by an oligopolist and a monopolist? A) a, b and d B) a, c, and d C) a and d D) a and c E) a, b, c and d Answer: C Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 17) A monopoly is defined as a firm that has the largest market share in an industry. Answer: FALSE Diff: 1 Type: TF Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 18) The market demand curve facing a monopolist is more elastic than the market demand curve facing a monopolistic competitor. Answer: FALSE Diff: 2 Type: TF Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 19) Joe Santos owns the only pizza parlor in a small town that is also home to a McDonald's, a Taco Bell and a Kentucky Fried Chicken. Using a broad definition of a monopoly, Joe has a monopoly. Answer: TRUE Diff: 2 Type: TF Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 20) What is a monopoly? Can a firm be a monopoly if close substitutes for its product exists? Answer: A monopoly is the only seller of a good or service that does not have a close substitute. The firm can't be a monopoly is a close substitute for its product exists. Diff: 2 Type: SA Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 6 Copyright © 2024 Pearson Canada Inc.

21) What made cable television a monopoly in Canada? A) high transmission and equipment costs B) regulations of the Canadian Radio-Television and Telecommunications Commission C) illegal cooperation among cable companies D) strict control of the technology required to receive and transmit television signals E) Cable television is not a monopoly in Canada. Answer: B Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking Special Feature: Chapter Opener: Do Firms Always Compete? 22) Few firms in Canada are monopolies because A) few firms experience economies of scale. B) of antitrust laws. C) when a firm earns profits, other firms will enter its market. D) most products that firms produce have substitutes. Answer: C Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking Special Feature: Chapter Opener: Do Firms Always Compete? 23) A monopoly is a firm that is the only seller of a good or service that does not have A) a patent. B) a close complement. C) a barrier to entry. D) a close substitute. E) a demand curve. Answer: D Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 24) A narrow definition of monopoly is that a firm is a monopoly if it can ignore A) government antitrust laws. B) the pricing decisions of its suppliers. C) the pricing decisions of firms that produce complementary products. D) the actions of all other firms. E) the output and pricing decisions of its competitors. Answer: D Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 7 Copyright © 2024 Pearson Canada Inc.

25) Using a broad definition, a firm would have a monopoly if A) it produced a product that has no close substitutes. B) it does not have to collude with any other producer to earn an economic profit. C) there is no other firm selling a substitute for its product close enough that its economic profits are competed away in the long run. D) it can make decisions regarding price and output without violating antitrust laws. E) it has only few small competitors. Answer: C Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 26) Why is Canada Post no longer a monopolist in Canada? A) It cannot earn economic profits. B) It faces a horizontal demand curve. C) It has many close substitutes. D) It is highly regulated by the federal government. E) It has a very low price of its products. Answer: C Diff: 2 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Analytic Skills Special Feature: Apply the Concept: Is Canada Post a Monopoly? 27) A monopoly firm is the only seller of a good or service that A) has a perfectly elastic demand. B) has no close complements. C) does not need to be advertised. D) does not have a close substitute. E) has no demand curve. Answer: D Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking

28) A firm that is the only seller of a good or service that does not have a close substitute is called A) a monopoly. B) an oligopolist. C) a market maker. D) a price maker. E) a competitive firm. Answer: A Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 29) Canada Post has a legal monopoly on delivering which one of the following types of mail to residential mailboxes? A) First-class mail, such as letters and paper bills. B) Marketing mail, such as advertising circulars and catalogs. C) Packages. D) Periodicals, such as newspapers and magazines. E) None of the above. Answer: A Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Analytical Thinking Special Feature: Apply the Concept: Is Canada Post a Monopoly? 30) A monopoly is a firm that is the only seller of a good or service that does not have a close substitute. Answer: TRUE Diff: 2 Type: TF Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 31) Unlike a perfect competitor, a monopolist faces the market demand curve. Answer: TRUE Diff: 2 Type: TF Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 32) Andrea Wong owns the only Chinese restaurant in a small town that is also home to a Burger King, a Kelsey's, and a KFC. Using a broad definition of a monopoly, Andrea has a monopoly. Answer: TRUE Diff: 2 Type: TF Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking

33) If you own the only bookstore in a small town, do you have a monopoly? Answer: Because consumers in your town could buy books on the Internet or by driving to another town that has a bookstore store, you would not have a monopoly under the narrow definition of the term. However, because competition from online sellers and stores in other towns may not be sufficient to eliminate your economic profits in the long run, you may have a monopoly in the broader sense of the term. Diff: 2 Type: SA Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking 34) Define monopoly and explain how it arises. Answer: Monopoly is a firm that is a sole seller of a product with no close substitute. It arises due to one of the three reasons; 1- when a single firm owns a key input resource, 2- when the government gives a firm the exclusive right to produce a good such as patent or copyrights, 3- when a single firm can supply the good for the entire market at a lower cost than many firms could provide together. Diff: 2 Type: SA Topic: Characteristics of Monopoly Learning Outcome: 13.1 Define monopoly AACSB: Reflective Thinking

13.2

Explain the four main reasons monopolies arise

1) To maintain a monopoly, a firm must have A) a perfectly inelastic demand. B) an insurmountable barrier to entry. C) marginal revenue equal to demand. D) few competitors. E) a large amount of money. Answer: B Diff: 2 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 2) Which one of the following about a monopoly is false? A) A monopoly could make profits in the long run. B) A monopoly could break even in the long run. C) A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly. D) A monopoly status could be temporary. E) All of the above. Answer: C Diff: 2 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 3) A local or provincial electrical company has a monopoly that is protected by an entry barrier that takes the form of A) control of a key raw material. B) network externalities. C) economies of scale. D) perfectly inelastic demand curve. E) product variety externality. Answer: C Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

4) A patent or copyright is a barrier to entry based on A) ownership of a key necessary raw material. B) large economies of scale as output increases. C) government action to protect a producer. D) widespread network externalities. E) the effort to protect a entrant in the market. Answer: C Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 5) A public franchise A) is a corporation that is owned by stockholders. B) results from ownership of a key raw material. C) is a government designation that a private firm is the only legal producer of a good or service. D) is an unregulated monopoly necessary for the public good. E) is a group of companies that are owned by the government. Answer: C Diff: 2 Type: MC Topic: Public Franchise Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 6) An example of a monopoly based on control of a key resource is A) the National Hockey League. B) the Paul Ecke Ranch monopoly on poinsettias. C) Microsoft's Windows operating system. D) Health Canada. E) Apple iPhones. Answer: A Diff: 2 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 7) A Canadian government patent lasts A) forever. B) 50 years. C) 20 years. D) 7 years. E) 5 years. Answer: C Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

8) Governments grant patents to encourage A) research and development on new products. B) competition. C) low prices. D) firms to form public enterprises. E) firms to break the entry barriers. Answer: A Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 9) Governments grant patents to A) compensate firms for research and development costs. B) encourage competition. C) encourage low prices. D) encourage firms to reveal secret production techniques. E) encourage firms to form public enterprises. Answer: A Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 10) For which of the following firms is patent protection of vital importance? A) furniture producers B) software firms C) pharmaceutical firms D) auto makers E) All of the above. Answer: C Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

11) One reason patent protection is vitally important to pharmaceutical firms is A) successful new drugs are not profitable. If firms are not granted patents many would go out of business and health care would be severely diminished. B) the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly. Patents enable firms to recover costs incurred during this process. C) that taxes on profits from drugs are very high; profits from patent protection enable firms to pay these taxes. D) the high salaries pharmaceutical firms pay to scientists and doctors make their labour costs higher than for any other business. Profits from patents are needed to pay these labour costs. E) All of the above are reasons for the importance of patent protection. Answer: B Diff: 2 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 12) Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale. The main reason for the elimination of profits is A) after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat. B) firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses. C) the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls. D) after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug. E) All of the above. Answer: D Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

13) What is the difference between a public franchise and a public enterprise? A) A public franchise grants a firm the right to be the sole legal provider of a good or service. A public enterprise refers to a service that is provided directly to consumers through the government. B) A public enterprise grants a firm the right to be the sole legal provider of a good or service. A public franchise refers to a service that is provided directly to consumers through the government. C) A public enterprise is owned by the public through its holdings of shares of stock in the enterprise. A public franchise is a firm owned by the government. D) Both refer to a service provided directly to consumers through the government, but "public franchise" is a term more commonly used in the North America while "public enterprise" is more commonly used in European countries. E) These are two different names for exactly the same kind of business that is owned by the government. Answer: A Diff: 1 Type: MC Topic: Public Franchise Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 14) Canada Post A) faces no competition for its mail services. B) has a monopoly in the provision of general mail delivery. C) can safely ignore the prices for mail services charges by its rivals such as FedEx and Purolator. D) is an example of a monopoly that results from the ownership of a key resource: letter carriers. E) has only a few competitors. Answer: B Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking Special Feature: Apply the Concept: Is Canada Post a Monopoly? 15) The International Nickel Company of Canada had a monopoly until the end of World War II because A) it was a public enterprise. B) it had a patent on the manufacture of aluminum. C) the company had a secret technique for making aluminum from bauxite. D) it had control of almost all the available supply of nickel ore. E) the government gave exclusive rights to the company. Answer: D Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

16) Government grant trade mark protection that does not expire. Firms are granted monopolies over the use of these trade marks — making it illegal for others to sell products with the same name or image. Why would government grant such long term monopolies? A) It is easier for firms to be taxed when they earn economic profit from monopoly power. B) The existence of brands and the trust consumers have in those brands create economic benefits for both consumers and producers. C) Most branded products are produced in industries with economies of scale. D) The sort of intellectual property that goes into brand identification supports the arts and thus receives additional government protection. E) The existence of long term monopolies allow consumers to gain more consumers surplus and the government is concerned about it. Answer: B Diff: 2 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking Special Feature: Apply the Concept: A Monopoly® Monopoly 17) The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds? A) because De Beers will not be able to guarantee the quality of previously owned diamonds and fears that its reputation might be harmed B) because the availability of previously owned diamonds would increase the market demand for diamonds and dilute De Beers' monopoly C) because previously owned diamonds would be a close substitute to newly mined diamonds and therefore reduce De Beers' market power D) because the availability of previously owned diamonds would make the market demand curve for diamonds more inelastic and force De Beers to lower its price E) because De Beers produces unique diamonds and if there is a resale market of its diamonds, they will have to reduce the price and profits will be lower as well Answer: C Diff: 2 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Analytic Skills Special Feature: Apply the Concept: Are Diamond Profits Forever? The De Beers Diamond Monopoly

18) What is a network externality? A) It refers to having a network of suppliers and buyers for a good or service. B) It refers to lobbying to form a public enterprise. C) It refers to a situation in which a product's usefulness increases with the number of people using it. D) It refers to a product that requires connection to a network for it to be useful. E) It refers to a situation where the product is being sold through social media. Answer: C Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 19) A virtuous cycle occurs A) when lobbyists petition Parliament a public franchise; the lobbyist then raise money for the political party that granted the franchise. B) when monopoly profits are used to create new products for additional monopoly profits. C) when a firm can attract enough buyers initially to increase a product's usefulness to attract even more buyers. D) when a firm's sales volume reaches a level where the firm can take advantage of economies of scale, thereby reducing the price of the product to further boost its sales. E) when a firm produces a product at a lower cost and then it continues producing at a lower cost. Answer: C Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 20) For a natural monopoly to exist, A) a firm must continually buy up its rivals. B) a firm's long-run average cost curve must exhibit diseconomies of scale beyond the economically efficient output level. C) a firm's long-run average cost curve must exhibit economies of scale throughout the relevant range of market demand. D) a firm must have a government-imposed barrier. E) the monopoly should have the natural capability of producing the good without considering its profitability. Answer: C Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

21) In a natural monopoly, throughout the range of market demand, A) marginal cost is above average total cost and pulls average total cost upward. B) average total cost is above marginal cost and pulls marginal cost upward. C) marginal cost is below average total cost and pulls average total cost downward. D) there are diseconomies of scale. E) marginal cost is constant and hence the extra units do not cost the firm more than previous units. Answer: C Diff: 1 Type: MC Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 22) A natural monopoly is characterized by large fixed costs relative to variable costs. Answer: TRUE Diff: 2 Type: TF Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 23) For a natural monopoly, the marginal cost of producing an additional unit of its product is relatively small. Answer: TRUE Diff: 2 Type: TF Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 24) The National Hockey League has long-term leases with the arenas in major cities. Control of these arenas is an entry barrier to a potential new hockey league. Answer: TRUE Diff: 2 Type: TF Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 25) Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market. Answer: FALSE Diff: 2 Type: TF Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

26) Provide two examples of a government barrier to entry. Answer: 1. A patent or copyright which gives an individual or a firm the exclusive right to produce a product for a given period of time, for example, a patents for pharmaceutical drugs such as the anti-depressant, Prozac, manufactured by Eli Lilly. 2. A public franchise which makes it the exclusive legal producer of a good or service, for example, Insurance Corporation of British Columbia (ICBC) is the sole provider of basic auto insurance in BC. Diff: 1 Type: SA Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 27) How does a network externality serve as a barrier to entry? Is this barrier surmountable? Explain. Answer: A network externality exists where the usefulness of the product increases with the number of people who use it. It can serve as an entry barrier because the popularity of the product attracts more and more consumers, thereby increasing the supplier's dominance in the market. However, this barrier is not insurmountable. If a rival enters the market with a superior product, then it is possible that customers will switch to the superior product. Diff: 2 Type: SA Topic: Network Externalities Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 28) What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly? Answer: A natural monopoly arises when the production function exhibits economies of scale over the relevant range of market demand. The average cost of production is lower as the output produced increases. Consumers benefit from having one supplier because the supplier will be able to pass some of the cost savings to consumers. Diff: 3 Type: SA Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 29) To have a monopoly in an industry there must be A) barriers to entry so high that no other firms can enter the industry. B) a patent or copyright giving the firm exclusive rights to sell a product for 20 years. C) an inelastic demand for the industry's product. D) a public franchise, making the monopoly the exclusive legal provider of a good or service. E) a product or service that no other firm is capable of producing but one firm in the entire industry. Answer: A Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

30) Which one of the following is not a possible barrier to entry high enough to keep competing firms out of a monopoly industry? A) The monopoly firm has control of a key resource necessary to produce a good. B) There are important network externalities in supplying a good or service. C) There are large economies of scale that result in a natural monopoly. D) There is a high concentration ratio. E) There is a very low concentration ratio. Answer: D Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 31) When the government wants to give an exclusive right to one firm to produce a product, it A) imposes a tariff on imports of the product. B) imposes a quota on imports of the product. C) grants a patent or copyright to an individual or firm. D) uses antitrust laws to keep other firms from entering the market. E) allows the firm to operate as a natural monopoly forever. Answer: C Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 32) There are several types of barriers to entry that can create a monopoly. Which of the following barriers is the result of government action? A) network externalities B) public franchise C) economies of scale D) control of a key resource E) product variety externalities Answer: B Diff: 1 Type: MC Topic: Public Franchise Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

33) When the government makes a firm the exclusive legal provider of a good or service, it grants the firm A) a copyright. B) a network externality. C) a quota. D) a public franchise. E) a patent. Answer: D Diff: 1 Type: MC Topic: Public Franchise Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 34) A patent A) grants the creator of a book, film, or piece of music the exclusive right to use the creation for 20 years. B) grants the creator of a book, film, or piece of music the exclusive right to use the creation during the creator's lifetime. C) gives a firm the exclusive right to a new product for 20 years from the date the product is invented. D) gives the firm the exclusive right to a new product during the product inventor's lifetime. E) gives the firm legal rights to produce as a public franchise. Answer: C Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 35) Ordinarily, governments attempt to promote competition in markets. Why do governments use patents to block entry into some markets when this prohibits competition? A) Patents encourage firms to spend money on research necessary to create new products. B) Politicians sometimes succumb to pressure from lobbyists to grant favours to businesses for political reasons. C) Patents are an important source of government revenue. D) Patents are justified because they are an important means for creating network externalities. E) Patents are given to encourage infant firms so that they can grow without facing competition. Answer: A Diff: 2 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

36) Experience with patents in the pharmaceutical industry shows that when patents on drugs expire, A) most patients will continue to buy the drugs from the same firms because their doctors recommend they buy brand-name drugs. B) prices remain high without patent protection because of a lack of competition. Firms that are not granted patents cannot compete with firms that are granted patents. C) other firms are free to produce chemically identical drugs. Competition reduces the profits that had been earned by the firms that received patents. D) firms will find ways to obtain additional patent protection—often by making cosmetic changes in drugs that were patented—so that they can continue charging high prices. E) firm can reapply for patent and can keep doing it as long as it wants to maintain its monopoly. Answer: C Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 37) Many biologic drug manufacturers are pushing for patent protection to be extended to 12 years before generics are allowed to be introduced to the market. This reflects which of the following barriers to entry? A) control of a key resource B) network externalities C) entry blocked by government action D) economies of scale creating a natural monopoly E) product variety externalities Answer: C Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 38) A 10-year protection period from generic competition for drug manufacturers is a form of A) copyright. B) trademark. C) hallmark. D) patent. E) natural monopoly. Answer: D Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

39) Which of the following is a reason why trade mark protection does not ensure monopoly profits for a firm? A) Trade mark protection is only granted in highly competitive industries. B) Trade marks do not prevent other firms from creating and selling close substitutes. C) Trade marks expire more quickly than patents. D) The cost of filing for a trade mark reduces most firms economic profits to zero. E) All of the above. Answer: B Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking Special Feature: Apply the Concept: A Monopoly® Monopoly 40) Network externalities A) can only exist when there are economies of scale. B) prevent the dominance of a market by one firm. C) exist when the usefulness of a product increases with the number of consumers who use it. D) are created when celebrity endorsements of products lead to a surge in the demand for those products. E) can exist when product is sold online only. Answer: C Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 41) What type of protection does Canadian law grant the creator of a book, film, or piece of music? A) a public franchise, which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 50 years after the author's death B) a copyright, which grants exclusive rights to the creation's author for 20 years after the work is created C) a patent, which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 50 years after the author's death D) a copyright, which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 50 years after the author's death E) government created natural monopoly Answer: D Diff: 1 Type: MC Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

42) The International Nickel Company of Canada is often cited as an example of monopoly. What was the source of the barrier to entry that gave this firm monopoly power? A) It was a public enterprise; therefore, the Canadian government blocked entry into the market for nickel. B) There were important network externalities in the production of nickel. C) Economies of scale resulted in the company becoming a natural monopoly. D) The company maintained control of a key resource. E) It was a public enterprise. Answer: D Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 43) The International Nickel Company of Canada is often cited as an example of monopoly, but International Nickel eventually lost its monopoly. What event was responsible for this? A) New technology allowed other firms to achieve network externalities after World War II. B) The Canadian government, which had owned International Nickel, sold the company after World War II. The government no longer blocked entry into the market for nickel. C) Competition in the market for nickel increased after nickel fields were developed in Russia after World War II. D) Competition in the market for nickel increased after Canada signed the North American Free Trade Agreement with the United States and Mexico in 1994. E) Competition increased when the government sold the public enterprise to private entrepreneurs. Answer: C Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 44) In Canada, barriers to entry in professional team sports (hockey for example) result from A) the draft of college players, which grants teams exclusive signing rights to individual players. B) long-term leases teams sign for stadiums and ballparks in major cities. C) television contracts, which give networks the exclusive rights to broadcast games. D) the reserve clause, which is a provision in contracts of professional athletes that require them to play for specific teams over the length of their contracts. E) the problem of network externalities. Answer: B Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

45) The De Beers diamond mining and marketing company of South Africa became one of the most profitable and longest-lived monopolies in history. Which of the following has always threatened De Beers' control of the diamond market? A) Since few diamonds are ever destroyed, De Beers has constantly faced possible competition from other firms reselling diamonds. B) Competition from imitation diamonds, as technology has made it possible to make fake diamonds look exactly like real diamonds. C) Competition from other gemstones, including rubies and emeralds, that have become more popular over time. D) At different times in the past, some countries have banned the importation of diamonds from South Africa for political reasons. E) De Beers always fear that some other firm might discover diamonds and they will face more competition. Answer: A Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Diamond Profits Forever? The De Beers Diamond Monopoly 46) BHP Billiton is a Canadian company that owns mines in northern Canada that A) produce nickel. After World War II, BHP Billiton began to compete with another Canadian firm, the International Nickel Company. This competition eventually ended International Nickel's monopoly in this market. B) produce bauxite, the mineral needed to produce aluminum. BHP Billiton began to mine bauxite after World War II. This competition eventually ended the Aluminum Company of America (ALCOA)'s monopoly in this market. C) produce coal. Until World War II, BHP Billiton had a monopoly on coal in Canada. D) produce aluminum without any competition from other firms due to possession of the key inputs. E) produce diamonds. Answer: E Diff: 3 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Diamond Profits Forever? The De Beers Diamond Monopoly

47) After having a monopoly in the diamond market for many years, by 2000 the De Beers company faced competition from other companies. To maintain its market share, De Beers A) began buying so-called "blood diamonds" in order to keep these diamonds out of the control of other diamond companies. B) adopted a strategy of differentiating its diamonds. Each of its diamonds is now marked with a microscopic brand. C) bought diamond mines in Canada and Russia that had been its competitors. D) lowered the prices of its diamonds to make the market appear less profitable to potential competitors. E) had to do nothing because it has developed a consumer loyalty to its brand which is not threatened by any competitor. Answer: B Diff: 1 Type: MC Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Diamond Profits Forever? The De Beers Diamond Monopoly 48) Some economists argue that Microsoft became a monopoly in the market for computer software by developing MS-DOS, an operating system used for the first IBM personal computers. The more people who used MS-DOS-based programs, the greater the usefulness of using a computer with an MS-DOS operating system. The explanation for Microsoft's monopoly is A) the development of new technology that other firms could not copy. B) control of a key resource which, in this case, is the MS-DOS operating system. C) network externalities. D) patents Microsoft obtained when it developed the MS-DOS operating system. E) no other competitor could develope an operating system that could be a substitute for MS-DOS. Answer: C Diff: 2 Type: MC Topic: Network Externalities Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 49) Although some economists believe network externalities are important barriers to entry, other economists disagree because A) they believe that the dominant positions of firms that are supposedly due to network externalities are to a greater extent the result of the efficiency of firms in offering products that satisfy consumer preferences. B) they believe that most examples of network externalities are really barriers to entry caused by the control of a key resource. C) network externalities are really negative externalities. D) they believe that the dominant positions of firms that are supposedly due to network externalities are to a greater extent the result of economies of scale. E) they believe that any competitor can take the advantage of network externalities. Answer: A Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 26 Copyright © 2024 Pearson Canada Inc.

50) In discussions of barriers to entry, what is meant by the term "virtuous cycle"? A) A virtuous cycle refers to successful research and development that leads to information that is used to develop other new products. B) A virtuous cycle refers to a firm using the profits from a monopoly in one market to establish a monopoly in another market. C) A virtuous cycle refers to the situation where the pursuit of self-interest in establishing an entry barrier leads to an increase in social welfare (the "invisible hand"). D) A virtuous cycle refers to a situation where if a firm can attract enough customers initially, it can attract additional customers because its product's value has been increased by other customers using it, which attracts even more customers. E) It refers to a new entrant producing at the minimum cost and can continue doing that throughout its production regardless of competition from other firms. Answer: D Diff: 1 Type: MC Topic: Network Externalities Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 51) To be a natural monopoly a firm must A) control a key resource input. B) have economies of scale that are so large that it can supply the entire market at a lower cost than two or more firms. C) have significant network externalities. D) be very large relative to the total market. E) be a government created monopoly. Answer: B Diff: 1 Type: MC Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

Figure 13.1

52) Refer to Figure 13.1. Which of the following statements about the firm depicted in the diagram is true? A) The fact that this firm is a natural monopoly is shown by the continually declining long-run average total cost as output rises. B) The fact that this firm is a natural monopoly is shown by the continually declining market demand curve as output rises. C) The fact that this firm is a natural monopoly is shown by the continually declining marginal revenue curve as output rises. D) The fact that this firm is a natural monopoly is shown by the fact that marginal cost lies below the long-run average total cost where the firm maximizes its profits. E) None of the above. Answer: A Diff: 1 Type: MC Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 53) A natural monopoly is most likely to occur in which of the following industries? A) the pharmaceutical industry because the development and approval of new drugs through the Food and Drug Administration can take more than 10 years B) the diamond mining and marketing industry because one firm can control a key resource C) the software industry because of the importance of network externalities D) an industry where fixed costs are very large relative to variable costs E) All of the above. Answer: D Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 28 Copyright © 2024 Pearson Canada Inc.

54) If Facebook is a natural monopoly, its A) marginal cost curve would still be declining when it crossed the demand curve. B) average total cost curve would still be declining when it crossed the demand curve. C) marginal revenue curve would be the same as its demand curve. D) marginal revenue curve would be horizontal. E) marginal cost is horizontal because it faces a constant marginal cost. Answer: B Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 55) If Facebook is a natural monopoly, dividing the business equally between two firms that each supplied the same number of online reservations would A) decrease marginal cost. B) raise average total cost. C) increase total revenue. D) make marginal revenue less elastic. E) increase the profit of both the firms. Answer: B Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 56) Network externalities refer to the situation where the usefulness of a product increases with the number of consumers who use it. Answer: TRUE Diff: 1 Type: TF Topic: Network Externalities Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 57) A public franchise gives the exclusive right to produce a product for 20 years from the date the product is invented. Answer: FALSE Diff: 1 Type: TF Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 58) A virtuous cycle refers to the development of new products that follows when a monopoly earns economic profits. Answer: FALSE Diff: 2 Type: TF Topic: Network Externalities Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 29 Copyright © 2024 Pearson Canada Inc.

59) Natural monopolies are most likely to occur in markets where fixed costs are very large relative to variable costs. Answer: TRUE Diff: 1 Type: TF Topic: Natural Monopoly Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 60) What is a public franchise? Are all public franchises natural monopolies? Answer: A public franchise is a firm that the government designates as the only legal provider of a good or service. It is doubtful that most public franchises are natural monopolies. If they were, they wouldn't need the government to restrict their competitors. Diff: 2 Type: ES Topic: Public Franchise Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking 61) Canadian competition (anti-trust) laws are designed to prohibit monopolization and encourage competition. Why, then, does the government erect barriers to entry and create monopoly power by granting firms patents? Answer: Patents are designed to encourage creative activity and promote the development of new technologies. Firms can spend years on research and development in the search for new and better production processes and consumer products. Research and development is costly - many potential new ideas are ultimately not technically feasible or never become commercially successful. If patent protection was not granted, competing firms could easily copy a product and sell it without incurring the research costs of the firm that developed the product. Most people would object to this form of "free riding" on equity grounds; but patents also encourage firms to conduct research that leads to social benefits: new technologies result in a higher standard of living for all and a more efficient allocation of society's scarce resources. Diff: 2 Type: ES Topic: Patents and Copyrights Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

62) Identify four reasons for high entry barriers. Briefly explain each reason. Answer: 1. Economies of scale. This occurs when a firm faces declining average total cost over the entire range of output that consumers are willing to buy. When this happens, the larger the firm's output, the smaller its per-unit costs, making it difficult for small firms to enter the market since the small firms face much higher average costs. Thus, only a single firm will survive. 2. Government can block entry via legal barriers such as public franchise, government license, patent, or copyright. A public franchise is a firm the government designates as the only legal provider of a good or service. A government license controls entry into particular occupations, professions, and industries. Patents and copyrights grant exclusive rights to a product that is invented or created. 3. Control over a key resource. If one firm owns the entire (or a great percentage of the) resource needed to produce a final good, it creates a barrier to entry because it limits other producers' access to that resource. 4. Network externalities in supplying the good or service. If a product becomes more valuable when more people use it, then firms with larger outputs (networks) may have advantages over smaller firms. Diff: 2 Type: ES Topic: Barriers to Entry Learning Outcome: 13.2 Explain the four main reasons monopolies arise AACSB: Reflective Thinking

13.3

Explain how a monopoly chooses price and output

1) The demand curve for the monopoly's product is A) the market demand for the product. B) more elastic than the market demand for the product. C) more inelastic than the market demand for the product. D) undefined. E) perfectly inelastic. Answer: A Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 2) A monopolist's profit-maximizing price and output correspond to the point on a graph A) where average total cost is minimized. B) where total costs are the smallest relative to price. C) where marginal revenue equals marginal cost and charging the price on the market demand curve for that output. D) where price is as high as possible. E) where marginal and average revenues are equal. Answer: C Diff: 3 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking

3) Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy wheat farmer in Saskatchewan, who sells his output in the world commodity market, does not. Why is this so? A) because Microsoft is large enough to hire the best people in the field B) because Microsoft could potentially lose sales if it sets prices indiscriminately C) because the wealthy wheat farmer is a price taker who chooses his optimal output independently of market price but Microsoft's optimal output depends on the price it selects D) because unlike Microsoft, the wealthy wheat farmer is probably a monopolist E) because the farmer is selling a product that has huge market Answer: B Diff: 2 Type: MC Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 4) Because a monopoly's demand curve is the same as the market demand curve for its product, A) the monopoly's marginal revenue equals its price. B) the monopoly is a price taker. C) the monopoly must lower its price to sell more of its product. D) the monopoly's average total cost always falls as it increases its output. E) monopoly's average revenue is equal its average cost. Answer: C Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 5) If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the A) marginal revenue of the sixth performance is $48,000. B) marginal revenue of the sixth performance is $38,000. C) cost of staging the sixth performance is probably higher than the cost of staging the previous five. D) firm should not proceed with the sixth performance because the marginal revenue is lower. E) company will be making a loss on the sixth performance because its ticket sales will be less than the average received from the previous five. Answer: B Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills

6) If a monopolist's price is $50 per unit and its marginal cost is $25, then A) to maximize profit the firm should increase output. B) to maximize profit the firm should decrease output. C) the firm is making losses, it should close the business. D) to maximize profit the firm should continue to produce the output it is producing. E) Not enough information is given to say what the firm should do to maximize profit. Answer: E Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 7) If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25, then A) to maximize profit the firm should increase output. B) to maximize profit the firm should decrease output. C) the firm should exit because it is not making any profit. D) to maximize profit the firm should continue to produce the output it is producing. E) Not enough information is given to say what the firm should do to maximize profit. Answer: D Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills

Figure 13.2

Figure 13.2 above shows the demand and cost curves facing a monopolist. 8) Refer to Figure 13.2. To maximize profit, the firm will produce A) Q1. B) Q2. C) Q3. D) Q4. E) Q3 or Q4. Answer: B Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 9) Refer to Figure 13.2. The firm's profit-maximizing price is A) P1. B) P2. C) P3. D) P4. E) either P2 or P3. Answer: C Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills

10) Refer to Figure 13.2. If the firm's average total cost curve is ATC1, the firm will A) suffer a loss. B) break even. C) make a profit. D) face competition. E) exit the market. Answer: C Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 11) Refer to Figure 13.2. If the firm's average total cost curve is ATC2, the firm will A) suffer a loss. B) break even. C) make a profit. D) face competition. E) exit the market. Answer: B Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 12) Refer to Figure 13.2. If the firm's average total cost curve is ATC3, the firm will A) suffer a loss. B) break even. C) make a profit. D) face competition. E) keep producing. Answer: A Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 13) If a firm's average total cost is less than price where MR = MC, A) the firm should shut down. B) the firm should raise its price. C) the firm should continue to produce the output it is producing. D) the firm should cut back on its output to lower its cost. E) the firm is incurring losses. Answer: C Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 35 Copyright © 2024 Pearson Canada Inc.

Table 13.1 Price per Unit $85 80 75 70 65 60 55

Quantity Demanded (units) 10 11 12 13 14 15 16

Total Cost of Production (dollars) $530 540 550 560 575 595 625

A monopoly producer of foreign language translation software faces a demand and cost structure as given in Table 13.1. 14) Refer to Table 13.1. What is the marginal revenue from the sale of the 12th unit? A) $75 B) $50 C) $20 D) $10 E) -$5 Answer: C Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Profit-Maximizing Price and Output for a Monopolist 15) Refer to Table 13.1. What is the firm's profit-maximizing output and what is the price charged to sell this output? A) P = $85; Q = 10 B) P = $80; Q = 11 C) P = $75; Q = 12 D) P = $65; Q = 14 E) P = $70; Q = 13 Answer: E Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Profit-Maximizing Price and Output for a Monopolist

16) Refer to Table 13.1. What is the amount of the firm's profit? A) $335 B) $350 C) $880 D) $910 E) $1,050 Answer: B Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Profit-Maximizing Price and Output for a Monopolist 17) Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit-maximizing outputs? A) Marginal revenue is less than price. B) Marginal revenue equals marginal cost. C) Price equals average revenue. D) Average revenue equals average cost. E) All of the above apply to both. Answer: A Diff: 2 Type: MC Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 18) Long-run economic profits would most likely exist in which market structure? A) monopoly, monopolistic competition and oligopoly B) monopoly and oligopoly C) monopoly and monopolistic competition D) monopoly only E) monopolistic competition only Answer: B Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking

Figure 13.3

Figure 13.3 above shows the demand and cost curves facing a monopolist. 19) Refer to Figure 13.3. Suppose the monopolist represented in the diagram above produces positive output. What is the profit-maximizing/loss-minimizing output level? A) 630 units B) 800 units C) 850 units D) 860 units E) 880 units Answer: A Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 20) Refer to Figure 13.3. Suppose the monopolist represented in the diagram above produces positive output. What is the price charged at the profit-maximizing/loss-minimizing output level? A) $38 B) $54 C) $68 D) $71.50 E) $75 Answer: C Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 38 Copyright © 2024 Pearson Canada Inc.

21) Refer to Figure 13.3. Suppose the monopolist represented in the diagram above produces positive output. What is the profit/loss per unit? A) profit of $7 per unit B) profit of $30 per unit C) loss of $21 per unit D) profit of $14 per unit E) loss of $7 per unit Answer: E Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 22) Refer to Figure 13.3. What happens to the monopolist represented in the diagram in the long run? A) It will raise its price at least until it breaks even. B) If the cost and demand curves remain the same, it will exit the market. C) The government will subsidize the monopoly to enable it to break even. D) It will be forced out of business by more efficient producers. E) It will continue making profit because it is a monopoly. Answer: B Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills

Figure 13.4

Figure 13.4 shows the demand and cost curves for a monopolist. 23) Refer to Figure 13.4. What is the profit-maximizing/loss-minimizing output level? A) 600 units B) 800 units C) 940 units D) 1,000 units E) 1,160 units Answer: A Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 24) Refer to Figure 13.4. What is the price charged for the profit-maximizing output level? A) $13 B) $21 C) $27 D) $34 E) $41 Answer: D Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills

25) Refer to Figure 13.4. What is the amount of the monopoly's total revenue? A) $21,600 B) $20,400 C) $19,740 D) $1,160 E) $7,800 Answer: B Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 26) Refer to Figure 13.4. What is the amount of the monopoly's total cost of production? A) $21,600 B) $17,700 C) $9,340 D) $7,800 E) $4,200 Answer: B Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 27) Refer to Figure 13.4. What is the amount of the monopoly's profit? A) $2,700 B) $4,200 C) $7,800 D) $10,400 E) $12,600 Answer: A Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 28) Refer to Figure 13.4. What is likely to happen to this monopoly in the long run? A) New firms will enter the market to eliminate its profits. B) It will expand its output to take advantage of economies of scale so as to further increase its profit. C) As long as there are entry barriers, this firm will continue to enjoy economic profits. D) It will be regulated by the government because of its excess profits. E) The firm will exit the market. Answer: C Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills

29) If a monopolist's price is $50 at the output where marginal revenue equals marginal cost and average total cost is $43, then the average profit is $7. Answer: TRUE Diff: 2 Type: TF Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 30) If a monopolist's marginal revenue is $15 per unit and its marginal cost is $25, then to maximize profit the firm should decrease output. Answer: TRUE Diff: 2 Type: TF Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 31) In the short run, even if a monopoly's total revenue does not cover its variable costs, it should continue to produce because ultimately in the long run, the monopoly will start earning profits. Answer: FALSE Diff: 2 Type: TF Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 32) To maximize profit, a monopolist will produce and sell a quantity such that for the last unit sold, marginal revenue equals marginal cost, and charges a price given by the demand curve at that output level. Answer: TRUE Diff: 2 Type: TF Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 33) What is the relationship between marginal revenue and average revenue for a monopolist and is it the same for a perfect competitor? Answer: Average revenue is equal to price for any firm but for a monopolist, marginal revenue is always less than price and therefore marginal revenue is less than average revenue. For a perfect competitor, marginal revenue is equal to price. Diff: 2 Type: SA Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking

34) What happens to a monopoly's revenue when it sells more units of its product? Answer: The monopolist must lower its price to sell more. Two things happen when a monopolist lowers its price. First, revenue will tend to rise as the monopolist sells more units and second, revenue tends to fall because less revenue is received from each unit than the amount received at the higher price. The total effect on total revenue could be an increase, a decrease, or no change in total revenue. Diff: 2 Type: SA Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 35) Explain why the monopolist has no supply curve? Answer: A supply curve that shows the relationship between the price of a product and the quantity that suppliers are willing and able to supply. The monopolist selects its profit maximizing output by equating marginal revenue to marginal cost and takes the price dictated by the demand curve. Thus, there is no array of prices and quantities supplied. Diff: 3 Type: SA Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking

Figure 13.5

36) Refer to Figure 13.5. Use the figure above to answer the following questions. a. What is the profit-maximizing quantity and what price will the monopolist charge? b. What is the total revenue at the profit-maximizing output level? c. What is the total cost at the profit-maximizing output level? d. What is the profit? e. What is the profit per unit (average profit) at the profit-maximizing output level? f. If this industry was organized as a perfectly competitive industry, what would be the profitmaximizing price and quantity? Answer: a. Quantity = 50; price = 32 b. Total revenue = 50 × $32 = $1,600 c. Total cost = 50 × $20 = $1,000 d. Profit = $1,600 - $1,000 = $600 e. Profit per unit = $32 - $20 = $12 f. If purely competitive, quantity = 80; price = $22 Diff: 3 Type: SA Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 37) A monopoly firm's demand curve A) is the same as the market demand curve. B) is perfectly inelastic. C) is more inelastic than the demand curve for the product. D) is inelastic at high prices and elastic at lower prices. E) is same as the demand curve for a perfectly competitive firm. Answer: A Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking

38) Which of the following is true for a monopolist? A) Being the only seller in the market, the monopolist faces a perfectly inelastic demand curve. B) Being the only seller in the market, the monopolist faces a perfectly elastic demand curve. C) Being the only seller in the market, the monopolist faces the market demand curve. D) Being the only seller in the market, the monopolist faces a downward-sloping demand curve that lies below the marginal revenue curve. E) None of the above. Answer: C Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 39) A price maker is A) a person who actively seeks out the best price for a product that he or she wishes to buy. B) a firm that has some control over the price of the product it sells. C) a firm that is able to sell any quantity at the highest possible price. D) a firm that can choose a price depending upon what other firms are choosing. E) a consumer who participates in an auction where she announces her willingness to pay for a product. Answer: B Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 40) Firms that face downward-sloping demand curves for their output in the product market are called A) price takers. B) price dictators. C) monopolists. D) price makers. E) competitors. Answer: D Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking

41) Wendell can sell five motor homes per week at a price of $22,000. If he lowers the price of motor homes to $20,000 he will sell six motor homes per week. What is the marginal revenue of the sixth motor home? A) $10,000 B) $12,000 C) $20,000 D) $22,000 E) $24,000 Answer: A Diff: 2 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills Figure 13.6

42) Refer to Figure 13.6. If the monopolist charges price P* for output Q*, in order to maximize profit or minimize loss in the short run, it should A) continue to produce because price is greater than average variable cost. B) shut down because price is greater than marginal cost. C) shut down because price is less than average total cost. D) exit the market because monopolist cannot operate if there are losses. E) continue to produce because a monopolist always earns a profit. Answer: A Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 46 Copyright © 2024 Pearson Canada Inc.

Table 13.2 Quantity per Day (cases) 1 2 3 4 5 6 7 8 9 10

Price per Case

Total Cost

$16 15 14 13 12 11 10 9 8 7

$7.00 9.50 11.00 12.00 14.50 17.50 21.00 25.00 30.00 35.50

The government of a small developing country has granted exclusive rights to Linden Enterprises for the production of plastic syringes. Table 13.2 shows the cost and demand data for this government protected monopolist. 43) Refer to Table 13.2. What is the profit-maximizing quantity and price for the monopolist? A) Quantity = 8 cases, Price = $9 B) Quantity = 6 cases, Price = $11 C) Quantity = 9 cases, Price = $8 D) Quantity = 10 cases, Price = $7 E) Quantity = 7 cases, Price = $10 Answer: E Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 44) Refer to Table 13.2. What is the amount of profit that the firm earns? A) $34.50 B) $42 C) $47 D) $49 E) $55 Answer: D Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills

45) Refer to Table 13.2. How much profit will this monopolist earn in the long run? A) $0 B) $42 C) $47 D) $49 E) $55 Answer: D Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills Figure 13.7

Figure 13.7 shows the cost and demand curves for a monopolist. 46) Refer to Figure 13.7. The profit-maximizing output and price for the monopolist are A) output = 62; price = $24. B) output = 62; price = $18. C) output = 83; price = $22. D) output = 104; price = $20.80. E) output = 83; price = $20. Answer: A Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 48 Copyright © 2024 Pearson Canada Inc.

47) Refer to Figure 13.7. The monopolist's total revenue is A) $1,116. B) $1,488. C) $1,726.40. D) $1,826. E) $1,950. Answer: B Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 48) Refer to Figure 13.7. The monopolist's total cost is A) $1,116. B) $1,240. C) $1,660. D) $1,726.40. E) $1,950. Answer: B Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 49) Refer to Figure 13.7. The monopolist earns a profit of A) $0. B) $170. C) $248. D) $372. E) $450. Answer: C Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills

Table 13.3 Price $17 16 15 14 13 12

Quantity Total Revenue 3 $51 4 64 5 75 6 84 7 91 8 96

Marginal Revenue ----$13 11 9 7 5

Total Cost $56 63 71 80 90 101

Marginal Cost ----$7 8 9 10 11

Assume Table 13.3 gives the monthly demand and costs for subscriptions to basic cable for Shaw, a cable television monopoly in Vancouver. 50) Refer to Table 13.3. If Shaw wants to maximize its profits, what price (P) should it charge and how many cable subscriptions per month (Q) should it sell? A) P = $12; Q = 8 B) P = $13; Q = 7 C) P = $16; Q = 4 D) P = $15: Q = 5 E) P = $14; Q = 6 Answer: E Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Profit-Maximizing Price and Output for a Monopolist 51) Refer to Table 13.3. If Shaw maximizes its profits, how much profit will it earn? A) $84 B) $40 C) $25 D) $4 E) Shaw will break even. Answer: D Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills Special Feature: Solved Problem: Finding the Profit-Maximizing Price and Output for a Monopolist

52) To maximize profit, a monopolist will produce where A) marginal revenue is equal to marginal cost. B) demand for its product is unit-elastic. C) revenue per unit is maximized. D) average total cost is minimum. E) average total cost is equal to average revenue. Answer: A Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 53) If a monopolist's marginal revenue is $35 per unit and its marginal cost is $25, then A) to maximize profit the firm should increase output. B) to maximize profit the firm should decrease output. C) to minimize losses, the firm should shut down. D) to maximize profit the firm should continue to produce the output it is producing. E) Not enough information is given to say what the firm should do to maximize profit. Answer: A Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 54) If a monopolist's price is $50 at 63 units of output, and marginal revenue equals marginal cost, and average total cost equals $43, then the firm's total profit is A) $3,150. B) $2,709. C) $441. D) $50. E) $7. Answer: C Diff: 3 Type: MC Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 55) Which of the following statements is true? A) Monopolists are price makers. All other firms are price takers. B) Unlike other industries, monopoly industries have high barriers to entry. C) Only monopoly firms are granted patents and copyrights. D) Unlike other firms, a monopolist's demand curve is the same as the market demand curve. E) None of the above. Answer: D Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 51 Copyright © 2024 Pearson Canada Inc.

56) The demand curve for a monopoly firm A) is perfectly inelastic. B) lies below its marginal revenue curve. C) is the same as the market demand curve. D) is horizontal. E) is same as its marginal revenue curve. Answer: C Diff: 1 Type: MC Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 57) A monopolist will maximize profit where marginal revenue equals marginal cost. Answer: TRUE Diff: 1 Type: TF Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 58) A monopolist's demand curve is the same as the marginal revenue curve for the product. Answer: FALSE Diff: 1 Type: TF Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 59) If a monopolist's price is $50 at the output where marginal revenue equals marginal cost and average total cost is $43, then the incremental profit from the last unit sold is $7. Answer: FALSE Diff: 2 Type: TF Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 60) A monopolist currently sells 18 units of a good. If marginal revenue on the last unit sold is $117, then the price of the good must be less than $117. Answer: FALSE Diff: 2 Type: TF Topic: Demand and Marginal Revenue Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills

61) What is the difference between a monopoly's marginal revenue curve and a perfect competitor's marginal revenue curve? Answer: A monopoly's marginal revenue curve lies entirely below its market demand curve and is downward sloping, but a perfect competitor's marginal revenue curve is the same as its demand curve, which is horizontal at the prevailing market price. Diff: 2 Type: SA Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking

Figure 13.8

Figure 13.8 reflects the cost and revenue structure for a monopoly that has been in business for a very long time. 62) Refer to Figure 13.8. Use the figure above to answer the following questions. a. Identify the curves labeled A and B. Identify the curve that contains both point Y and point Z. Identify the curve that contains both point V and point W. b. What is the profit-maximizing quantity and what price will the monopolist charge? c. What area represents total revenue at the profit-maximizing output level? d. What area represents total cost at the profit-maximizing output level? e. What area represents profit? f. What is the profit per unit (average profit) at the profit-maximizing output level? g. If this industry was organized as a perfectly competitive industry, what would be the profitmaximizing price and quantity? h. What area represents the deadweight loss as a result of a monopoly? Answer: a. A = demand curve; B = marginal revenue curve; the curve that contains both points Y and Z = marginal cost curve; the curve that contains both points V and W = average total cost curve. b. quantity = Q2 units; price = P3 c.

area 0P3XQ2

d. area 0P0VQ2 e.

area P0P3XV

P3 - P0 g. quantity = Q4 and price = P2 h. the triangle XYZ Diff: 3 Type: ES Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Analytic Skills 54 Copyright © 2024 Pearson Canada Inc.

63) "Being the only seller in the market, the monopolist can choose any price and quantity it desires." Evaluate this statement: Is it true or false? Explain your answer. Answer: The statement is false. The monopolist cannot choose both the price and quantity. The monopolist has some market power, and therefore has some ability to affect market price, but it does not control the demand curve. If the monopolist sets a price, the quantity sold will be indicated by the demand curve. Diff: 2 Type: SA Topic: Characteristics of Monopoly Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking 64) Explain whether a monopoly that maximizes profit will also be maximizing revenue and production. Answer: Profit maximization is not the same thing as revenue maximization. To maximize revenue, the firm would produce up to the point where marginal revenue is zero. Unless marginal cost is zero, this is a larger quantity than the quantity where marginal revenue equals marginal cost. Maximizing production could mean producing the physical maximum possible. This is likely to be far beyond the profitmaximizing level of output. Diff: 2 Type: SA Topic: Profit Maximization Learning Outcome: 13.3 Explain how a monopoly chooses price and output AACSB: Reflective Thinking

13.4

Use a graph to illustrate how a monopoly affects economic efficiency

1) Economic efficiency in a free market occurs when A) consumer surplus is maximized. B) producer surplus is maximized. C) the sum of consumer surplus and producer surplus is maximized. D) price is as low as possible. E) inputs costs are at their minimum on average. Answer: C Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 2) A profit maximizing monopoly's price is A) the same as the price that would prevail if the industry was perfectly competitive. B) less than the price that would prevail if the industry was perfectly competitive. C) greater than the price that would prevail if the industry was perfectly competitive. D) not consistently related to price that would prevail if the market was perfectly competitive. E) too high that the government always has to intervene to bring it an acceptable level. Answer: C Diff: 2 Type: MC Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking

Figure 13.9

Figure 13.9 shows the demand and cost curves for a monopolist. 3) Refer to Figure 13.9. What is the economically efficient output level? A) 600 units B) 800 units C) 940 units D) between 940 and 1160 units E) 1160 units Answer: C Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 4) Refer to Figure 13.9. What is the difference between the monopoly output and the perfectly competitive output? A) 140 units B) 240 units C) 340 units D) between 340 and 560 units E) 560 units Answer: C Diff: 2 Type: MC Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills

5) Refer to Figure 13.9. What is the difference between the monopoly's price and perfectly competitive industry's price? A) The monopoly's price is higher by $9.50. B) The monopoly's price is higher by $13. C) The monopoly's price is higher by $3.50. D) The monopoly's price is higher by $21. E) The monopoly price is same as perfectly competitive price. Answer: D Diff: 2 Type: MC Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 6) Refer to Figure 13.9. At the profit-maximizing quantity, what is the difference between the monopoly's price and the marginal cost of production? A) $8 B) $11.50 C) $21 D) $9.50 E) There is no difference. Answer: C Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 7) Compared to perfect competition, the consumer surplus in a monopoly A) is unchanged because price and output are the same. B) is lower because price is higher and output is lower. C) is higher because price is higher and output is the same. D) is eliminated. E) is higher because the seller is interested in building loyalty not in maximizing profit. Answer: B Diff: 2 Type: MC Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking

8) Why does a monopoly cause a deadweight loss? A) because it does not produce some output for which marginal benefit exceeds marginal cost B) because it appropriates a portion of consumer surplus for itself C) because it increases producer surplus at the expense of consumer surplus D) because it does not produce some output for which demand exceeds supply E) because it charges different price to different consumers Answer: A Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 9) Why does the dead weight loss represent the minimum cost to society of a monopoly? A) Monopolists will often spend part of their profits protecting and expanding their monopoly powers. B) Monopolies have no real incentive to maximize profits. C) All monopolies have heavily regulated by government. D) Monopoly profits will ultimately be eroded by the entry of new firms. E) Monopolist gives incentives to consumers by lowering prices and doing this incurs losses. Answer: A Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 10) Relative to a perfectly competitive market, a monopoly results in A) a gain in producer surplus equal to the gain in consumer surplus. B) a gain in producer surplus equal to the loss in consumer surplus. C) a gain in producer surplus less than the loss in consumer surplus. D) greater economic efficiency. E) a gain in consumer surplus equal to the loss in producer surplus. Answer: C Diff: 2 Type: MC Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking

Figure 13.10

11) Refer to Figure 13.10. What is the area that represents consumer surplus under a monopoly? A) the triangle P0P1F B) the triangle P0P2E C) the trapezium P1P2EF D) the trapezium P1P2E E) the rectangle P1P3HF Answer: A Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 12) Refer to Figure 13.10. Compared to a perfectly competitive market, consumer surplus is lower in a monopoly by an amount equal to the A) area FHE. B) area FGE. C) area P1P2EF. D) area P1P2GF. E) area P0P2EF. Answer: C Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 59 Copyright © 2024 Pearson Canada Inc.

13) Refer to Figure 13.10. What is the area that represents producer surplus under a monopoly? A) the triangle 0P2E B) the triangle 0P3H C) the triangle FGE D) the trapezium 0P1FH E) the rectangle P1P3HF Answer: D Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 14) Refer to Figure 13.10. The deadweight loss due to a monopoly is represented by the area A) FHE. B) FGE. C) GEH. D) GQ1Q2E. E) FQ1Q2E. Answer: A Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills

Table 13.4 Price per Dose $80 72 64 56 48 40 32 24 16

Quantity Demanded (dose) 0 1 2 3 4 5 6 7 8

Total Cost of Production (dollars) $80 82 88 100 124 164 208 268 340

Onawy Inc. has been granted a patent for its birch root toothache balm. Table 13.4 shows the demand and the total cost schedule for the firm. 15) Refer to Table 13.4. What is Onawy's profit-maximizing output? A) 4 units B) 5 units C) 6 units D) 7 units E) 8 units Answer: A Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 16) Refer to Table 13.4. What is the amount of Onawy's profit? A) $68 B) $72 C) $84 D) $124 E) $192 Answer: A Diff: 2 Type: MC Topic: Profit Maximization Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills

17) Refer to Table 13.4. What is the economically efficient output level? A) 5 units B) 6 units C) 7 units D) 8 units E) 0 units Answer: A Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 18) Refer to Table 13.4. What is the approximate deadweight loss generated by Onawy when it produces the monopoly output? A) $124 B) $42 C) $40 D) $36 E) $12 Answer: E Diff: 3 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 19) Refer to Table 13.4. What is the most Onawy would pay to have a monopoly for one period? A) $0 B) $68 C) $72 D) $96 E) $128 Answer: B Diff: 3 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 20) Market power refers to A) the ability of consumers to dictate what products should be produced. B) the ability of a firm to advertise its product and succeed in selling more output. C) the ability of a firm to sell at a lower price than rival sellers. D) the ability of a firm to charge a price higher than the marginal cost of production. E) the ability of a firm to control the entire market by choosing any price and quantity it wants. Answer: D Diff: 1 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 62 Copyright © 2024 Pearson Canada Inc.

21) Firms do not have market power in which of the following market structures? A) perfect competition only B) perfect competition and monopolistic competition C) oligopoly D) monopoly E) all of the above Answer: A Diff: 1 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking Figure 13.11

Assume Shaw Cable has a monopoly to provide cable TV in Vancouver. Figure 13.11 shows the cable television market in Vancouver. 22) Refer to Figure 13.11. Suppose the local government imposes a $2.50 lump sum per month tax on cable companies. What happens to the price charged by the cable company following the imposition of this tax? A) The price rises from PM to (PM + $2.50). B) The price rises from PM but it increases by an amount less than $2.50. C) The price rises from PM but it increases by an amount greater than $2.50 to reflect the monopoly's markup. D) The price remains at PM. E) The price falls from PM because the monopolists wants to increase the quantity sold to increase revenue. Answer: D Diff: 3 Type: MC Topic: Profit-Maximizing Level of Output Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Assume That Charging a Higher Price Is Always More Profitable for a Monopolist 63 Copyright © 2024 Pearson Canada Inc.

23) Refer to Figure 13.11. If government has imposed a lumpsum tax of $2.50 on Shaw's services. Should Shaw increase its price by $2.50 to cover the increase in its cost due to tax or not? Explain. Answer: The tax does not affect Shaw's marginal revenue of marginal cost, PM is still the profitmaximizing price, and Shaw should continue to charge it. The tax reduces Shaw's profits but doesn't cause to increase the price of cable subscriptions. Diff: 2 Type: SA Topic: Profit-Maximizing Level of Output Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Assume That Charging a Higher Price Is Always More Profitable for a Monopolist 24) If a monopoly firm is facing increase in its cost because of a new tax. Why can't monopolist pass along the cost to consumers by raising the price since it has the monopoly power? Answer: The reason for not passing along the cost of taxes to the consumers is that the monopolist is not interested in charging high prices for the sake of high prices; it is interested in maximizing profits and before it raises the price, it must look at its demand curve which is downward sloping and if the firm will increase price, it has to lose some customers and if the price is considerably high, no one might be interested in purchasing the good and the monopolist cannot maximize profits with such an increase in price. Diff: 2 Type: SA Topic: Profit-Maximizing Level of Output Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Assume That Charging a Higher Price Is Always More Profitable for a Monopolist 25) The size of a deadweight loss in a market is reduced by A) government legislating a ceiling price. B) government legislating a price floor. C) market price being close to marginal cost. D) creative destruction. E) all of the above. Answer: C Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking

26) Which of the following monopolists would produce the smallest dead weight loss? A) a monopolist with a very flat demand curve B) a monopolist with a very flat marginal cost curve C) a monopolist very steep demand curve D) a monopolist with a very flat average variable cost curve E) none of the above Answer: C Diff: 3 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 27) A market economy benefits from market power A) if the majority of the population are entrepreneurs. B) if firms with market power do research and development with the profits earned. C) if market power gets so bad the government creates public enterprises. D) under no circumstances. E) if firms with market power give all the profits to charities. Answer: B Diff: 2 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 28) Which of the following statements is consistent with the views of Joseph Schumpeter? A) Research and development by competitive firms is responsible for most technological changes. B) An economy benefits from firms having market power because these firms are more likely to be able to commit funds for research and development. C) Enforcement of antitrust laws is necessary to promote competition among firms. D) A lack of competition discourages firms from developing new technologies. E) None of the above. Answer: B Diff: 2 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 29) If a per-unit tax on output sold is imposed on a monopoly's product, the monopolist will increase its market price by the full amount of the tax. Answer: FALSE Diff: 2 Type: TF Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Assume That Charging a Higher Price Is Always More Profitable for a Monopolist

30) Suppose a monopoly is producing its profit-maximizing output level. Now suppose the government imposes a lump-sum tax on the monopoly, independent of its output. As a result, the monopoly's profit will fall. Answer: TRUE Diff: 2 Type: TF Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Assume That Charging a Higher Price Is Always More Profitable for a Monopolist 31) In reality, because few markets are perfectly competitive, some loss of economic efficiency occurs in the market for nearly every good or service. Answer: TRUE Diff: 1 Type: TF Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 32) Market power in Canada causes a huge loss of economic efficiency. Answer: FALSE Diff: 1 Type: TF Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 33) How do the price and quantity of a monopoly compare to that of a perfectly competitive industry? Answer: A monopolist sells a smaller quantity and charges a price greater than the perfectly competitive price. Diff: 2 Type: SA Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 34) Suppose that a perfectly competitive industry becomes a monopoly. What effect will this have on consumer surplus, producer surplus, and deadweight loss? Answer: If a perfectly competitive industry is monopolized, consumer surplus will decrease, producer surplus will increase, and there will be a deadweight loss. Diff: 2 Type: SA Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills

Figure 13.12

35) Refer to Figure 13.12. From the monopoly graph above, identify the following: a. The profit-maximizing price b. The profit-maximizing quantity c. The area representing deadweight loss d. The area representing the transfer of consumer surplus to the monopoly Answer: a. Price = P3 b. Quantity = Q1 c. Deadweight loss = area C + D d. Transfer of consumer surplus to the monopoly = area A Diff: 2 Type: SA Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills

36) Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements regarding economic surplus in each market structure is true? A) Under perfectly competitive conditions, economic surplus in this industry equals consumer surplus plus producer surplus. Under monopoly conditions, some consumer surplus is transferred to producer surplus, but economic surplus is the same as it was under perfectly competitive conditions. B) Under perfectly competitive conditions, economic surplus in this industry is maximized. Under monopoly conditions, economic surplus is minimized. C) Under perfectly competitive conditions, economic surplus is equal to consumer surplus; there is no producer surplus because firms are price-takers. Under monopoly conditions, economic surplus is equal to producer surplus. D) Under perfectly competitive conditions, economic surplus is maximized. Under monopoly conditions economic surplus is less than under perfect competition and there is a deadweight loss. E) None of the above. Answer: D Diff: 2 Type: MC Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 37) Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. Which of the following statements comparing the conditions in the industry under both market structures is true? A) A monopoly will produce more and charge a higher price than would a perfectly competitive industry producing the same good. B) A monopoly will produce more and advertise more than would a perfectly competitive industry producing the same good. C) A monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same good. D) A monopoly will produce less and charge a lower price than would a perfectly competitive industry producing the same good. E) None of the above. Answer: C Diff: 1 Type: MC Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking

38) Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly. As a result of this change, A) price will be higher, output will be lower, and the deadweight loss will be eliminated. B) consumer surplus will be smaller, producer surplus will be greater, and there will be a reduction in economic efficiency. C) price will be higher, consumer surplus will be greater, and output will be greater. D) consumer surplus will be smaller and producer surplus will be greater. There will be a net increase in economic surplus. E) economic efficiency will increase because the firm is more conscious about its image than it was with a competitive market. Answer: B Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 39) The most profitable quantity for a monopolist is A) the highest price a consumer is willing to pay for the monopolist's product. B) the quantity at which demand is unit-elastic. C) a quantity that maximizes the price sold. D) the quantity at which its average revenue equals average cost. E) the quantity at which marginal revenue equals marginal cost. Answer: E Diff: 1 Type: MC Topic: Profit Maximization Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Assume That Charging a Higher Price Is Always More Profitable for a Monopolist 40) Which of the following statements is true? A) If a tax is imposed on a product sold by a monopolist, the monopolist will maximize its profits by producing where marginal revenue equals marginal cost. B) A monopolist will always charge the highest possible price. C) If a tax is imposed on a product sold by a monopolist, the monopolist can increase its price to pass along the entire tax to consumers. D) Because a monopolist faces no competition, the demand for its product is perfectly inelastic. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking

Figure 13.13

Figure 13.13 shows the cost and demand curves for a monopolist. 41) Refer to Figure 13.13. Assume the firm maximizes its profits. What is the amount of consumer surplus? A) $21 B) $124 C) $186 D) $220 E) $332 Answer: C Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 42) Refer to Figure 13.13. What is the amount of consumer surplus if, instead of monopoly, the industry was organized as a perfectly competitive industry? A) $21 B) $124 C) $186 D) $220 E) $332 Answer: E Diff: 3 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills

43) Refer to Figure 13.13. If this industry was organized as a perfectly competitive industry, the market output and market price would be A) output = 62; price = $24. B) output = 83; price = $22. C) output = 62; price = $18. D) output = 104; price = $20.80. E) output = 83; price = $24. Answer: B Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 44) Refer to Figure 13.13. If the firm maximizes its profits, the deadweight loss to society due to this monopoly is equal to the area A) ABF. B) ABEG. C) ACE. D) EFG. E) BCG. Answer: C Diff: 3 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills 45) The ability of a firm to charge a price greater than marginal cost is called A) monopoly power. B) price-making power. C) cost-plus pricing. D) market power. E) exploitation. Answer: D Diff: 1 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking

46) Whenever a firm can charge a price greater than marginal cost, A) the firm must be a monopolist. B) there is some loss of economic efficiency. C) consumers have the ability to choose a close substitute. D) the firm will earn economic profits. E) it increases economic efficiency. Answer: B Diff: 2 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 47) The only firms that do not have market power are A) firms in industries with low barriers to entry. B) firms that do not advertise their products. C) firms in perfectly competitive markets. D) firms that sell identical products. E) firms that are regulated by the government. Answer: C Diff: 1 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 48) Estimates put the loss of economic efficiency due to monopolies in Canada at A) close to 1 percent of GDP. B) about 10 percent of GDP. C) as high as 50 percent of GDP. D) about 5 percent of GDP. E) about 7 percent of GDP. Answer: A Diff: 1 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking

49) Arnold Harberger was the first economist to estimate the loss of economic efficiency due to market power in the United States. Since Harberger's findings were published, other researchers have studied this issue for the Canadian economy. How do the results of these researchers compare to Harberger's results? A) The other researchers reached conclusions similar to Harberger's findings for the U.S.; namely, the loss of economic efficiency due to market power is about 10 percent of the value of production in Canada. B) The other researchers reached conclusions different from Harberger's; namely, they found that the loss of economic efficiency due to market power is only about 1 percent of the value of production in Canada, much less than Harberger's estimate for the U.S. economy. C) The other researchers reached conclusions different from Harberger's; namely, the loss of economic efficiency due to market power is about 10 percent of the value of production in Canada, significantly greater than Harberger's estimate for the U.S. D) The other researchers reached conclusions similar to Harberger's conclusions for the U.S.; namely, the loss of economic efficiency due to market power is about 1 percent of the value of production in Canada. E) The other researchers reached conclusions different from Harberger's conclusions for the U.S, they found that the loss of economic efficiency due to market power is about 3% of the value of GDP, greater than Harberger's estimate of 1% for U.S. Answer: D Diff: 2 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 50) In evaluating the degree of economic efficiency in a market, we can state that the size of the deadweight loss in a market will be smaller A) the greater the difference between marginal cost and price. B) the smaller the difference between marginal cost and average total cost. C) the smaller the difference between marginal cost and price. D) the greater the difference between marginal cost and average revenue. E) the smaller the difference between average cost and price. Answer: C Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 51) The possibility that the economy may benefit from having market power, rather than being very competitive, is closely identified with which famous economist? A) Arnold Harberger B) Joseph Schumpeter C) Sergey Brin D) John M. Keynes E) Donald Turner Answer: B Diff: 1 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 73 Copyright © 2024 Pearson Canada Inc.

52) Some economists believe that the economy benefits from firms having market power. Which of the following is an argument that has been made to support this position? A) Large firms are better able than small firms to spend funds on research and development required to develop new products. B) Competition is very rare in the Canadian economy and few new products are produced by smaller, competitive firms. C) Research has shown that the deadweight loss from monopolies is a small percentage of the value of production in Canada. D) Large firms can afford to lobby the federal government in order to impose restrictions on imports and reduce the outsourcing of jobs to other countries. E) All of the above. Answer: A Diff: 1 Type: MC Topic: Market Power Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 53) A profit-maximizing monopoly produces a lower output level than would be produced if the industry was perfectly competitive. Answer: TRUE Diff: 2 Type: TF Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 54) If the market for a product begins as perfectly competitive and then becomes a monopoly, there will be a reduction in economic efficiency and a deadweight loss. Answer: TRUE Diff: 2 Type: TF Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 55) Suppose a monopoly is producing its profit-maximizing output level. Now suppose the government imposes a lump-sum tax on the monopoly, independent of its output. As a result, the monopolist will increase the price of its product to cover its higher cost. Answer: FALSE Diff: 2 Type: TF Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Assume That Charging a Higher Price Is Always More Profitable for a Monopolist

56) Producers in perfect competition receive a smaller producer surplus than a monopoly producer. Answer: TRUE Diff: 2 Type: TF Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 57) Equilibrium in a perfectly competitive market results in the greatest amount of economic surplus, or total benefit to society, from the production of a good. Why, then, did Joseph Schumpeter argue that an economy may benefit more from firms that have market power than from firms that are perfectly competitive? Answer: Schumpeter did not deny that perfectly competitive firms produced the greatest amount of consumer surplus, but this result does not address which type of market structure is best for developing new products. Schumpeter pointed to the large costs of product development; how can small, perfectly competitive firms afford the monetary cost and the risk of failure that product development requires? Only large firms in monopoly or oligopoly industries can afford investments in research and development, and the inevitable failures that accompany research. According to Schumpeter, the higher prices firms with market power charge are less important than the benefits from new products these firms introduce to the market. Diff: 2 Type: ES Topic: Comparing Monopoly and Perfect Competition Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking 58) Explain why market power leads to a deadweight loss. Is the total deadweight loss from market power in Canada large or small? Answer: Market power allows a firm to set its price above marginal cost, which creates deadweight loss. Research suggests that in Canada total deadweight loss from market power is fairly small, perhaps less than one percent of GDP. Diff: 2 Type: ES Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Reflective Thinking

Figure 13.14

59) Refer to Figure 13.14. From the monopoly graph above, identify the area representing the deadweight loss. Would the deadweight loss be larger if the demand curve was more elastic or less elastic? Answer: The deadweight loss = area C + D. The less elastic the demand curve is, the greater market power the firm has, the bigger the difference between the marginal benefit (which equals the price) and marginal cost of the last unit produced is, and the greater deadweight loss due to the monopoly is. Diff: 2 Type: SA Topic: Monopoly and Economic Efficiency Learning Outcome: 13.4 Use a graph to illustrate how a monopoly affects economic efficiency AACSB: Analytic Skills

13.5

Explain how a firm can increase its profits through price discrimination

1) If a firm charges different consumers different prices for the same product and the difference cannot be attributed to cost variations, then it is engaging in A) odd pricing. B) cost-plus pricing. C) price discrimination. D) markup pricing. E) competitive pricing. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 2) Why is price discrimination legal but not discrimination based on race or gender? A) because price discrimination increases profits and therefore tax revenues for the government, but discrimination based on race or gender reduces tax revenues B) because price discrimination reduces deadweight loss, but discrimination based on race or gender increases deadweight loss C) because price discrimination involves charging people different prices based on their willingness to pay rather than on the basis of arbitrary characteristics D) because price discrimination enables firms to increase output and employment, but race- or genderbased discrimination reduces employment E) because price discrimination affect the entire economy and other types affect certain groups only. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Price Discrimination with Other Types of Discrimination 3) Firms price discriminate A) to reduce the quantity sold so as to reduce production costs. B) to increase profits. C) to take advantage of customers. D) to increase total economic surplus. E) to increase equality. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

4) Toot Sweets Bakery sells freshly baked muffins from 6.30 am at $1.20 per muffin. By 4 pm, the remaining muffins are marked down to $0.60 each. Which of the following statements is true? A) Toot Sweets engages in price discrimination; a higher price for those who cannot wait and a lower price for those willing to wait until 4 pm. B) Toot Sweets is trying to prevent the opportunity to make arbitrage profit. C) Toot Sweets is not engaging in price discrimination because the product could be resold by customers. D) Toot Sweets has underestimated the demand for its muffins. E) Toot Sweets is price discriminating based on demand. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 5) Which of the following is not a way by which price-discriminating firms can segment a market? A) on the basis of time of purchase, for example long-distance calling B) by requiring an advance purchase, for example airline tickets C) on basis of the buyer's location, for example requiring out-of-state students to pay higher tuition D) on the basis of the supplier's marginal cost of production, for example requiring customers to pay a premium for customizing options E) on the basis of age, for example movie ticket price. Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 6) Which of the following products allows the seller to identify different groups of consumers (segment the market) at virtually no cost? A) early bird dinner specials B) books sold online C) a pair of Bose speakers D) iPhones E) movie tickets Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

7) Which of the following are necessary conditions for successful price discrimination? a. zero transactions costs b. a perfectly competitive market structure c. an imperfectly competitive market structure d. at least two different markets with different price elasticities of demand e. at least two different markets with different price elasticities of supply A) a, b, and d only B) c and d only C) a, c, d, and e only D) a and c only E) a and b only Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 8) Which of the following is a necessary condition for successful price discrimination? A) The seller must possess market power. B) The buyer must possess market power. C) Transactions costs must be zero. D) Buyers must have identical inelastic demands. E) Buyers must not know they are being discriminated. Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 9) Successful price discrimination cannot take place if A) the market is perfectly competitive. B) the market can be segmented into different buyer groups. C) customers are not able to resell the product. D) the demand curve facing the firm is downward sloping. E) the market is segregated. Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

10) Consider the following actions undertaken by a firm: a. charging a higher price for products of higher quality b. charging different prices to different consumers for the same product when the variation cannot be explained by cost differences c. charging different prices for products of different qualities d. charging a lower price to match a competitor's price Which of the above will be considered price discrimination? A) a, b, c, and d B) a, b, and d only C) b and d only D) b only E) c only Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 11) Price discrimination is possible in which of the following market structures? a. perfect competition b. monopoly c. oligopoly d. monopolistic competition A) a, b, c, and d B) c and d only C) b and c only D) b, c, and d only E) b and d only Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 12) Which of the following undermines a firm's ability to engage in price discrimination? A) the seller's market power B) the inability to prevent resale of the product from one market segment to another C) buyers having different elasticities of demand for the product D) the seller's ability to segment the total market E) segregated market Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

13) Which of the following firms is not able to practice price discrimination? A) movie theaters B) commercial airlines C) land-line telephone companies D) the largest wheat farmer in Nebraska E) publishers Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Table 13.5 Quantity Demanded in Middle Fall (tubes per week) 1 2 3 4 5

Price per Quantity Demanded in Tube West Fall (tubes per week) $8.00 1 7.00 2 6.00 3 5.00 4 4.00 5

Price per Tube $5.00 4.50 4.00 3.50 3.00

Neem Products sells its Ayurvedic Neem toothpaste in two completely isolated markets with demand schedules as shown in Table 13.5. The average cost of production is constant at $2 per tube. 14) Refer to Table 13.5. How many tubes of toothpaste will Neem sell in Middle Fall and at what price? A) Q = 2 units; P = $7 B) Q = 3 units; P = $6 C) Q = 4 units; P = $5 D) Q = 5 units; P = $4 E) Q = 5 units; P = $6 Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

15) Refer to Table 13.5. How many tubes of toothpaste will Neem sell in West Fall and at what price? A) Q = 2 units; P = $4.50 B) Q = 3 units; P = $4 C) Q = 4 units; P = $3.50 D) Q = 5 units; P = $3 E) Q = 5 units; P = $4 Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 16) Refer to Table 13.5. What is the total revenue received from both markets combined? A) $30 B) $34 C) $68 D) $70 E) $80 Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 17) Refer to Table 13.5. What are the total profits from both markets combined? A) $50 B) $48 C) $18 D) $15 E) $20 Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 18) Refer to Table 13.5. Which of the following statements is true about the two markets? A) The demand in Middle Fall is more price elastic than the demand in West Fall. B) The demand in Middle Fall is less price elastic than the demand in West Fall. C) The demand in Middle Fall is more income elastic than the demand in West Fall. D) The demand in Middle Fall is less income elastic than the demand in West Fall. E) The demand in Middle Fall has same price elasticity as in West Fall. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

19) A firm that can effectively price discriminate will charge a higher price to A) customers who have the more elastic demand for the product. B) customers who have the more inelastic demand for the product. C) buyers who belong to the largest market segment. D) buyers who are members of the smallest market segment. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 20) For a firm that can effectively price discriminate, who will be charged a lower price? A) customers who have an elastic demand for the product B) customers who have an inelastic demand for the product C) buyers that are members of the largest market segment D) buyers that are members of the smallest market segment Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 21) Movie theaters often charge higher ticket prices for evening showings than for afternoon showings. Why is this the case? A) Movie theaters hope to discourage customers from seeing movies during the afternoon to keep their labor costs down. B) The cost of showing movies is higher during the afternoon than in the evening. C) Movie theaters know that many people are willing to pay more to see a movie in the evening than during the afternoon. D) Movie theaters have more physical space to show movies during the afternoon than they do during the evening, so the excess supply of available theaters dictates that prices be lower. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

22) Toronto Transit Commission (TTC) offers senior citizens discounted fares for TTC rides. This suggests that TTC authorities believe that senior citizens have a ________ demand for TTC rides. A) more income elastic B) less income elastic C) more price elastic D) less price elastic E) zero elasticity of Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 23) An article on how hotel prices rose during the solar eclipse on August 21, 2017 noted that in Hopkinsville, Kentucky: "At the local La Quinta Inn & Suites, prices are $425 a night, up from a $93 average on Google for the weekend before." Source: David Gernon, "Once-in-a-lifetime solar eclipse is a bonanza for hotels, airlines," cnbc.com, July 27, 2017. Which of the following statements is true? A) The La Quinta Inn & Suites is practicing first-degree price discrimination by charging what the market will bear. B) This is evidence of third-degree price discrimination because hotel accommodation on a particular day is not a product that can be resold later. C) There is no evidence of price discrimination; the La Quinta Inn & Suites is responding to increased demand for hotel rooms in the face of constant supply. D) The La Quinta Inn & Suites has adopted this pricing strategy to capitalize on arbitrage profits. E) This is an evidence of second degree price discrimination where different price is charged from different group of people. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 24) From an economic perspective, price discrimination is desirable because A) the increase in profits is more than offset by the loss in consumer surplus, resulting in a net increase in economic surplus. B) it enables firms to increase profits with no loss in economic surplus, and in turn, this could provide firms with incentives to engage in beneficial product innovation. C) the increase in profits results in higher corporate tax revenues received by the government which could be used to subsidize consumption for low-income individuals. D) it redistributes wealth from wealthy consumers to highly innovative firms. E) price discrimination is never desireable. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 84 Copyright © 2024 Pearson Canada Inc.

25) Yield management and price discrimination have enabled firms to increase profits and, at the same time A) reduce the cost of production. B) capture some consumer surplus. C) reduce transactions costs. D) transfer some producer surplus to consumers. E) increase the consumer surplus. Answer: B Diff: 2 Type: MC Topic: Yield Management Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 26) Which of the following is a reason why airline yield management is an effective method to increase revenue? A) because airlines have invested heavily in developing computer models that identify optimal pricing strategies in the various market segments B) because airlines have successfully induced customers to reveal their resources and preferences by offering them different versions of the product such as business class and coach plane tickets C) because a ticket is a contract to transport a specific person, and is not transferable D) because airlines have a monopoly in long-distance carriage E) because airlines have a no refund policy Answer: C Diff: 2 Type: MC Topic: Yield Management Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 27) When firms use big data to determine how responsive different groups of customers are to changes in prices, the firms are engaging in price discrimination. This pricing strategy is also called all of the following except A) arbitrage pricing. B) price optimization. C) dynamic pricing. D) yield management. E) all of the above are considered price discrimination. Answer: A Diff: 1 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

28) If a firm could practice perfect price discrimination, it would A) allow resale of its product. B) charge every buyer a different price. C) charge a price based on the quantity of a product bought. D) use odd pricing. E) charge a price on the basis of age. Answer: B Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 29) With perfect price discrimination there is A) no deadweight loss. B) no producer surplus. C) one single price. D) an increase in consumer surplus. E) shortage of the good. Answer: A Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 30) Which of the following does not arise from price discrimination? A) an increase in producer surplus B) an increase in consumer surplus C) an increase in quantity sold D) an increase in profits E) all of the above happen as a result of price discrimination Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

31) Joss is a marketing consultant. Iris and Daphne are potential customers interested in commissioning Joss to undertake a market survey and compile the findings in a report. Iris is willing to pay $500 for the service while Daphne is willing to pay $800. Suppose that the opportunity cost of Joss's time is $1,200. Assume that Iris and Daphne do not know each other. If Joss charges the same price per copy of the report to both Iris and Daphne A) the report will not get written. B) only Daphne will commission the job and the report will be written. C) both Iris and Daphne will commission the job and the report will be written. D) no conclusion can be drawn without information on the price. E) only Iris will commission the job and the report will be written. Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 32) Joss is a marketing consultant. Iris and Daphne are potential customers interested in commissioning Joss to undertake a market survey and compile the findings in a report. Iris is willing to pay $500 for the service while Daphne is willing to pay $800. Suppose that the opportunity cost of Joss's time is $1,200. Assume that Iris and Daphne do not know each other. If the price of the report is $500 per copy A) only Iris will purchase Joss's services and Joss will undertake the job for her. B) only Daphne will purchase Joss's services and Joss will undertake the job for her. C) both Iris and Daphne will purchase Joss's services and Joss will undertake the job. D) both Iris and Daphne will want to purchase Joss's services but Joss will not be willing to undertake the job. E) Joss is willing to undertake the job. Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 33) Joss is a marketing consultant. Iris and Daphne are potential customers interested in commissioning Joss to undertake a market survey and compile the findings in a report. Iris is willing to pay $500 for the service while Daphne is willing to pay $800. Suppose that the opportunity cost of Joss's time is $1,200. Assume that Iris and Daphne do not know each other. If the price of the report is $800 per copy A) both Iris and Daphne will purchase Joss's services and Joss will undertake the job. B) only Daphne will purchase Joss's services and Joss will undertake the job for her. C) only Daphne will want to purchase Joss's services but Joss will not be willing to do the work. D) neither Iris nor Daphne will commission the work. E) Joss is willing to undertake the job but nobody is willing to purchase the services. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

34) Joss is a marketing consultant. Iris and Daphne are potential customers interested in commissioning Joss to undertake a market survey and compile the findings in a report. Iris is willing to pay $500 for the service while Daphne is willing to pay $800. Suppose that the opportunity cost of Joss's time is $1,200. Assume that Iris and Daphne do not know each other. Which of the following statements is true? A) Joss should charge each customer $600; that way he will earn his opportunity cost and it will be fair to both Iris and Daphne. B) Joss should charge Iris $500 and Daphne no more than $700; that way he earns his opportunity cost and there is no loss in economic surplus. C) Joss should charge Iris $500 and Daphne $800; that way economic surplus is maximized. D) Joss should charge Iris $500 but charging Daphne $800 is unfair because it allows Joss to earn more than his opportunity cost. E) none of the above. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 35) Some consumer electronics products such as OLED TVs, Blu-ray players, and digital cameras, are introduced at very high prices but over time, their prices start falling (beyond what could be attributed to falling costs as companies take advantage of economies of scale and cheaper technologies). Which of the following is the best explanation for this observation? A) More firms are likely to enter the consumer electronics market over time, forcing market prices down. B) Early adopters of these new products typically have a higher demand and higher income compared to those who are willing to wait. C) Early adopters are more quality conscious and are willing to pay higher prices for the initial production of these goods. D) After satisfying the demand for early adopters, firms lower price to attract the more price-sensitive consumers. E) Due to substantial increase in supply, prices went down. Answer: D Diff: 2 Type: MC Topic: Price Discrimination Across Time Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 36) The antitrust law that prohibits price discrimination on grounds that it reduces competition was enacted in Canada in A) 1960. B) 1920 C) 1900. D) 1889. E) 1870. Answer: D Diff: 1 Type: MC Topic: Antitrust Laws Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical thinking 88 Copyright © 2024 Pearson Canada Inc.

37) When a monopolist engages in perfect price discrimination, the quantity produced and sold A) is lower than the quantity produced and sold if it adopted a single price. B) is larger than the quantity produced and sold if it adopted a single price. C) is the same level as that produced and sold if it adopted a single price. D) could be lower, higher, or the same as that produced and sold if it adopted a single price. E) cannot be determined without information about price. Answer: B Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 38) With perfect price discrimination, the marginal revenue curve A) is below the demand curve. B) is above the demand curve. C) is equal to the demand curve. D) is horizontal. E) is vertical. Answer: C Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

Figure 13.15

39) Refer to Figure 13.15. With perfect price discrimination, the firm will produce and sell A) Q1 units. B) Q2 units. C) Q3 units. D) Q4 units. E) any quantity between Q1 and Q2 units. Answer: C Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 40) Refer to Figure 13.15. What is the price charged under perfect price discrimination? A) P2 B) P3 C) P4 D) a range of prices corresponding to the demand curve from P3 and above E) a range of prices corresponding to the demand curve from P4 and above Answer: D Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 90 Copyright © 2024 Pearson Canada Inc.

41) Refer to Figure 13.15. What is the consumer surplus received under perfect price discrimination? A) the area under the demand curve above P1 B) the area under the demand curve above P2 C) the area under the demand curve above P3 D) the area under the demand curve above P4 E) zero Answer: E Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 42) Refer to Figure 13.15. What is the economically efficient output level? A) Q1 units B) Q2 units C) Q3 units D) Q4 units E) any quantity between Q1 and Q2 units. Answer: C Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

Figure 13.16

Plato Playhouse, a theatre company in the university town of Wegg, caters to two groups of customers: students and the non-student population. Figure 13.16 shows the demand curves for the two groups of customers. 43) Refer to Figure 13.16. Suppose Plato Playhouse price discriminates. What is the price charged in the two markets? A) price in the student market = price in the non-student market = Pa B) price in the student market = price in the non-student market = Pb C) price in the student market = Pd; price in the non-student market = Pe D) price in the student market = Pc; price in the non-student market = Pe E) price in the student market = Pa; price in the non-student market = Pb Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Solved Problem: How Apple Uses Price Discrimination to Increase Profits 44) Refer to Figure 13.16. Suppose Plato Playhouse price discriminates. What is the quantity sold to each group of customers and what is the total quantity sold? A) quantity sold to students = Qb; quantity sold to non-students = Qb; total sales = Qa B) quantity sold to students = Qc; quantity sold to non-students = Qb; total sales = Qb + Qc C) quantity sold to students = Qc; quantity sold to non-students = Qe; total sales = Qe + Qc D) quantity sold to students = Qc; quantity sold to non-students = Qd; total sales = Qd + Qc E) quantity sold to students = Qd; quantity sold to non-students = Qe; total sales = Qd + Qe Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Solved Problem: How Apple Uses Price Discrimination to Increase Profits 92 Copyright © 2024 Pearson Canada Inc.

45) Refer to Figure 13.16. Suppose Plato Playhouse price discriminates. Which of the following statements is true? A) By charging two different prices, the theatre company has redistributed some profits from those who can pay higher prices to those who cannot, thereby increasing economic efficiency. B) By charging two different prices, the theatre company essentially allows those willing to pay higher prices to subsidize those who are not. C) By charging two different prices, the theatre company has redistributed some profits from those who can pay higher prices to those who cannot, thereby improving equity. D) Plato Playhouse will earn higher profits if it charges a single price–an average of the two prices– instead of charging two different prices to the two different groups of customers. E) None of the above. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Solved Problem: How Apple Uses Price Discrimination to Increase Profits 46) Refer to Figure 13.16. Suppose Plato Playhouse charges a single price of Pd for each performance. Which of the following statements is true? A) The company is selling more than the profit-maximizing quantity in the non-student market and less than the profit-maximizing quantity in the student market. B) The company is selling less than the profit-maximizing quantity in the non-student market and more than the profit-maximizing quantity in the student market. C) The company is selling less than the profit-maximizing quantity in both markets but it is maximizing its revenue. D) The company is selling less than the profit-maximizing quantity in both markets. E) All of the above. Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Solved Problem: How Apple Uses Price Discrimination to Increase Profits 47) If Mort's House of Flowers sells one dozen roses to different customers at different prices, economists would consider this an example of A) price gouging. B) rational ignorance. C) arbitrage. D) price discrimination. E) exploitation. Answer: D Diff: 1 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

48) Price discrimination is the practice of A) charging different prices for the same good when the price differences are not due to differences in cost. B) charging different prices for the same good when the price differences arise because of differences in cost. C) charging different prices for different qualities of a product. D) charging higher prices for brand-named goods and lower prices for generic versions of the goods. E) charging different prices for different products. Answer: A Diff: 1 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 49) Which of the following is necessary in order for a firm to successfully practice price discrimination? A) The firm must practice product differentiation. B) The demand for the firm's product is inelastic. C) The firm must be able to segment the market for the product. D) The firm's transactions costs must be zero. E) The firm must be in a perfectly competitive market. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 50) Arnold Marion, a first-year economics student at Fazer College, was given an assignment to find an example of price discrimination and present it to his class. When asked for his example Arnold said "I went to a Milwaukee Brewers baseball game with my cousin last week. We paid $25 each for our seats in left field. My aunt and uncle paid $50 each for their tickets; they sat five rows behind the first base dugout. This is an example of price discrimination since we paid different prices for the same product, and the differences were not due to differences in costs." How would Arnold's economics instructor assess Arnold's example? A) He would agree with Arnold that he had found an example of price discrimination, but would add that arbitrage would occur if ticket scalpers sold Brewers tickets for more than the prices Arnold and his uncle paid. B) He would disagree with Arnold's example because the $25 seats and the $50 seats were not the same products. C) He would agree with Arnold that he had found an example of price discrimination and would explain that the elasticity of demand for Brewers tickets is different for Arnold and his uncle. D) He would disagree with Arnold's example because there were differences in transactions costs for the $50 tickets and the $25 tickets. E) He would agree because Arnold's aunt and uncle paid higher price due to their age. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 94 Copyright © 2024 Pearson Canada Inc.

51) Which of the following is not a requirement for a successful price discrimination strategy? A) A firm must have the ability to charge a price greater than marginal cost. B) Some consumers must have a greater willingness to pay for the product than other consumers, and the firm must be able to know what prices consumers are willing to pay. C) The firm must be able to prevent arbitrage. D) Transactions costs must be the same for all consumers. E) Markets must be segregated. Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 52) Which of the following is not a requirement for a successful price discrimination strategy? A) A firm must have market power. B) The firm must be able to prevent consumers who buy a product at a low price from reselling it to other consumers at a high price. C) Managers must practice yield management. D) Some consumers must have greater willingness to pay for the product than other consumers, and the firm must be able to know what prices consumers are willing to pay. E) All of the above are required for a successful price discrimination strategy. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 53) Which of the following is a reason why a firm would not engage in price discrimination? A) Price discrimination is illegal in some western states and the owners of firms in these states face civil or criminal prosecution if they engage in price discrimination. B) Some firms are not able to segment the market for the products they sell. C) Some firms do not want to violate the law of one price. D) The transactions costs associated with selling the product exceed the price of the product. E) All of the above are reasons to engage in price discrimination. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

54) Insurance companies typically charge women lower prices than men for automobile insurance. Is this an example of price discrimination? A) No, because, on average, women have better driving records than men and the costs of insuring men are greater than the costs of insuring women. B) Yes, because the costs of selling insurance to men and women are the same. C) Yes, because insurance companies can prevent arbitrage; that is, women cannot transfer their insurance coverage to men. D) No, because there are too many insurance companies for any one company to have market power. A firm must possess market power in order to practice price discrimination. E) Yes, because they are discriminating purely on the basis of gender. Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Price Discrimination with Other Types of Discrimination 55) Price discrimination is a rational strategy for a profit-maximizing firm when A) it is possible to engage in arbitrage across market segments. B) it is not possible to segment consumers into identifiable markets. C) there is no opportunity for arbitrage across market segments. D) firms want to increase the amount of consumer surplus received by its customers. E) price discrimination is always rational for firms. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 56) Bubba's Hula Shack Bar and Bistro has begun giving customers who can show proof that they arrived at the establishment by public transportation a 10 percent discount on their total bill. This is an example of A) arbitrage. B) two-part tariff pricing. C) price discrimination. D) odd pricing. E) discount pricing. Answer: C Diff: 1 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

57) Bubba's Hula Shack Bar and Bistro has begun giving customers who can show proof that they arrived at the establishment by public transportation a 10 percent discount on their total bill. All else equal, customers who arrive by public transportation to take advantage of Bubba's Hula Shack discount have a ________ for the services of the establishment than customers who drive to the establishment. A) higher price elasticity of demand B) lower price elasticity of demand C) higher price elasticity of supply D) lower price elasticity of supply E) unit price elasticity of demand Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 58) One reason why airlines charge business travelers and leisure travelers different prices is A) business travelers fly according to schedules that are planned months in advance. Many leisure travelers buy their tickets at the last minute. B) business travelers usually travel alone. Leisure travelers often fly with friends and family members; therefore, they have a more inelastic demand for airline tickets than business travelers. C) business travelers fly more often than most leisure travelers. As a result, their employers are able to bargain with airlines for lower fares than leisure travelers pay. D) business travelers often have inflexible schedules and have to travel on a particular day. The opposite is true for leisure travelers. E) business travelers have very high demand elasticity as compare to leisure travelers. Answer: D Diff: 1 Type: MC Topic: Yield Management Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 59) Perfect price discrimination is also known as A) monopoly. B) first-degree price discrimination. C) third-degree price discrimination. D) yield management. E) second-degree price discrimination. Answer: B Diff: 1 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

60) The prices college students and faculty members pay for Apple computers are lower than the prices Apple charges on its website and in retail stores. Apple charges lower prices to college students and faculty members because A) college students and faculty members have a more elastic demand for computers than the general public. B) Apple can deduct from its federal taxes some of the costs of the computers it sells to college students and faculty members. C) college students and faculty members have a more inelastic demand for computers than the general public. D) college students and faculty members typically buy more supplies from Apple (print cartridges, paper, etc.) than the general public. E) Apple is required to do so by the Government. Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Solved Problem: How Apple Uses Price Discrimination to Increase Profits 61) College students and faculty members have a more elastic demand than the general public for Apple's MacBook Pro laptop computers. From this we can conclude that A) Apple will charge college students and faculty members higher prices than it charges the general public. B) Apple will charge college students and faculty members lower prices than it charges the general public. C) the general public will earn arbitrage profits by buying MacBook Pro Laptop computers from Apple and reselling them to college students and faculty members. D) Apple will earn economic profits from the computers it sells to the general public but will break even on the computers it sells to college students and faculty members. E) there are many substitutes available for college students and faculty. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Solved Problem: How Apple Uses Price Discrimination to Increase Profits 62) When firms adopt successful dynamic pricing strategies, typically A) all consumers gain by paying lower prices. B) all consumers lose by paying higher prices. C) some consumers gain and some lose, but as a group, consumers gain. D) some consumers gain and some lose, but as a group, consumers lose. E) nothing changes with dynamic pricing strategies. Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 98 Copyright © 2024 Pearson Canada Inc.

63) If a firm knew every consumer's willingness to pay and could prevent arbitrage, it could charge every consumer a different price. This practice is known as A) first-degree exploitation, or perfect price discrimination. B) maximization of producer surplus, or perfect price discrimination. C) first-degree price discrimination, or perfect price discrimination. D) first-degree transfer of consumer surplus, or perfect price discrimination. E) second-degree price discrimination. Answer: C Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 64) A price-discriminating firm charges the highest price to A) the group with the largest demand. B) the group with the most elastic demand. C) the group with the least elastic demand. D) the group with demand that is unit elastic. E) none of the above. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 65) In which market structure is it not possible to practice price discrimination? A) perfect competition B) monopolistic competition C) oligopoly D) monopoly E) price discrimination is possible in all of the above. Answer: A Diff: 1 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

66) Which of the following is not an example of price discrimination? A) Adobe Systems offers software at discounted prices to students and faculty at K-12 and university levels. B) Unlike foreign tourists, citizens of Cambodia are exempted from paying an admission fee to the temples of Angkor. C) Senior citizens may purchase special fare tickets for public transportation that are not available to others. D) Buyers at an automotive parts store receive a discount for bulk buying because the store is able to pass on to its customers some of the lower average cost for producing large quantities. E) Senior citizens may pay a lower price for movie tickets than others. Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 67) Erin and Deidre, two residents in Ottawa, Ontario, are planning a trip to Vancouver British Columbia. Erin, the sales manager for a large retailer, has to attend a business meeting. Deidre, a college student on vacation, is planning a leisurely trip to visit friends and relatives. Whose demand curve for air travel is likely to be more elastic? A) Erin B) Deidre C) There is no difference in their price elasticities of demand. D) The elasticity of the demand curves for Erin and Deidre cannot be determined without more information. E) It depends on the price of airline ticket they both are paying. Answer: B Diff: 2 Type: MC Topic: Yield Management Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 68) Erin and Deidre, two residents of Ottawa, Ontario, are planning a trip to Vancouver, British Columbia. Erin, the sales manager for a large retailer, has to attend a business meeting. Deidre, a college student on vacation, is planning a leisurely trip to visit friends and relatives. Which of the following statements is true? A) An airline that price discriminates will most likely charge Erin a higher price. B) An airline that price discriminates will most likely charge Deidre a higher price. C) Since there is no difference in the cost of producing air travel, airlines will not charge different prices to Erin and Deidre. D) An airline cannot price discriminate because buyers can resell their tickets through the Internet. E) An airline cannot have this information about the travelers, hence charges the same price. Answer: A Diff: 1 Type: MC Topic: Yield Management Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

69) Suppose Dublin Electronics charges regular customers $60 for a Blu-ray player but allows senior citizens to purchase the same item for $45. Is this likely to be a successful price discriminating strategy? A) Yes, firms price discriminate to maximize profits. B) No, price discrimination will not be effective because the store cannot prevent senior citizens from buying large quantities of Blu-ray players and reselling them for a profit. C) Yes, because senior citizens are likely to have a more elastic demand and therefore will be willing to pay a lower price compared to regular customers. D) No, because there are many different brands of Blu-ray players and consumers will shop around. E) Yes, the firm can allow senior citizens to purchase at a lower price with the condition of not reselling the item. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 70) Which of the following products allows the seller to identify different groups of consumers (segment the market) and practice price discrimination? A) clothing items sold through Macy's Department Store B) a hamburger sold at Burger King C) a cafe latte sold at Starbucks D) tickets to matinee shows at a movie theatre E) an Apple iPhone Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 71) Why might a producer practice price discrimination? A) to make its products more affordable to those with low incomes B) to maximize economic efficiency C) to maximize profits D) to maximize quantity demanded E) to allow consumers to gain more surplus Answer: C Diff: 1 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

72) Which of the following pricing strategies allows a firm to earn economic profit? A) price discrimination B) charging a price equal to marginal cost C) charging a price equal to the average total cost of production D) charging a price equal to the average variable cost of production E) all of the above Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

Figure 13.17

Chantal owns a hairdressing salon which caters to two main groups of customers: residents of "The Chateau," a retirement community, and other residents in the neighborhood. Figure 13.17 shows the demand curves for the residents of the retirement community, labeled Market A, and other residents in the neighborhood, labeled Market B. The demand curves are not identical.

73) Refer to Figure 13.17. Suppose the salon price discriminates. What prices are charged in the two markets? A) price in market A = price in market B = $15 B) price in market A = $10; price in market B = $15 C) price in market A = price in market B = $5 D) price in market A = price in market B = $10 E) price in market A = $15; price in market B = $10 Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 74) Refer to Figure 13.17. Which group of customers is likely to have a more elastic demand curve (more sensitive to price)? A) the other residents of the neighborhood–market B B) There is no difference in the elasticity of demand between the two groups. C) the customers from "The Chateau"–market A D) There is insufficient information to answer this question. E) Elasticity will be different at different prices for each group. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 75) Refer to Figure 13.17. Suppose Chantal practices price discrimination. Which of the following statements is true? A) Chantal's profits will be higher if she has uniform pricing instead of different prices for different groups of customers. B) By charging a higher price in market B, Chantal has transferred some of the consumer surplus from customers in market B to customers in market A. C) By charging different prices in markets A and B, Chantal can transfer some producer surplus into economic profit. D) By charging a higher price in market B, Chantal can convert some consumer surplus into economic profit. E) It is impossible for Chantal to increase the profit by charging different prices from the two groups. Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

76) Refer to Figure 13.17. Suppose Chantal charges all her customers a uniform price of $10 for a haircut. Which of the following statements is true? A) Chantal is selling more than the profit-maximizing quantity of haircuts in market B. B) Chantal is selling less than the profit-maximizing quantity of haircuts in market B. C) Chantal is maximizing revenue in market B. D) Chantal will earn a greater profit through uniform pricing than if she practices price discriminates. E) Chantal will not be able to cover the cost by charging such a low price. Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Table 13.6 Quantity Demanded in Northlake (Pairs per day) 1 2 3 4 5

Price per Pair $1.50 1.30 1.10 0.90 0.70

Quantity Demanded in Southlake (Pairs per day) 1 2 3 4 5

Price per Pair $1.75 1.50 1.25 1.00 0.75

SeeClear sells its disposable contact lenses in two completely isolated markets with demand schedules as shown in Table 13.6. The average cost of production is constant at $0.70 per pair. 77) Refer to Table 13.6. How many pairs of contact lenses will SeeClear sell in Northlake and at what price? A) Q = 2 units; P = $1.30 B) Q = 3 units; P = $1.10 C) Q = 4 units; P = $0.90 D) Q = 5 units; P = $0.70 E) Q = 1 units; P = $1.50 Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

78) Refer to Table 13.6. How many pairs of contact lenses will SeeClear sell in Southlake and at what price? A) Q = 2 units; P = $1.50 B) Q = 3 units; P = $1.25 C) Q = 4 units; P = $1.00 D) Q = 5 units; P = $0.75 E) Q = 1 units; P = $1.75 Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 79) Refer to Table 13.6. What is the total revenue received from both markets combined? A) $6.35 B) $7.05 C) $7.25 D) $7.60 E) $8.00 Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 80) Refer to Table 13.6. What are the total profits from both markets combined? A) $2.40 B) $2.85 C) $3.35 D) $3.75 E) $6.35 Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 81) Refer to Table 13.6. Which of the following statements is true about the two markets? A) The demand in Northlake is more price elastic than the demand in Southlake. B) The demand in Northlake is less price elastic than the demand in Southlake. C) The demand in Northlake is more income elastic than the demand in Southlake. D) The demand in Northlake is less income elastic than the demand in Southlake. E) The demand in Northlake has same elasticity as the demand in Southlake. Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 106 Copyright © 2024 Pearson Canada Inc.

82) Assume that a monopolist practices perfect price discrimination. The firm's marginal revenue curve will A) be perfectly elastic. B) be equal to its demand curve. C) be perfectly inelastic. D) lie below its demand curve. E) be equal none of the above. Answer: B Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 83) Assume that a monopolist practices perfect price discrimination. The firm will produce an output A) that is less than the efficient level of output. B) that is greater than the efficient level of output. C) that is equal to the efficient level of output. D) that converts consumers surplus into a deadweight loss. E) that maximizes consumers surplus. Answer: C Diff: 3 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 84) If a monopolist practices perfect price discrimination A) the firm will break even in the long run. B) consumers surplus will be equal to the deadweight loss. C) producer surplus will equal consumer surplus. D) consumer surplus will be zero. E) consumer surplus will be maximized. Answer: D Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

85) Which of the following statements about perfect price discrimination is false? A) There is no consumer surplus if a firm engages in perfect price discrimination. B) Perfect price discrimination occurs when the seller charges the highest price each consumer would be willing to pay for the product. C) A condition for perfect price discrimination is that it must be costlier to service some customers than others. D) For the price-discriminating firm, its marginal revenue curve coincides with its demand curve. E) All of the above are true. Answer: C Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 86) Suppose that a price-discriminating producer divides its market into two segments. If the firm sells its product at a price of $34 in the market segment with relatively less-elastic customer demand, the price in the market segment with more-elastic customer demand will be A) greater than $34. B) less than $34. C) less than marginal revenue in that market segment. D) equal to marginal revenue in that market segment. E) equal $34 because elasticity does not determine the price. Answer: B Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 87) Publishers practice price discrimination when they sell books at high prices to A) early adopters. B) local bookstores. C) large chain bookstores. D) online book sellers. E) students directly. Answer: A Diff: 1 Type: MC Topic: Price Discrimination Across Time Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

88) The term "early adopters" refers to A) firms that are the first to implement a new technology that is used to produce new goods or services. B) book clubs that are first to recommend best-selling books to their members. C) consumers who respond quickly to fads, seasonal changes, etc. D) consumers who are willing to pay high prices to be among the first to own new products. E) all of the above. Answer: D Diff: 1 Type: MC Topic: Price Discrimination Across Time Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 89) Consumers who will pay high prices to be among the first to own certain new products are called A) savvy consumers. B) naive consumers. C) gullible. D) early adopters. E) wealthy consumers. Answer: D Diff: 1 Type: MC Topic: Price Discrimination Across Time Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Table 13.7 Potential Willingness to Pay Customer (dollars per hour) Arun $8 Bernice 9 Cara 10 Dawn 12 Julie plans to start a pet-sitting service. She surveyed her neighborhood to determine the demand for this service. Assume that each person surveyed demands only one hour of pet sitting services per period. Table 13.7 above shows a portion of her survey results. 90) Refer to Table 13.7. If Julie charges $10 per hour, how many hours of pet sitting services will be purchased and by whom? A) 2 hours (1 hour by Cara and 1 hour by Dawn) B) 1 hour by Cara only C) 1 hour by Dawn only D) 3 hours (1 hour each by Arun, Bernice, and Cara) E) 4 hours (1 hour by each of the potential customer) Answer: A Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 109 Copyright © 2024 Pearson Canada Inc.

91) Refer to Table 13.7. If Julie charges $10 per hour, what is the value of the consumer surplus received by Dawn? A) $2 B) $10 C) $12 D) $22 E) $24 Answer: A Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 92) Refer to Table 13.7. Suppose Julie's marginal cost of providing this service is constant at $7 and she charges $7. How many hours will be purchased and what is her total revenue? A) 5 hours; total revenue = $35 B) 4 hours; total revenue = $28 C) 3 hours; total revenue = $21 D) 2 hours; total revenue = $14 E) 6 hours; total revenue = $42 Answer: B Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 93) Refer to Table 13.7. Suppose Julie's marginal cost of providing this service is constant at $7 and she charges $7 per hour. What is her marginal revenue? A) It is $7 for the first hour and starts declining thereafter. B) It is $7 for the first hour and starts increasing thereafter. C) It is constant at $7. D) It coincides with the figures in the table; $12 for the first hour, $10 for the second, $9 for the third, and $8 for the fourth. E) Marginal revenue will keep on falling and will reach zero at some point. Answer: C Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

94) Refer to Table 13.7. Suppose Julie's marginal cost of providing this service is constant at $7 and she charges $7. What is the value of the consumer surplus enjoyed by her customers? A) $39 B) $28 C) $11 D) $9 E) $0 Answer: C Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 95) Refer to Table 13.7. Suppose Julie's marginal cost of providing this service is constant at $7 and she decides to charge each customer according to his or her willingness to pay. What is Julie's total revenue and how many hours of service will be purchased? A) 4 hours and her total revenue = $39 B) 4 hours and her total revenue = $28 C) 1 hour and her total revenue = $7 D) 5 hours and her total revenue = $35 E) 6 hours and her total revenue = $42 Answer: A Diff: 3 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 96) Refer to Table 13.7. Suppose Julie's marginal cost of providing this service is constant at $7 and she decides to charge each customer according to his or her willingness to pay. What is the value of consumer surplus by her customers? A) $39 B) $28 C) $11 D) $10 E) $0 Answer: E Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

97) Refer to Table 13.7. Suppose Julie's marginal cost of providing this service is constant at $7 and she charges each customer according to his or her willingness to pay instead of a uniform price of $7. Which of the following statements is true? A) Julie is worse off because the demand for her services is reduced. B) Julie has converted the consumer surplus (from a uniform price) into economic profit. C) Julie's customers are better off because their consumer surplus has increased. D) Julie's has converted the producer surplus (from a uniform price) into consumer surplus. E) None of the above. Answer: B Diff: 2 Type: MC Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 98) One requirement for a firm pursuing a price-discrimination strategy is the ability to segment the market for its product. This means that A) the firm must set different prices for different regions where the product is sold. B) the firm must be willing to offer price discounts for senior citizens and children. C) the firm must be able to divide the market in a way that makes arbitrage impossible. D) the firm must choose a marketing strategy that appeals to different segments of the economy. E) the firm must charge different price based on quantity purchased. Answer: C Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 99) A perfectly competitive firm cannot practice price discrimination because A) a firm that breaks even in the long run cannot afford to engage in yield management. B) it does not advertise; this prevents the firm from marketing its product to different segments of the market. C) each consumer in a perfectly competitive market has the same willingness to pay. D) the firm can only charge the market price. E) the firm's cost will be very high to sell at different prices. Answer: D Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

100) If price discrimination occurs in a market A) the law of one price does not hold. B) the firm earns arbitrage profits. C) consumers whose demand for the product sold is more elastic pay higher prices than consumers whose demand is less elastic. D) the marginal cost of production is constant. E) consumer surplus increases. Answer: A Diff: 2 Type: MC Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 101) Big data is often used to establish pricing strategies for automobile insurance companies. Answer: TRUE Diff: 1 Type: TF Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 102) Amazon has now such a dominant online presence, the company has no need to analyze big data to assist with pricing strategies. Answer: FALSE Diff: 1 Type: TF Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 103) To successfully price discriminate, a firm must ensure that there are no opportunities for arbitrage. Answer: TRUE Diff: 1 Type: TF Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 104) If a monopolist engages in first-degree price discrimination, it will produce the same output level as a perfectly competitive industry. Answer: TRUE Diff: 2 Type: TF Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

105) Because each customer pays according to her willingness to pay, a consumer maximizes her consumer surplus under first-degree price discrimination. Answer: FALSE Diff: 2 Type: TF Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 106) One reason why McDonald's charges a single price for its products is that it is difficult and costly for the company to determine each individual consumer's willingness to pay. Answer: TRUE Diff: 2 Type: TF Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 107) Both first-degree price discrimination and optimal two-part tariff pricing maximize economic surplus. Answer: TRUE Diff: 2 Type: TF Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 108) Early adopters are consumers who will pay a high price to be among the first to own new products. Answer: TRUE Diff: 2 Type: TF Topic: Price Discrimination Across Time Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 109) A successful strategy of price discrimination requires that a firm be a price taker. Answer: FALSE Diff: 1 Type: TF Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 110) The practice of continually adjusting prices to take into account fluctuations in demand is called "yield management." Answer: TRUE Diff: 2 Type: TF Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

111) A firm that engages in price discrimination must be able to identify the preferences of every customer it serves. Answer: FALSE Diff: 2 Type: TF Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 112) Perfect price discrimination will lead a firm to produce up to the point where price equals marginal cost, the efficient level of output. Answer: TRUE Diff: 2 Type: TF Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 113) What is the difference between price discrimination and other forms of discrimination? Answer: Discrimination based on race or gender and other arbitrary characteristics is illegal under civil rights laws. Price discrimination generally is legal, although it could be illegal under the RobinsonPatman Act if its effect is to reduce competition in an industry. Price discrimination involves charging people different prices based on differences in their willingness to pay, when these differences are not due to differences in costs. Diff: 2 Type: SA Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Price Discrimination with Other Types of Discrimination 114) Why is it necessary for a firm that practices price discrimination be a price maker rather than a price taker? Answer: A price taker has no market power and therefore cannot influence market price. A price maker, on the other hand, is able to influence market price. As long as a seller cannot influence market price, it will not be able to engage in price discrimination. Diff: 2 Type: SA Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

115) What three conditions must hold for a firm to successfully price discriminate? Answer: Successful price discrimination has three requirements: 1. A firm must possess market power. 2. Some consumers must have a greater willingness to pay for the product than others; the firm must know the prices consumers are willing to pay. 3. The firm must be able to segment the market so consumers who buy at a low price cannot resell at a higher price. Diff: 2 Type: SA Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 116) What is perfect price discrimination and why do economists believe that no firm is able to practice perfect price discrimination? Answer: Perfect price discrimination, also known as first-degree price discrimination, occurs when a firm knows every consumer's willingness to pay and is able to charge every consumer a different price the maximum price each is willing to pay. The firm's marginal revenue curve in this situation is the same as its demand curve and the firm converts all potential consumer surplus into profits. It is highly unlikely that any firm would be able to use yield management to determine each consumer's maximum willingness to pay. It is also unlikely that if the firm charged each consumer a different price it would prevent arbitrage, where a consumer who bought the product at a low price could sell the product to another consumer with a higher willingness to pay. Diff: 2 Type: ES Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 117) What is yield management? How is yield management being used in the airline industry? Answer: Yield management is the use of sophisticated models of demand and pricing strategies to maximize revenue and profits. Yield management is used in the airline industry when airlines vary ticket prices based on the season, length of route, day of the week, time of day, and type of passengers on the flight. Diff: 2 Type: ES Topic: Yield Management Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 118) Are restaurant coupons a form of price discrimination? Why or why not? Answer: Yes, coupons are a form of price discrimination. People who are willing to take the time to clip coupons have a higher price elasticity of demand than people who are not. Coupons are a way for firms to cut the price paid by higher price elasticity consumers–without having to cut the price for everyone else. Diff: 2 Type: ES Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

119) Racial discrimination and other forms of discrimination based on irrelevant factors are illegal. Can price discrimination be illegal as well? Answer: In 1936, Congress passed the Robinson-Patman Act which outlawed price discrimination if it resulted in less competition. However, the language used in the act made it seem that all price discrimination that was not based on differences in cost was illegal. Courts render judgments regarding violations of acts of Congress based on how they interpret the language used in these acts. In recent years, the courts have interpreted the Robinson-Patman Act narrowly; that is, price discrimination as practiced by the airlines, colleges and universities, and other firms is not considered to be illegal. Diff: 2 Type: ES Topic: Antitrust Laws Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 120) Book publishers use price discrimination routinely, but the form of price discrimination they use is different from the form used by airlines and other industries. Explain. Answer: Some consumers in some markets are willing to pay a high price to be among the first to buy a new product. These consumers are called "early adopters." Book publishers offer new novels at high prices knowing that some consumers do not want to wait for a lower price before reading the book. Other consumers who are not early adopters will buy the novel in hardcover after time has elapsed and the novel's price is lower. Consumers who are content to wait for a paperback version of the book to be published will pay an even lower price. Publishers achieve higher profits from the books they sell by segmenting the market over time and charging a higher price to the segment with an inelastic demand (early adopters) and a lower price to the segment with a more elastic demand (paperback buyers). Diff: 2 Type: ES Topic: Price Discrimination Across Time Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 121) Your text refers to airlines as "The Kings of Price Discrimination." Why is price discrimination common in the airline industry? Answer: When airlines fly with empty seats, they lose the revenue that could have been earned from selling tickets for those seats that they can never recover. In addition, the marginal cost of flying one more passenger is very low. Therefore, airlines have an incentive to sell tickets for as many seats as they can, even if the price is low. This strategy will be profitable only if the airlines can prevent those who buy tickets at low prices from reselling them to other passengers at higher prices. Since the 1980s, airlines have used computer models to adjust prices for each seat on all of their flights. Airlines can divide their customers into two main categories: business travelers, who have inflexible schedules and often cannot book their flights very far in advance, and leisure travelers who are more flexible about when they travel and are more sensitive than business travelers to changes in price. By placing restrictions on who can purchase low-price tickets, airlines can force business travelers to pay high prices while attracting leisure travelers with low prices. Diff: 2 Type: ES Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking

122) Suppose a restaurant is trying to determine how much to charge for a bowl of chili, and decides to run an experiment to see how much its customers are willing to pay by allowing them to set their own price for this menu item. a. Is charging a customer the price he or she is willing to pay for the bowl of chili an example of price discrimination? Briefly explain. b. What is it called when a firm knows every consumer's willingness to pay, and can charge every consumer a different price? What happens to consumer surplus in this situation? Answer: a. This is an example of price discrimination, since it references charging different prices to different customers for the same product, and the price differences are not due to differences in costs. Determining different customers' willingness to pay is one of the requirements for successful price discrimination, and this is accomplished by asking the customers how much they want to pay for the chili. b. When a firm knows every consumer's willingness to pay, and can charge every consumer a different price, this is known as perfect price discrimination, or first-degree price discrimination. With perfect price discrimination, there is no consumer surplus. Diff: 2 Type: ES Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 123) Draw a graph that shows producer surplus, consumer surplus, and deadweight loss in a market where the seller practices perfect price discrimination. Be sure to identify the demand curve, the marginal revenue curve, the marginal cost curve, and the profit maximizing quantity on the graph. Answer: The perfect price discriminator sells Q3 units and charges a range of prices along the demand curve–P1 to the person who is willing to pay P1 for unit Q1, P2 to the person who is willing to pay P2 for unit Q2, and P3 to the person buying unit Q3, for example. Producer surplus is the entire area of triangle A between the demand and marginal cost curves. There is no deadweight loss and there is no consumer surplus. The marginal revenue curve equals the demand curve.

Diff: 2 Type: ES Topic: Perfect Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 118 Copyright © 2024 Pearson Canada Inc.

Figure 13.18

124) Refer to Figure 13.18. Graph (a) represents a monopolist who cannot price discriminate and graph (b) represents a monopolist practicing perfect price discrimination. On each graph, identify the monopoly price, the monopoly output, the efficient output, and the areas representing profit, consumer surplus, and deadweight loss.

Answer: In graph (b), the monopoly output is equal to the efficient output, and the consumer surplus and deadweight loss shown in graph (a) are converted to profit. In graph (a), the monopoly price occurs where demand is equal to the output where marginal revenue equals marginal cost. In graph (b), a monopolist who practices perfect price discrimination charges each consumer the price that he or she is willing to pay, so there is not one set monopoly price.

125) Book publishers often use price discrimination across time to increase profits. Toni Morrison's book, A Mercy, was published as a hardcover edition in November 2008 at a price of $23.95. In August 2009, the paperback version was published at a price of $15.00. Assume that 100,000 hardcover books were sold to hard-core Toni Morrison fans in November 2008, and 400,000 paperback books were sold to casual readers in August 2009. Illustrate each of these situations graphically. Assume that the marginal cost of the hardcover version is $2.00 and the marginal cost of the paperback version is $0.75. Answer:

Diff: 2 Type: ES Topic: Price Discrimination Across Time Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking 121 Copyright © 2024 Pearson Canada Inc.

126) Arnold's Airport Transport provides passenger transportation to and from the local airport. Arnold charges a flat rate of $30 per person for round-trip service, and he gives a $5 discount to senior citizens. Assume Arnold's marginal cost is $3.00 per person. Draw two graphs, one showing demand and marginal cost for his $30 customers, of which he has 300 per month, and the other graph showing demand and marginal cost for his senior citizen customers, of which he has 100 per month. If Arnold charged all of his customers $30, he would have 325 customers per month. Answer:

Diff: 2 Type: ES Topic: Price Discrimination Learning Outcome: 13.5 Explain how a firm can increase its profits through price discrimination AACSB: Analytical Thinking Special Feature: Solved Problem: How Apple Uses Price Discrimination to Increase Profits 122 Copyright © 2024 Pearson Canada Inc.

13.6

Discuss government policies toward monopoly

1) The ________ is the law that covers monopolies in Canada. A) Sherman Act B) MacDonald Act C) Monopoly Act D) Competition Act E) Antitrust Law Answer: D Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 2) Competition laws are intended to A) reduce trust the public has in elected officials. B) reduce trust between firms and consumers. C) eliminate collusion and promote competition. D) prevent selling below average total cost. E) force sellers to sell at the marginal cost. Answer: C Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 3) Guidelines for mergers between firms are laid out in the A) Mergers and Acquisitions Act. B) Sherman Act. C) Competition Act. D) Antimonopoly Act. E) Antitrust Act. Answer: C Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

4) Competition law in the United States are known as A) the Dodd-Frank Act. B) Roosevelt laws. C) Antitrust laws. D) Antimonopoly laws. E) Competition Act. Answer: C Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 5) Enforcement of the Competition Act is the job of the A) Federal Trade Commission. B) Ministry of Industry. C) Competition Bureau. D) Ministry of Justice. E) Provincial Governments. Answer: C Diff: 2 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 6) A merger between the McCain Foods and Cavendish Farms (both of which are major producers of frozen French fries) would be an example of a A) vertical merger. B) horizontal merger. C) conglomerate merger. D) trust. E) cartel. Answer: B Diff: 1 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 7) A merger between Rona building supplies and West Fraser Timber Co Ltd would be an example of a A) vertical merger. B) horizontal merger. C) conglomerate merger. D) conspiracy in restraint of trade. E) trust. Answer: A Diff: 1 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 124 Copyright © 2024 Pearson Canada Inc.

8) When a proposed merger between two companies is reviewed by the government, the relevant market is reviewed by A) whether or not there are close substitutes for the products of the two firms. B) how elastic the demand is for each firm's product. C) counting the number of firms that produce the same product. D) how much advertising is done in the industry. E) whether the firms have monopoly over the input resources for the product. Answer: A Diff: 2 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 9) If an increase in the price of PC Cola causes the profits of President's Choice to decrease, A) PC Cola is in a market by itself. B) the competition bureau should prevent President's Choice from raising its prices. C) the relevant market for PC Cola includes competitors. D) President's Choice should cease production. E) as price increase demand decreases, PC Cola is facing a downward sloping demand curve. Answer: C Diff: 1 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 10) If a merger creates a firm with 65% of the sales in the market, A) the merger will be reviewed by the Competition Bureau. B) the merger is unlikely to be reviewed. C) the merger is certain to be prevented by the Competition Bureau. D) the merger will be reviewed by the Prime Minister's Office. E) the merger will be allowed without any review. Answer: A Diff: 2 Type: MC Topic: Market Power Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 11) The Competition Bureau considers markets to have A) a product dimension and a price dimension. B) a product dimension and a geographic dimension. C) a quality dimension and a quantity dimension. D) a time dimension and a space dimension. E) a product dimension and a quality dimension. Answer: B Diff: 2 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 125 Copyright © 2024 Pearson Canada Inc.

12) A possible advantage of a horizontal merger for the economy is that A) the merging firms could avoid losses. B) the merged firm might reap economies of scale which could translate into lower prices. C) the degree of competition in the industry will be intensified. D) the government stands to collect more corporate income tax revenue. E) all of the above are possible advantages of a horizontal merger. Answer: B Diff: 2 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 13) The Competition Bureau will prevent a merger from taking place if A) the merger will prevent or reduce competition substantially. B) the merger will prevent or reduce competition in the slightest. C) the merger will result in higher profits for the merged firms. D) the merger will increase market concentration. E) the merger will increase producer surplus. Answer: A Diff: 2 Type: MC Topic: Government Policy toward Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 14) A merger between two competitors may be approved by the Competition Bureau if the two companies can substantiate ________ as a result of the merger. A) increases in revenue for the merged company B) an increase share of sales controlled by one firm C) decreases in marginal revenue for the merged company D) increases in economic efficiency E) lower prices Answer: D Diff: 2 Type: MC Topic: Government Policy toward Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 15) Many natural monopolies in Canada are regulated by A) the Federal Trade Commission. B) the Competition Bureau. C) local or provincial public utility boards. D) Industry Canada. E) the Federal Government. Answer: C Diff: 1 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 126 Copyright © 2024 Pearson Canada Inc.

16) If a natural monopoly regulatory board sets a price where marginal cost is equal to demand, A) the firm would earn monopoly profits. B) economic efficiency would not be achieved. C) the firm would incur a loss. D) the firm would break even. E) the firm will go out of business. Answer: C Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking Figure 13.18

Figure 13.18 shows the cost and demand curves for the Erickson Power Company. 17) Refer to Figure 13.18. Erickson Power is a natural monopoly because A) it is a power company and all power companies are natural monopolies. B) average total cost is still declining when it intersects demand. C) of its continually declining marginal revenue curve as output rises. D) its marginal cost lies entirely below its long-run average cost. E) its average total cost crosses both the marginal revenue and average revenue. Answer: B Diff: 1 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 127 Copyright © 2024 Pearson Canada Inc.

18) Refer to Figure 13.18. The firm would maximize profit by producing A) Q1 units. B) Q2 units. C) Q3 units. D) Q4 units. E) Anywhere between Q3 units and Q4 units. Answer: B Diff: 1 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 19) Refer to Figure 13.18. The profit-maximizing price is A) P1. B) P2. C) P3. D) P4. E) Anywhere between P3 and P4. Answer: C Diff: 1 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 20) Refer to Figure 13.18. If the government regulates Erickson Power Company so that the firm can earn a normal profit, the price would be set at ________ and the output level is ________. A) P1; Q4 B) P2; Q3 C) P2; Q2 D) P1; Q2 E) P3; Q2 Answer: B Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills

21) Refer to Figure 13.18. What is the economically efficient output level and what is the price at that level? A) Q4; P1 B) Q3; P2 C) Q2; P2 D) Q2; P3 E) Q4; P3 Answer: A Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 22) Refer to Figure 13.18. Why won't regulators require that Erickson Power produce the economically efficient output level? A) because there is insufficient demand at that output level B) because at the economically efficient output level, the marginal cost of producing the last unit sold exceeds the consumers' marginal value for that last unit C) because Erickson Power will earn zero profit D) because Erickson Power will sustain persistent losses and will not continue in business in the long run E) because Erickson Power provides an essential product and regulators wants it to earn high profits Answer: D Diff: 2 Type: MC Topic: Government Policy toward Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 23) Economic efficiency requires that a natural monopoly's price be A) equal to average total cost where it intersects the demand curve. B) equal to marginal cost where it intersects the demand curve. C) equal to average variable cost where it intersects the demand curve. D) equal to the lowest price the firm can charge and still make a normal profit. E) equal to the minimum of average total cost so that it earns zero profit. Answer: B Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

24) In regulating a natural monopoly, the price strategy that ensures the highest possible output and zero profit is one that sets price A) equal to average total cost where it intersects the demand curve. B) equal to marginal cost where it intersects the demand curve. C) equal to average variable cost where it intersects the demand curve. D) corresponding to the demand curve where marginal revenue equals zero. E) equal to average total cost where it intersects the marginal revenue curve. Answer: A Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking Figure 13.19

Assume Shaw Cable has a monopoly to provide cable TV in Vancouver. Figure 13.19 shows the cable television market in Vancouver. 25) Refer to Figure 13.19. Following the entry of Telus, the subscription price falls from PM to PC. What is the increase in consumer surplus as a result of this change? A) the area A + B + C B) the area B + C C) the area D + F D) the area B + C + D E) the area A + B + C + D Answer: D Diff: 3 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 130 Copyright © 2024 Pearson Canada Inc.

26) Refer to Figure 13.19. What is the size of the deadweight loss prior to Telus entering the market and what happens to this deadweight loss after Telus does enter the market? A) The deadweight loss of area D is converted to consumer surplus. B) The deadweight loss of area C + D is converted to consumer surplus. C) The deadweight loss area B + C is converted to consumer surplus. D) The deadweight loss of area D is converted to producer surplus. E) The total deadweight loss is the area D + F; D is converted to consumer surplus and F to producer surplus. Answer: A Diff: 3 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 27) A product's price approaches its marginal cost as market concentration increases. Answer: FALSE Diff: 2 Type: TF Topic: Market Power Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 28) A vertical merger is one that takes place between two companies producing different goods or services for one specific finished product. Answer: TRUE Diff: 1 Type: TF Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 29) Holding everything else constant, government approval of horizontal mergers is more likely to be granted if the "market" that firms are in are broadly defined rather than narrowly defined. Answer: TRUE Diff: 2 Type: TF Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 30) Competition Bureau would never approve a proposed merger between two firms that could significantly increase the newly merged firm's market power even if the efficiency gains from the newly merged firm could make consumers better off. Answer: FALSE Diff: 2 Type: TF Topic: Government Policy toward Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

31) Identify two ways by which the government controls monopolies? Answer: The government control monopolies by enforcing antitrust laws and through economic regulation of natural monopolies. Diff: 2 Type: SA Topic: Government Policy toward Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 32) a. What is the difference between a horizontal merger and a vertical merger? b. Give an example of each type of merger. c. Could a horizontal merger be welfare improving? Answer: a. A horizontal merger is a merger between firms in the same industry. A vertical merger is a merger between firms at different stages of production of a good. b. Students can offer many different examples. c. Yes, if there are economies of scale so that the merged firm can produce output at a lower average total cost. Diff: 2 Type: ES Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

Figure 13.20

33) Refer to Figure 13.20 to answer the following questions. a. What quantity will this monopoly produce and what price will it charge? b. Suppose the monopoly is regulated. If the regulatory agency wants to achieve economic efficiency, what price should it require the monopoly to charge? c. To achieve economic efficiency, what quantity will the regulated monopoly produce? d. Will the regulated monopoly make a profit if it charges the price that will achieve economic efficiency? e. Suppose the government decides to regulate the monopoly by imposing a price ceiling of $35. What quantity will the monopoly produce and what price will the monopoly charge? f. With the price ceiling of $35, what profit will the monopoly earn? Answer: a. Quantity = 835 units and Price = $59. b. To achieve economic efficiency, the price = $20. c. The quantity produced = 2,204 units. d. No, the regulated monopoly will make a loss. e. If the ceiling price is set at $35, the monopoly will produce a quantity of 1,740 units and charge the ceiling price of $35. f. The monopoly will break even. Diff: 2 Type: ES Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills

34) Collusion is A) common among monopoly firms. B) an agreement among firms to charge the same price or otherwise not to compete. C) necessary for firms to raise money by borrowing from investors or from banks in order to fund research and development required to develop new products. D) legal under Canadian antitrust laws if the intent is to increase competition. E) all of the above. Answer: B Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 35) In Canada, government policies with respect to monopolies and collusion are embodied in A) the Constitution of 1982. B) common law, which Canada adopted from English law. C) the Sherman Act. D) the Competition Act. E) the Antitrust Act. Answer: D Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 36) The maximum possible sentence for violating the Competition Act is A) deportation. B) 5 years in prison and/or a $5 million fine. C) a fine of up to 300% of the gains from violating the act. D) 14 years in prison and/or a $25 million fine. E) $10 million fine. Answer: D Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 37) Which of the following is not an offence under the Competition Act? A) price discrimination B) price fixing C) bid rigging D) predatory pricing E) All of the above are offences under the Competition Act. Answer: A Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 134 Copyright © 2024 Pearson Canada Inc.

38) The guidelines for mergers between companies are set out in the A) Mergers and Acquisitions Act. B) Competition Act. C) MacDonald Act of 1868. D) Sherman Act. E) Antitrust Act. Answer: B Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 39) Antitrust laws are intended to A) prevent any one firm from ever becoming a monopoly. B) prevent banks and non-bank lenders from becoming trust companies. C) eliminate collusion and promote competition among firms. D) eliminate deceptive advertising, which destroys the public trust. E) eliminate mistrust among the merging companies. Answer: C Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 40) The Competition Act gives authority to enforce the act to which organization? A) the antitrust division of the Office of the Superintendent of Financial Institutions B) the Canada Revenue Agency C) the Antitrust Division of the Ministry of the Economy D) the Competition Bureau E) the Department of Finance Answer: D Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 41) A merger between firms at different stages of production of a good A) is a vertical merger. B) was made illegal by the Sherman Act. C) was made legal by the Competition Act. D) is a horizontal merger. E) is a weak merger. Answer: A Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

42) A horizontal merger A) is a merger between firms in the same industry. B) results in a trust (for example, CanadaTrust). C) is a merger between firms at different stages of production of a good. D) was illegal in Canada until the Competition Act was overturned in 1980. E) is illegal in Canada. Answer: A Diff: 1 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 43) Molson of Canada, one of Canada's oldest brewers, merged with Coors, an American brewer. This is an example of A) a conglomerate merger. B) a horizontal merger. C) a vertical merger. D) a two-dimensional merger. E) an international merger. Answer: B Diff: 1 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 44) When considering the impact of a merger, the Competition Bureau has to consider A) product definition and complexity. B) market definition and measures of market concentration. C) market definition and the availability of complements. D) the profitability of the merged firm and tax revenue. E) the quality of the product of merging firms. Answer: B Diff: 2 Type: MC Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

45) Which two factors make regulating mergers complicated? A) First, firms may lobby government officials to influence their decision to approve the merger. Second, by the time the government officials reach a decision regarding the merger, the firms often decide not to merge. B) First, the time it takes to reach a decision to approve a merger is so long that the firms often have new owners and managers. Second, by law, government officials are not allowed to consider the impact of foreign trade (exports and imports) on the degree of competition in the markets of the merged firms. C) First, the Competition Bureau must approve mergers. Second, the concentration ratios that are used to evaluate the degree of competition of the merged firms face are flawed. D) First, it is not always clear what market firms are in. Second, the newly merged firm might be more efficient than the merging firms were individually. E) None of the above. Answer: D Diff: 2 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 46) A merger that leads to a new firm with a high degree of market power may be approved by the Competition Bureau if A) the new firm will pay significantly more taxes than the original firms. B) it will result in increased costs of production and therefore lower profits. C) the new firm will be much more efficient than existing firms, making both consumers and producers better off. D) the proposed merger eliminates foreign competition. E) both companies can convince the Bureau that they are not interested in high profits. Answer: C Diff: 2 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 47) Economists played a key role in the development of merger guidelines used by the Competition Bureau. These guidelines have two main parts. What are these parts? A) concentration ratios and the Herfindahl-Hirschman Index B) concentration standards and concentration ratios C) economic analysis and political analysis D) cost and benefit analysis E) market definition and measure of concentration Answer: E Diff: 1 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

48) The Competition Bureau does not usually allow mergers that result in a firm with sales greater than ________ of the entire market. A) 25 percent B) 35 percent C) 50 percent D) 65 percent E) 70 percent Answer: B Diff: 1 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 49) The Competition Bureau's definition of a market has two dimensions. Those elements are A) the product dimension and the geographic dimension. B) the geographic dimension and the time dimension. C) the product dimension and the legal dimension. D) the legal dimension and the cost dimension. E) the quality dimension and the quantity dimension. Answer: A Diff: 2 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 50) According to Competition Bureau practice, a proposed merger between two firms is likely to be challenged if A) the post-merger firm has sales of more than 25 percent of the market's sales and/or the 4 largest remaining firms have sales of more than 65 percent of the market. B) the post-merger firm has sales of more than 35 percent of the market and/or the 4 largest remaining firms have sales of more than 65 percent of the market. C) the post-merger firm has sales of more than 50 percent of the market and/or the 4 largest remaining firms have sales of more than 80 percent of the market. D) the post-merger firm has sales of more than 25 percent of the market and/or the 4 largest remaining firms have sales of more than 50 percent of the market. E) the post-merger firm has sales of more than 75% of the market. Answer: B Diff: 2 Type: MC Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

51) Consider an industry that is made up of six firms with the following market shares: Firm A = 20%; Firm B = 14%; Firms C and D = 8% each; and Firms E and F = 5% each. How will the industry be categorized? A) highly concentrated B) low concentration C) effectively monopolistic D) effectively perfectly competitive E) monopolistically competitive Answer: B Diff: 2 Type: MC Topic: Herfindahl-Hirschman Index Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 52) If a firm is a natural monopoly, competition from other firms cannot be counted on to force price down to the level where the company earns zero economic profit. How are prices usually set in natural monopoly markets in Canada? A) Each natural monopoly is made a public franchise. The public franchise is then required to set its price equal to its marginal cost. B) Natural monopolies are privately owned, but prices proposed by the firms must be approved by the Competition Bureau. C) Natural monopolies are privately owned and allowed to set their own prices. Government regulation of the firms would result in greater deadweight losses. D) Public utility boards usually set prices for natural monopolies. E) Any of the above can be used to set the prices of natural monopolies depending upon the nature of business. Answer: D Diff: 1 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

Figure 13.21

Figure 13.21 shows the market demand and cost curves facing a natural monopoly. 53) Refer to Figure 13.21. Suppose the government regulates this industry in order to remove the inefficiency implied by the behaviour of the profit maximizing owners. If regulators require that the firm produces the economically efficient output level, what is this level and what price will be charged? A) Q4 units; P4 B) Q1 units; P4 C) Q1 units; P1 D) Q3 units; P3 E) Q5 units; P5 Answer: A Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 54) Refer to Figure 13.21. Which of the following would be true if government regulators required the natural monopoly to produce at the economically efficient output level? A) It would result in a misallocation of resources. B) The marginal cost of producing the last unit sold would exceed the marginal benefit. C) The firm would sustain persistent losses and would not continue in business in the long run. D) The firm would break even. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills

55) Refer to Figure 13.21. If the regulators of the natural monopoly allow the owners of the firm to break even on their investment, the firm will produce an output of ________ and charge a price of ________. A) Q1 units; P4 B) Q1 units; P1 C) Q5 units; P3 D) Q2 units; P5 E) Q3 units; P3 Answer: E Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 56) Refer to figure 13.21. In the absence of any government regulation, the profit-maximizing owners of this firm will produce ________ and charge a price of ________. A) Q0 units; P0 B) Q1 units; P1 C) Q1 units; P4 D) Q3 units; P3 E) Q5 units; P5 Answer: B Diff: 2 Type: MC Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 57) A proposed merger between Rogers Cellular and Telus Mobility would be classified as a ________ merger. A) vertical B) horizontal C) conglomerate D) diagonal E) weak Answer: B Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

58) The product dimension of the Competition Bureau's merger guidelines is concerned with A) the impact of an increase in regional price on a firm's profits. B) the impact of an increase in marketing expenditure on a firm's profits. C) the availability of complements for a product. D) the number of firms producing the product. E) the availability of substitutes for a product. Answer: E Diff: 2 Type: MC Topic: Monopoly and Economic Efficiency Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 59) Despite the popularity of the National Hockey League in Toronto, the Maple Leafs remain the only team in an area with a market of more than 6 million people. Alberta's population of just over 4 million has two teams. One possible reason why Toronto only has one hockey team is A) a second team would violate antitrust laws. B) a second team in Toronto would reduce the profits of both the Maple Leafs and the Buffalo Sabres. C) NHL Commissioner Gary Betman doesn't like having to watch games in Toronto. D) a second team in Toronto is less likely to be profitable than a new team in Arizona. E) no one is interested to join another team than Maple Leaf. Answer: B Diff: 1 Type: MC Topic: Characteristics of Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills 60) Merger guidelines developed by the Competition Bureau use a four-firm sales concentration of 75 percent of market sales as an indicator of concentration. Answer: FALSE Diff: 1 Type: TF Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 61) Provincial offices of the Competition Bureau usually set prices for natural monopolies in their jurisdictions. Answer: FALSE Diff: 1 Type: TF Topic: Government Policy toward Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 62) The term "trust" in antitrust refers to the trust the public has in companies to provide safe products. Answer: TRUE Diff: 1 Type: TF Topic: Antitrust Law and Enforcement Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 142 Copyright © 2024 Pearson Canada Inc.

63) Economic efficiency requires that a natural monopoly's price be set corresponding to the quantity where marginal revenue equals marginal cost. Answer: FALSE Diff: 2 Type: TF Topic: Monopoly and Economic Efficiency Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 64) Identify the type of merger in each of the following situations and indicate how the post-merger concentration ratio for the industry is affected. a. A steel company merges with a coal and iron ore mining company. b. Staples, a retailer of office supplies, acquires Office Depot, another retailer of office supplies. c. An oil company merges with pipeline, shipping, and railroad companies as well as refineries and gas stations. Answer: a. This would be a vertical merger; the concentration ratio of the steel industry is not likely to change. b. This is a horizontal merger; the concentration ratio would increase. c. This is a vertical merger; the concentration ratio for the oil industry is not likely to change. Diff: 2 Type: ES Topic: Mergers Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking 65) a. What is the defining characteristic of a natural monopoly? b. Should the government break up a natural monopoly into two or more firms to make the industry more competitive? c. Suppose the government wants to ensure that some of the benefits of declining average total cost are passed on to consumers. To achieve this goal, it requires that the natural monopoly set its price equal to marginal cost. Is this a feasible goal? Explain. d. What is an alternative to marginal cost pricing that ensures that consumers reap some of the benefits of declining average total cost? Answer: a. The defining characteristic is the presence of significant economies of scale such that the average total cost of production declines over the relevant range of market demand. b. No, given the importance of economies of scale, society is better off with one big firm producing the output rather than several small firms. c. Setting price equals to marginal cost is not feasible because the natural monopoly will incur persistent losses and will not continue to produce in the long run. d. An alternative solution is to require average total cost pricing; that is, price is set equal to the average cost of production (where the average cost includes the opportunity cost of funds invested in the firm by its owners). This will allow the monopolist to break even on its investment and stay in business. Diff: 3 Type: ES Topic: Natural Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Reflective Thinking

Figure 13.22

66) Refer to Figure 13.22 to answer the following questions. a. What quantity will this monopoly produce and what price will it charge? b. Suppose the government decides to regulate this monopoly and imposes a price ceiling of $25. Now what quantity will the monopoly produce and what price will it charge? c. Will every consumer who is willing to pay the ceiling price of $25 be able to buy the product? Briefly explain. Answer: a. To maximize profits, the monopoly will produce the quantity where marginal revenue equals marginal cost. So, the monopoly will produce 15 units and charge a price of $32. b. Its marginal revenue curve is now a flat line at $25, running from the vertical axis to the demand curve, so the monopoly will produce 26 units and charge a price of $25. c. The quantity demanded at a price of $25 is 34, but the quantity supplied is only 26, so there will be a shortage of 8 units, and some consumers will not be able to buy the product. Diff: 2 Type: ES Topic: Government Policy toward Monopoly Learning Outcome: 13.6 Discuss government policies toward monopoly AACSB: Analytic Skills

Microeconomics, 4Ce (Hubbard) Chapter 14 The Markets for Labour and Other Factors of Production 14.1

Explain how firms choose the profit-maximizing quantity of labour to employ

1) In a market economy, the price of labour (wages) is determined by A) business owners decisions alone. B) government policies such as the minimum wage. C) the interaction of the demand for workers and the supply of workers. D) the availability of substitutes for labour. E) the elasticity of labour demand. Answer: C Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking Special Feature: Chapter Opener: Great Hamburger? Thank a Robot 2) The labour market is considered as one of the more important markets in an economy because A) most people typically earn the bulk of their income from wages and salaries. B) most people are concerned that wages determined in the labour market are unfair. C) the usual market forces do not hold in the labour market. D) the labour market does not reach an equilibrium. E) the government has to decide about the minimum wage in this market. Answer: A Diff: 1 Type: MC Topic: Factors of Production Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking Special Feature: Chapter Opener: Great Hamburger? Thank a Robot 3) Demand in factor markets differs from demand in product markets in that A) the demand for a factor of production is difficult to determine. B) the demand for a factor of production is influenced by workers' productivity and by the producers' expected sales revenues, not by tastes and preferences of consumers. C) demand for a factor of production is based on the tastes and preferences of firms. D) demand for a factor of production is based on the tastes and preferences of resource owners. E) demand for a factor of production is determined by the overall wealth of the country. Answer: B Diff: 1 Type: MC Topic: Factors of Production Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking Special Feature: Chapter Opener: Great Hamburger? Thank a Robot

4) The demand for labour is described as a derived demand because A) it is derived by workers seeking to earn income to fund the consumption of goods and services. B) it is derived by producers seeking to make profits by starting new businesses. C) it is derived from the demand for products that use labour in the production process. D) it is derived from government institutions which rely on labour markets for the purpose of raising tax revenue. E) it is derived by the interaction of labour supply and labour demand. Answer: C Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 5) Which of the following is not an example of a derived demand? A) Several of the animated films released between 1999 and 2001 failed to earn a profit, which caused some companies to stop making these films, thereby decreasing the demand for animators. B) Seth Bullock, a personal-injury attorney, complains that he is earning far less now than a few years ago largely because personal injury cases have been undercut by state laws limiting class-action suits and payouts on damages. C) Millicent Manning, the owner of a furniture store, is concerned that her sales have fallen for the past six months. She attributes this to the downturn in the real estate market. D) As advancements in medical technology increase the safety and success of laser eye surgery, the demand for opticians has decreased. E) All of the above are examples of derived demand. Answer: C Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 6) Marginal revenue product of labour for a competitive seller is A) the change in total product from hiring one more worker. B) equal to the marginal product of labour multiplied by the output price. C) the output price multiplied by the quantity sold. D) the marginal revenue of the product multiplied by the output price. E) equal to the marginal product of labour multiplied by the quantity of output. Answer: B Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

7) Suppose you own a local sandwich shop and Sophia is one of your employees who has worked in the shop for a year and asks for a raise. You will respond to her A) by threatening to fire her she asks again to give a raise. B) by evaluating her marginal revenue product and her skills and accept her raise request if she is contributing more towards the revenue of your shop. C) by explaining to her how difficult it is for you to break even. D) by convincing her that it is not easy to find a competitive job and telling her that she should be happy to be employed. E) by explaining to her that there are many jobless people in the area and if she is not happy with the current wage, she can quit, it is not hard to find a new worker. Answer: B Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: When Should You Give an Employee a Raise? 8) Marginal revenue product for a perfectly competitive seller is equal to A) the output price multiplied by the total product of labour. B) the output price multiplied by the number workers hired. C) the change in total revenue that results from hiring another worker. D) the marginal cost of production. E) the wage rate in the market. Answer: C Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 9) What is the difference between labour's marginal product and marginal revenue product? A) The marginal product of labour is the increase in output as a result of hiring an additional worker while the marginal revenue product of labour is the increase in profit as a result of hiring an additional worker. B) The marginal revenue product of labour is the dollar value of hiring an additional worker while the marginal product of labour is the increase in the firm's physical output as a result of hiring an additional worker. C) The marginal product of labour is the additional labour's contribution to the firm's total output while the marginal revenue product is the additional labour's contribution to the firm's total sales revenue. D) Labour's marginal product is a measure of labour's productivity while labour's marginal revenue product is a measure of labour's ability to sell the firm's products. E) There is no difference; both terms are used for the same concept. Answer: C Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

10) What is the difference between a firm's marginal revenue and its marginal revenue product? A) Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the profit earned from hiring one more worker. B) Marginal revenue is the change in sales revenue from selling one more unit of output while marginal revenue product is the change in total revenue from hiring one more worker. C) Marginal revenue is the increase in revenue when a firm raises its output price while marginal revenue product is the increase in marginal product when a firm hires an additional worker. D) Marginal revenue is the change in output whereas marginal revenue product is change in input. E) There is no difference between the two terms. Answer: B Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking Figure 14.1

Figure 14.1 shows the marginal revenue product for Dale's Hand-Sewn Doilies, a producer of linen doilies. 11) Refer to Figure 14.1. If the wage rate is $40, how many workers should Dale hire? A) 6 units B) 5 units C) 4 units D) 3 units E) 2 units Answer: D Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

12) Refer to Figure 14.1. If the wage rate is $20, how many workers should Dale hire? A) 6 units B) 5 units C) 4 units D) 3 units E) 2 units Answer: A Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 13) Refer to Figure 14.1. If the wage rate is $28, how many workers should Dale hire? A) 6 units B) 5 units C) 4 units D) 3 units E) 2 units Answer: B Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 14) Refer to Figure 14.1. If the wage rate is $36, how many workers should Dale hire? A) 6 units B) 5 units C) 4 units D) 3 units E) 2 units Answer: C Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 15) Refer to Figure 14.1. If Dale can sell her doilies at $2 each, what is the marginal product of the 5th worker? A) $28 B) 28 doilies C) 14 doilies D) $56 E) $14 Answer: C Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 5 Copyright © 2024 Pearson Canada Inc.

16) Refer to Figure 14.1. If Dale can sell her doilies at $4 each, what is the marginal product of the 5th worker? A) $28 B) 28 doilies C) 7 doilies D) $7 E) $112 Answer: C Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 17) Refer to Figure 14.1. Suppose the market price of doilies rises to $3. What happens to the curve given in the diagram? A) Nothing, because labour's productivity has not changed. B) There will be a movement along the curve. C) The curve shifts to the right. D) The curve shifts to the left. E) We cannot answer the question without knowing if Dale would want to hire more workers. Answer: C Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 18) Refer to Figure 14.1. Suppose the market price of doilies falls from $2 each to $1 each. What happens to the curve given in the diagram? A) Nothing, because labour's productivity has not changed. B) There will be a movement downward along the curve. C) The curve shifts to the left. D) The curve shifts to the right. E) We cannot answer the question without knowing if Dale would want to hire more workers. Answer: C Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

19) A firm's demand for labour curve is also called its A) marginal revenue product of labour curve. B) marginal factor cost of labour curve. C) marginal valuation curve. D) marginal benefit of labour curve. E) marginal revenue curve. Answer: A Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking Table 14.1 Quantity of labour 1 2 3 4 5 6 7

Output (units) 80 170 240 300 350 390 420

20) Refer to Table 14.1. The marginal product of the fourth unit of labour is A) 300. B) 75. C) 60. D) 45. E) 15. Answer: C Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 21) Refer to Table 14.1. If the output price is $3, what is the marginal revenue product of the fifth unit of labour? A) $1,050 B) $360 C) $210 D) $180 E) $150 Answer: E Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 7 Copyright © 2024 Pearson Canada Inc.

22) Refer to Table 14.1. Suppose the output price is $3. If the firm represented in the table is maximizing its profit by hiring six workers, what is the wage rate? A) $120 B) $90 C) $65 D) $40 E) There is insufficient information to answer the question. Answer: A Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 23) Refer to Table 14.1. Suppose the output price is $3. If the wage rate is $90, what is the profitmaximizing quantity of labour that the firm should hire? A) 7 units B) 6 units C) 5 units D) 4 units E) 3 units Answer: A Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 24) Firms use information on labour's marginal revenue product to determine A) how much to produce at each output price. B) how many workers to hire at each wage rate. C) how much each worker should produce. D) how much marginal product to produce at each wage rate. E) how much labour services to supply at each wage rate. Answer: B Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

25) A reason why a perfectly competitive firm's demand for labour curve slopes downward is that A) each additional unit of labour hired is less efficient than previously hired units. B) in the short run, as more labour is hired, labour's marginal product falls because of the law of diminishing returns. C) the extra cost of hiring additional units of labour increases as a firm hires more units of labour. D) the firm's demand curve for the product that uses labour is downward sloping. E) the law of demand says that quantity of a good falls as price increases. Answer: B Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 26) A firm's primary interest when it hires an additional worker is A) the cost of hiring the additional worker. B) how the average output of the firm will be affected by this new worker. C) the extra revenue the firm realizes from hiring that worker. D) whether or not the new worker gets along with the firm's existing workers. E) to take as much work from the worker as possible. Answer: C Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 27) The firm's gain in profit from hiring another worker is A) the marginal revenue product of the extra worker. B) the difference between marginal revenue product and the wage of the worker. C) the extra output of the extra worker. D) the extra revenue that the worker generates. E) the reduction in costs from hiring another worker. Answer: B Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

Table 14.2 Quantity of labour

Output of iPods per Week

Marginal Product Product Price Wage of labour (dollars) (dollars)

$300

$350

280

350

260

350

240

350

220

350

200

350

180

350

28) Refer to Table 14.2. The firm represented in the table A) has market power in the factor market only. B) has market power in the output market only. C) has market power in both the factor and product market. D) has no market power in the factor or product market. E) needs more information to determine its market power. Answer: B Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills Special Feature: Solved Problem: Hiring Decisions by a Firm That Is a Price Maker 29) Refer to Table 14.2. The marginal revenue product of labour from the third unit of labour is A) $5,460. B) $1,560. C) $1,260. D) $945. E) $780. Answer: C Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills Special Feature: Solved Problem: Hiring Decisions by a Firm That Is a Price Maker

30) Refer to Table 14.2. The marginal profit from hiring the second unit of labour is A) $4,200. B) $1,960. C) $1,800. D) $1,645. E) $1,450. Answer: E Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills Special Feature: Solved Problem: Hiring Decisions by a Firm That Is a Price Maker 31) Refer to Table 14.2. What is the profit-maximizing quantity of labour that the firm should hire? A) 5 units B) 4 units C) 3 units D) 2 units E) 1 unit Answer: A Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills Special Feature: Solved Problem: Hiring Decisions by a Firm That Is a Price Maker 32) Suppose a competitive firm pays a wage of $12 an hour and sells its product at $3 per unit. Assume that labour is the only input. If hiring another worker would increase output by five units per hour, then to maximize profits the firm should A) not change the number of workers it currently hires. B) lay off some of its workers. C) hire the additional worker. D) hire some new workers and layoff some old workers. E) There is not enough information to answer the question. Answer: C Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

33) Suppose a competitive firm is paying a wage of $12 an hour and sells its product at $3 per unit. Assume that labour is the only input. If hiring another worker would increase output by three units per hour, then to maximize profits the firm should A) cease operation. B) not hire an additional worker. C) hire another worker. D) lay off some workers. E) There is not enough information to answer the question. Answer: B Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 34) Suppose a competitive firm is paying a wage of $12 an hour and sells its product at $3 per unit. Assume that labour is the only input. If the last worker hired increases output by three units per hour, then to maximize profits the firm should A) not change the number of workers it currently hires. B) lay off some of its workers. C) hire additional workers. D) hire some new workers and layoff some old workers. E) There is not enough information to answer the question. Answer: B Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 35) Let MP = marginal product, P = output price, and W = wage, then the equation that represents the condition where a competitive firm would hire another worker is A) P × MP = W. B) P × MP < W. C) P × MP > W. D) P × W > MP. E) P × W < MP. Answer: C Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

36) Let MP = marginal product, P = output price, and W = wage, then the equation that represents a situation where a competitive firm should lay off some workers to maximize profits is A) P × MP = W. B) P × MP > W. C) P × MP < W. D) MP × W < $40 P. E) MP × W = P. Answer: C Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 37) If a worker can produce 20 units of output which can be sold for $4 per unit, what is the maximum wage that firm should pay to hire this worker? A) $80 B) $80 minus the firm's profit markup C) $40 D) It depends on what the going wage rate is in the labour market. E) There is insufficient information to answer the question. Answer: A Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 38) Marginal revenue product can be calculated using the formula marginal product × output price A) only if output price is constant. B) only if output is constant. C) only if the marginal product of labour is constant. D) only if the both marginal product of labour and the output price are constant. E) only if the firm has market power in the labour market. Answer: A Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

39) An increase in the wage rate causes A) a rightward shift of the firm's labour demand curve. B) a leftward shift of the firm's labour demand curve. C) a decrease in the quantity of labour demanded. D) an increase in labour's marginal productivity. E) an increase shifts the labour supply curve to the right. Answer: C Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 40) A decrease in the wage rate causes A) an increase in the quantity of labour demanded. B) a rightward shift of the firm's labour demand curve. C) a leftward shift of the firm's labour demand curve. D) a decrease in labour's productivity. E) a leftward shift of the labour supply curve. Answer: A Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 41) An increase in a perfectly competitive firm's demand for labour could be caused by A) a decrease in the market wage rate. B) an increase in the market demand for the firm's product. C) a decrease in the marginal product of workers. D) layoff of workers from the firm. E) an increase in the quantity of labour supplied. Answer: B Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 42) Which of the following will not cause the labour demand curve to shift to the right? A) an increase in the price of the firm's product B) a technological improvement that increases labour productivity C) an increase in human capital in the labour force D) an increase in the market wage rate E) All of the above will cause a right shift of labour demand curve. Answer: D Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

43) In the legal sector, some practice areas have declined in recent years. For example, personal-injury and medical-malpractice cases have been undercut by state laws limiting class-action suits, out-of-state plaintiffs and payouts on damages, and securities class-action litigation has declined in part because of a buoyant stock market. How does this affect the market for lawyers? A) The demand for lawyers shifts to the left. B) The demand for lawyers shifts to the right. C) The supply of lawyers shifts to the left. D) The quantity of lawyers demanded decreases and this is represented by a movement along the demand curve. E) Both the demand and supply curves decrease. Answer: A Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 44) If education reform leads to a more skilled and better trained public, the economy would experience A) an increase in human capital. B) an increase in the supply of labour. C) an increase in labour demand. D) an increase in comparable worth. E) a decrease in compensating differentials. Answer: A Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 45) One way to increase the demand for labour would be A) to better educate workers. B) to decrease wages. C) to give subsidies to firms. D) to enact a minimum wage. E) to increase the supply of labour. Answer: A Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

46) Education reform could lead to a more skilled and better trained public. A more skilled and better trained public would A) cause the market supply curve for labour to shift to the right. B) cause the market demand curve for labour to shift to the right. C) not shift the market demand curve for labour. D) shift the labour demand curve to the left. E) cause both the market demand curve for labour and the market supply curve for labour to shift to the left. Answer: B Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 47) Labour demand is considered a derived demand because producers do not demand labour for itself but only because labour is used to produce output that consumers desire. Answer: TRUE Diff: 1 Type: TF Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 48) The marginal product of labour is the increase in output as a result of hiring an additional worker while the marginal revenue product of labour is the increase in profit as a result of hiring an additional worker. Answer: FALSE Diff: 1 Type: TF Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 49) Technological advancements that increase labour's productivity shift the labour supply curve to the right. Answer: FALSE Diff: 2 Type: TF Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking, Use of Information Technology 50) A profit-maximizing firm should hire workers up to the point where labour's marginal revenue product equals the wage rate. Answer: TRUE Diff: 2 Type: TF Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

51) What are the five most important variables that cause the market demand curve for labour to shift? Answer: The most important factors that cause the demand curve for labour to shift are: 1) changes in human capital, 2) changes in technology, 3) changes in the quantity of other inputs, 4) changes in the price of the product, and 5) changes in the number of firms in the market. Diff: 2 Type: SA Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 52) A firm's labour demand curve is also its marginal revenue product curve. For both the perfectly competitive firm and the output price maker, the labour demand curve slopes downwards. However, there is a difference in the reasons why the labour demand curve slopes downwards. What is this difference? Answer: A perfectly competitive firm can sell all its output at a constant price. This means that its marginal revenue product falls as additional units of labour are hired only because of the law of diminishing returns. This law states that in the presence of a fixed factor, ultimately each additional unit of labour will be less productive than previous units. A firm with market power has to lower its selling price to sell more, so its marginal revenue product falls as additional units of labour are hired because of diminishing returns and a falling marginal revenue. Diff: 2 Type: SA Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

Table 14.3 Number of Mechanics

Oil Changes per Day

1 2 3 4 5 6

6 12 17 21 24 26

Marginal Product

Marginal Revenue Product

53) Refer to Table 14.3. Oil Can Harry's, a new automobile service shop, is ready to start hiring. The table above shows the relationship between the number of mechanics the firm hires and the quantity of oil changes it produces. a. Suppose the price of an oil change is $20. Complete the table by filling in the values for marginal product and marginal revenue product. b. Oil Can Harry's is an input price-taker. Suppose the wage paid to mechanics is $80 per day. What is the profit-maximizing number of mechanics? c. Suppose the wage rate rises to $100 per day. (i) What happens to the firm's demand curve for mechanics? (ii) What happens to the profit-maximizing quantity of mechanics? d. Suppose the wage rate is $60 per day and the price of haircuts is now $15. (i) What happens to the firm's demand curve for mechanics? (ii) What happens to the profit-maximizing quantity of mechanics? Answer: a. Marginal Number of Oil Changes Marginal Revenue Mechanics per Day Product Product 1 6 6 $120 2 12 6 120 3 17 5 100 4 21 4 80 5 24 3 60 6 26 2 40 b. The profit-maximizing number of mechanics is 4, where the marginal revenue product equals the wage rate. c. (i) The demand curve does not change. (ii) The profit-maximizing quantity of mechanics falls to 3. d. (i) The demand curve shifts to the right. (ii) The profit-maximizing quantity of mechanics increases to 4. Diff: 3 Type: SA Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

54) One difference between the labour market and markets for goods and services is that A) the demand in the labour market is inelastic; the demand for goods and services may be elastic or inelastic. B) the supply of labour is perfectly inelastic because the quantity supplied is constant. The elasticity of supply for goods and services is different in different markets. C) concepts of fairness arise more frequently in labour markets than in the markets for goods and services. D) in the labour market, firms are suppliers while households are demanders. E) in the labour market, demand is less elastic than demand in the goods and services market. Answer: C Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking Special Feature: Chapter Opener: Great Hamburger? Thank a Robot 55) The spread of robotic technology and artificial intelligence software will likely cause A) the demand for labour to shift to the right. B) the demand for labour to shift to the left. C) the demand for labour to remain unchanged. D) lower living standards. E) higher labour costs. Answer: B Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking Special Feature: Chapter Opener: Great Hamburger? Thank a Robot 56) Firms in the mining industry are much like other firms in that they use factors of production to produce a product. An example of capital used by mining firms to produce their products is A) truck drivers at remote locations. B) the land on which the ore is mined. C) the specialized training received by remote drivers. D) the robotic drilling machines. E) labour with specialized skills. Answer: D Diff: 1 Type: MC Topic: Factors of Production Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

57) What is a factor market? A) It is a market where financial instruments are traded. B) It is a market where stocks and bonds are traded. C) It is a market where producers buy consumption and capital goods. D) It is a market in which only capital goods are produced. E) It is a market where resources used to produce final goods are traded. Answer: E Diff: 1 Type: MC Topic: Factors of Production Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 58) The demand for labour is different from the demand for final goods and services because A) the demand for labour is derived from the demand for the good or service the labour is used to produce. B) it is a demand for people, not inanimate objects. C) the demand for labour is more inelastic than the demand for the goods and services produced with this labour. D) the law of demand does not apply to the demand for labour. E) the demand for labour is inelastic and demand for final goods and services is perfectly elastic. Answer: A Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 59) The demand for labour depends primarily on the additional output produced as a result of hiring an additional worker and A) the additional revenue received from selling the output produced as a result of hiring an additional worker. B) the payment made to the worker for producing the additional output. C) the elasticity of demand for the output produced by the worker. D) the number of workers willing to produce the additional output. E) the amount of output produced. Answer: A Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

60) The term "derived demand" refers to A) the demand for financial products called derivatives. B) the demand for a factor of production that is derived from the demand for the good the factor produces. C) a firm's estimated demand curve derived from sales data. D) a demand curve that derives from the availability of resources. E) demand that is created because of higher unemployment. Answer: B Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 61) An increase in the demand for orthodontic services leads to A) an increase in the supply of orthodontists. B) lower prices for orthodontic care. C) an increase in the demand for orthodontists. D) a rise in the rates of dental insurance. E) decrease in the tuition fee for orthodontists degree. Answer: C Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 62) The marginal product of labour is A) the payment made to workers for their contribution to the output they produce. B) equal to the demand for labour. C) always less than demand for labour. D) the change in a firm's revenue as a result of hiring one more worker. E) the additional output a firm produces as a result of hiring one more worker. Answer: E Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 63) A firm should hire more workers to increase its profits if A) the marginal product of labour is greater than the wage the firm will pay these workers. B) the wage rate is less than the marginal revenue product of labour. C) there is enough capital and other resources for the workers to use. D) the demand for labour is elastic. E) it has sufficient resources to produce more output. Answer: B Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 21 Copyright © 2024 Pearson Canada Inc.

64) The demand curve for labour is also A) the demand curve for the output produced with labour since the demand for labour is a derived demand. B) the marginal product of labour curve. C) the marginal revenue product of labour curve. D) the supply curve for the output labour is used to produce. E) the market wage curve. Answer: C Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 65) Which of the following describes a difference between the marginal product of labour and the marginal revenue product of labour? A) The marginal product of labour declines as each additional worker is hired because of the law of diminishing returns. The marginal revenue product of labour declines as each additional worker is hired because of diseconomies of scale. B) The marginal product of labour declines as each additional worker is hired because of the law of diminishing returns. The marginal revenue product increases as each additional worker is hired because of increases in the productivity of labour. C) The marginal product of labour is inelastic. The marginal revenue product of labour is elastic. D) The marginal product of labour measures the change in output as additional workers are hired. The marginal revenue product measures the change in revenue as additional workers are hired. E) None of the above. Answer: E Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 66) As more output is produced, the marginal product of labour declines A) because of the law of diminishing returns. B) if firms reduce the wage paid to labour. C) if firms hire too many workers. D) if the firm's output supply curve is inelastic. E) because the firm's marginal revenue declines. Answer: A Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

67) A firm's demand curve for labour slopes downwards because A) of the law of diminishing marginal returns. B) firms supply less labour as the wage rate rises. C) of hiring too many workers. D) workers supply less labour services as the wage rate falls. E) of rising marginal product. Answer: A Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 68) For a firm that is a price taker in the market for labour, the marginal revenue product of labour equals the A) marginal product of labour multiplied by the wage rate. B) marginal product of labour multiplied by the product price. C) marginal product of labour divided by the wage rate. D) wage rate. E) marginal product of labour multiplied by the marginal cost of production. Answer: B Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 69) The change in a firm's revenue as a result of hiring one more worker A) is the definition of the marginal product of labour. B) is equal to the firm's marginal cost. C) is equal to marginal revenue of the product the firm is producing. D) is the definition of the marginal revenue product of labour. E) will be negative if the demand for the firm's output is inelastic. Answer: D Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 70) The marginal revenue product of labour is defined as A) the change in the firm's revenue as a result of selling one more unit of output. B) the change in the firm's output as a result of hiring one more worker. C) the change in the firm's profit as a result of hiring one more worker. D) the change in the firm's revenue due to selling an extra unit of output. E) the change in the firm's revenue as a result of hiring one more worker. Answer: E Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 23 Copyright © 2024 Pearson Canada Inc.

71) The benefit to the firm from hiring one additional worker is called the A) marginal revenue product of labour. B) marginal revenue. C) marginal profit. D) total revenue. E) average revenue. Answer: A Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 72) Holding the price of a firm's output constant, if the marginal product of labour increases, A) the marginal revenue product of labour decreases. B) the marginal revenue product of labour also increases. C) the marginal products of other inputs also increase. D) the wage will have to increase. E) the marginal revenue product of labour may increase or decrease. Answer: B Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 73) Hotspur Incorporated, a manufacturer of microwaves, is a price taker in both the input and output markets. To maximize its profit, Hotspur will hire labour up to the point where A) the marginal product of labour is no longer positive. B) all economies of scale have been exhausted. C) the marginal revenue product of labour equals the wage rate. D) average total cost of the firm reaches its minimum. E) the marginal revenue product of labour equals the output price. Answer: C Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

74) Marginal revenue product falls as more labour is hired because A) the price of the product must fall for a perfectly competitive firm to sell more. B) the wage rate rises as more workers work more hours. C) the marginal product of labour is negative as additional units of labour are hired. D) the marginal product of labour falls as a result of the law of diminishing returns. E) when more labour is hired, workers get in each other's way and because of over crowded work space, productivity falls. Answer: D Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking Figure 14.2

Figure 14.2 shows the marginal revenue product for Becca's Baubles, a producer of hand-beaded bracelets. 75) Refer to Figure 14.2. If the wage rate is $20, how many workers should Becca hire? A) 6 B) 5 C) 4 D) 3 E) 2 Answer: A Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 25 Copyright © 2024 Pearson Canada Inc.

76) Refer to Figure 14.2. If Becca can sell her bracelets at $3 each, what is the marginal product of the 4th worker? A) $36 B) 12 bracelets C) 36 bracelets D) $92 E) $144 Answer: B Diff: 1 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 77) Refer to Figure 14.2. Suppose the market price of bracelets falls to $2. What happens to the curve given in the diagram? A) Nothing, because labour's productivity has not changed. B) There will be a movement along the curve. C) The curve will shift to the left. D) The curve will shift to the right. E) We cannot answer the question without knowing if Becca would want to hire more workers. Answer: C Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

Table 14.4 Number of Workers 1 2 3 4 5 6

Output of Microwave Ovens per Week 30 55 75 90 100 105

Hotspur Incorporated, a manufacturer of microwave ovens, is a price taker in its input and output markets. The firm hires labour at a constant wage rate of $800 per week and sells microwave ovens at a constant price of $80. Table 14.4 shows the relationship between the quantity of labour it hires and the quantity of microwave ovens it produces. 78) Refer to Table 14.4. What is the amount of revenue added as a result of hiring the fourth worker? A) $1,200 B) $5,000 C) $7,200 D) 15 microwaves E) 90 microwaves Answer: A Diff: 2 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 79) Refer to Table 14.4. What is the amount of profit added as a result of hiring the fourth worker? A) $7,200 B) $1,200 C) $1,050 D) $800 E) $400 Answer: E Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

80) Refer to Table 14.4. What is Hotspur's profit maximizing quantity of labour? A) 2 workers B) 3 workers C) 5 workers D) 6 workers E) 7 workers Answer: C Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 81) Which of the following is not held constant along a firm's demand curve for labour? A) the quantity of other inputs used by the firm B) the wage rate C) changes in technology D) the price of the product produced by the firm E) All of the above are held constant along a firm's demand curve for labour. Answer: B Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

Table 14.5 Quantity of Labour Output 0 0 1 6 2 11 3 15 4 18 5 20 6 21

MPL --6 5 4 3 2 1

Price $200 180 160 140 120 100 80

Total Revenue $0

MRPL ---

Wage $500 500 500 500 500 500 500

Table 14.5 lists data for the production of propeller blades by Irving Shipyards. Irving is assumed to be a price maker, so to increase its sales of its propeller blades the firm must lower its price. MPL and MRPL refer to the marginal product of labour and the marginal revenue product of labour, respectively. 82) Refer to Table 14.5. What are the price and quantity of workers that result in the maximum amount of revenue Irving would earn from selling propeller blades? A) $180; 1 B) $165; 1 C) $140; 2 D) $120; 2 E) $120; 4 Answer: E Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills Special Feature: Solved Problem: Hiring Decisions by a Firm That Is a Price Maker 83) Refer to Table 14.5. What are the price and quantity of workers that result in the maximum amount of profit Irving would earn from selling propeller blades? A) $140; 2 B) $160; 2 C) $140; 3 D) $165; 1 E) $180; 1 Answer: B Diff: 3 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills Special Feature: Solved Problem: Hiring Decisions by a Firm That Is a Price Maker

84) Refer to Table 14.5. What are the quantity of labour and marginal revenue product of labour that will maximize the profit Irving would earn from selling propeller blades? A) 2; $160 B) 3; $340 C) 2; $680 D) 3; $520 E) 3; $140 Answer: C Diff: 3 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills Special Feature: Solved Problem: Hiring Decisions by a Firm That Is a Price Maker 85) Suppose a competitive firm is paying a wage of $12 an hour. Assume that labour is the only input. If hiring another worker would increase output by four units per hour, then to maximize profits the firm should A) not change the number of workers it currently hires. B) hire an extra worker. C) lay off some workers. D) hire more workers only if they are willing to work at lower than market wage. E) There is not enough information to answer the question. Answer: E Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills 86) Suppose a competitive firm is paying a wage of $12 an hour and sells its product at $3 per unit. Assume that labour is the only input. If the last worker hired produces four units of output per hour, then to maximize profits the firm should A) not change the number of workers it currently hires. B) lay off some workers. C) hire another worker. D) lay off some older workers and hire some new workers. E) There is not enough information to answer the question. Answer: A Diff: 2 Type: MC Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

87) The market demand curve for labour A) is determined by adding up the quantity of labour demanded by each firm at each wage, holding constant the other variables that affect the willingness of firms to hire workers. B) is the same as the market demand curve for the product labour produces because it is a derived demand. C) is determined by adding up the demand for labour by each firm at each wage, holding constant the other variables that affect the willingness of firms to hire workers. D) is perfectly inelastic because there is a finite number of workers in the market for labour. E) is same as a firm's demand curve for labour. Answer: A Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 88) An increase in a perfectly competitive firm's demand for labour could be caused by A) a decrease in the market wage rate. B) an increase in the amount of human capital among the labour force. C) an increase in the supply of labour. D) an increase in population. E) a decrease in the market price of the product the firm produces. Answer: B Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 89) Which of the following factors will not cause the labour demand curve to shift? A) increases in human capital B) changes in technology C) changes in the price of the product produced with labour D) the wage rate E) All of the above cause a shift in labour demand. Answer: D Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

90) An increase in the supply of capital, which is a complement to labour, will lead to A) a decrease in the quantity of labour demanded. B) an increase in the demand for labour. C) decrease in wages of labour. D) a decrease in the demand for labour. E) an increase in the quantity of labour demanded. Answer: B Diff: 2 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 91) Rio Tinto is a London-based mining company that uses robotic technology to dig for iron ore deposits. Rio Tinto's incentive to adopt new robotic technology was increased by the high wages it was having to pay to attract miners and truck drivers. In this instance, Rio Tinto began using new robotic technology to A) add capital as a complementary resource for its labour. B) substitute labour for capital in production. C) substitute capital for labour in production. D) add labour as a complementary resource for its capital. E) use the Big Data. Answer: C Diff: 1 Type: MC Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytical Thinking Special Feature: Chapter Opener: Great Hamburger? Thank a Robot 92) Rio Tinto is a London-based mining company that uses robotic technology to dig for iron ore deposits. Rio Tinto was able to introduce robotic machines into its mining operations because of developments in computer technology, the Global Positioning System (GPS), and robotics. The company's mining operations are an example of ________, in which devices directly communicate data to a computer without a person having to enter the data. A) the Internet of Things B) the use of Big Data C) Artificial Intelligence D) Technological Singularity E) Science and Technology Answer: A Diff: 1 Type: MC Topic: Factors of Production Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytical Thinking Special Feature: Chapter Opener: Great Hamburger? Thank a Robot

93) An increase in the price of grape juice causes an increase in the marginal revenue product of labour used to produce grape juice. Answer: TRUE Diff: 1 Type: TF Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 94) The marginal product of labour curve is the demand curve for labour. Answer: FALSE Diff: 1 Type: TF Topic: Marginal Product of Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 95) A decrease in the amount of human capital acquired by workers will lead to a decrease in the supply of labour. Answer: FALSE Diff: 2 Type: TF Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 96) An increase in the supply of capital, which is a substitute to labour, will lead to a decrease in the demand for labour. Answer: TRUE Diff: 2 Type: TF Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking 97) The demand for labour is a derived demand. Explain what is meant by the term "derived demand." Answer: A derived demand is the demand for a factor of production that is derived from the demand for the good or service the factor produces. Diff: 1 Type: SA Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

Table 14.6 Number of Haircuts per Hairdressers Day 1 2 3 4 5 6

Marginal Product

Marginal Revenue Product

8 16 23 29 34 38

98) Refer to Table 14.6. The Hair Cuttery, a new hair salon, is ready to start hiring. The table above shows the relationship between the number of hairdressers the firm hires and the quantity of haircuts it produces. a. Suppose the price of haircuts is $8. Complete the table by filling in the values for marginal product and marginal revenue product. b. The Hair Cuttery is an input price-taker. Suppose the wage paid to hairdressers is $40 per day. What is the profit-maximizing number of hairdressers? c. Suppose the wage rate rises to $60 per day. (i) What happens to the firm's demand curve for hairdressers? (ii) What happens to the profit-maximizing quantity of hairdressers? d. Suppose the wage rate is $40 per day and the price of haircuts is now $10. (i) What happens to the firm's demand curve for hairdressers? (ii) What happens to the profit-maximizing quantity of hairdressers? Answer: a. Marginal Number of Haircuts per Marginal Revenue Hairdressers Day Product Product 1 8 8 $64 2 16 8 64 3 23 7 56 4 29 6 48 5 34 5 40 6 38 4 32 b. The profit-maximizing number of hairdressers is 5, where the marginal revenue product equals the wage rate. c. (i) The demand curve does not change. (ii) The profit-maximizing quantity of hairdressers falls to 2. d. (i) The demand curve shifts to the right. (ii) The profit-maximizing quantity of hairdressers increases to 6. Diff: 3 Type: SA Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Analytic Skills

99) Explain how the market for opticians is affected as a result of the development of laser technology that reduces the demand for glasses and contact lenses. In your explanation be sure to show the connection between the market for glasses and contact lenses and the market for opticians. Answer: Opticians are trained professionals who fit people with glasses and contact lenses. If the demand for glasses and contact lenses falls because more customers switch to laser eye correction, the demand for opticians, which derives from the demand for glasses and contact lenses, will also fall. Diff: 2 Type: SA Topic: The Demand for Labour Learning Outcome: 14.1 Explain how firms choose the profit-maximizing quantity of labour to employ AACSB: Reflective Thinking

14.2

Explain how people choose the quantity of labour to supply

1) An individual's labour supply curve shows A) the maximum wage rates offered to that individual by various potential employers. B) the relationship between wages and the quantity of labour that she is willing to supply. C) the relationship between wages and the quantity of labour that a firm is willing to employ. D) the relationship between a person's available time and how much she is willing to supply. E) the relationship between the quantity of hours worked and total income earned by that individual. Answer: B Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills 2) The labour supply for an industry would decrease if A) the wage rate falls. B) the percentage of the population from age 16 to 65 decreases. C) if income of people increase. D) the government welcomes foreign workers into the country. E) a greater percentage of women want to work outside the home. Answer: B Diff: 2 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 3) How will an increase in population affect the labour market? A) It will shift the market supply curve. B) It will cause a decrease in the quantity of labour demanded. C) It will cause movement along the labour supply curve. D) It will increase the supply of jobs. E) It will increase the opportunity cost of leisure. Answer: A Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 35 Copyright © 2024 Pearson Canada Inc.

4) All of the following will shift the labour supply curve except A) an increase in labour force participation rate among women. B) an increase in the average age of retirement. C) an increase in the wage rate. D) an increase in population. E) a change in a country's immigration policy. Answer: C Diff: 2 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 5) Which of the following best explains why unemployment rates are higher in the European economies than in Canada? A) More Europeans go to school fulltime and are therefore not able to participate in the labour market. B) population of lower in Europe than in Canada. C) Unemployment benefits are more generous in Europe than in Canada. D) Workers in Europe are less productive than workers in Canada. E) European industries pay a lower wage rate than industries in Canada. Answer: C Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 6) If Molly Bee increases her work hours when her wage increases, then A) the income effect of the wage increase outweighs the substitution effect. B) the substitution effect of the wage increase outweighs the income effect. C) leisure is an inferior good to Molly. D) Molly does not care about leisure. E) Molly is spending beyond her means. Answer: B Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 7) If Alan Shaw reduces his work hours when his salary increases, then A) the income effect of his salary increase dominates the substitution effect. B) the substitution effect of his salary increase dominates the income effect. C) the income effect of his salary increase is completely offset by the substitution effect. D) leisure is an inferior good to Alan. E) Alan does not like to work. Answer: A Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 36 Copyright © 2024 Pearson Canada Inc.

8) At low wages, the labour supply curve for most people slopes upward because A) at low wages there is no income effect. B) at low wages the substitution effect tends to outweigh the income effect. C) at low wages the income effect tends to outweigh the substitution effect. D) at low wages the demand for labour is rising. E) at low wages, people have to work longer hours to make ends meet. Answer: B Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 9) The substitution effect of a wage increase is observed when A) the higher wage income causes workers to take more leisure and work less. B) leisure's higher opportunity cost causes workers to take less leisure and work more. C) the higher wage income causes workers to take more leisure and work more. D) the higher wage causes workers to spend equal time in leisure and work. E) leisure's higher opportunity cost causes workers to take more leisure and work less. Answer: B Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 10) The income effect of a wage increase is observed when A) the higher wage income causes workers to take more leisure and work less. B) the labour supply curve shifts to the right due to more work with more income. C) leisure's higher opportunity cost causes workers to take less leisure and work more. D) the higher wage income causes workers to take less leisure and work more. E) leisure's higher opportunity cost causes workers to take more leisure and work less. Answer: A Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking

11) The combined effect (both income and substitution) of a wage increase is that A) the substitution effect always dominates, leading to more work at a higher wage. B) the income effect always dominates, leading to less work at a higher wage. C) both income and substitution effects will have half impact on the labour supply. D) if the substitution effect outweighs the income effect, the labour supply curve slopes upward, but if the income effect outweighs the substitution effect, the labour supply curve is backward bending. E) if the substitution effect outweighs the income effect, the labour supply curve is backward bending, but if the income effect outweighs the substitution effect, the labour supply curve slopes upward. Answer: D Diff: 3 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking Figure 14.3

12) Refer to Figure 14.3. Which of the panels in the diagram best represents an individual's labour supply curve? A) Panel A B) Panel B C) Panel C D) Panel D E) Panel A and Panel C Answer: A Diff: 2 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills 38 Copyright © 2024 Pearson Canada Inc.

13) Refer to Figure 14.3. Which of the following statements is true? A) Panel B correctly describes a situation in which the income effect dominates the substitution effect at low wages (segment i) and again at very high wages (segment iii). B) Panel B incorrectly describes a situation in which the income effect dominates the substitution effect at low wages (segment i) and a situation in which the substitution effect dominates the income effect at very high wages (segment iii). C) Panel B incorrectly describes a situation in which the income effect dominates the substitution effect at low wages (segment i). D) Panel B incorrectly describes a situation in which the income effect dominates the substitution effect at very high wages (segment iii). E) None of the above. Answer: C Diff: 3 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills 14) Refer to Figure 14.3. Panel D is appropriate when used to represent A) the quantity of labour demanded by an input price taker. B) labour supply is perfectly inelastic. C) the labour supply curve facing an input price taker. D) the quantity of labour supplied by someone working a fixed number of hours. E) the highly-skilled labour market supply curve. Answer: C Diff: 2 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills 15) Refer to Figure 14.3. In Panel A, at low wages (segment i), A) the substitution effect outweighs the income effect. B) the income effect outweighs the substitution effect. C) there is more demand for labour. D) the substitution effect offsets the income effect. E) labour suppliers demand more leisure as wages increase. Answer: A Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills

16) Refer to Figure 14.3. In Panel A, at high wages (segment iii), A) the price of leisure is rising relative to the price of labour. B) the price of leisure is falling relative to the price of labour. C) labourers work more as wages increase. D) there is less demand for labour. E) labour suppliers take more leisure as wages increase. Answer: E Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills Figure 14.4

17) Refer to Figure 14.4. Which of the following is true if the wage rate increases from W1 to W2? A) The income effect is larger than the substitution effect. B) The substitution effect is larger than the income effect. C) The income effect and the substitution effect are equal. D) The supply curve is unit-elastic. E) The supply curve is inelastic. Answer: A Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills 18) Refer to Figure 14.4. Which of the following is true at W0? A) The income effect is larger than the substitution effect. B) The substitution effect is larger than the income effect. C) The income effect and the substitution effect are equal. D) The supply curve is positively sloped. E) None of the above. Answer: B Diff: 3 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills 40 Copyright © 2024 Pearson Canada Inc.

19) If the market wage rate increases, a firm's labour demand curve does not shift, but the labour supply curve shifts to the right. Answer: FALSE Diff: 2 Type: TF Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 20) If the substitution effect of a wage increase dominates the income effect, the labour supply curve has a positive slope. Answer: TRUE Diff: 2 Type: TF Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 21) The income effect of a wage decrease examines the effect of the decrease in wage income on a worker's ability to purchase goods and services. Answer: TRUE Diff: 2 Type: TF Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 22) An increase in wages raises the opportunity cost of leisure and leads to an increase in the quantity supplied of labour. Answer: TRUE Diff: 2 Type: TF Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 23) What is the substitution effect of a wage increase? What is the income effect of a wage increase? Under what conditions will a worker's labour supply curve become downward sloping? Answer: The substitution effect refers to the fact that an increase in the wage raises the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure. The income effect of a wage increase refers to the fact that an increase in the wage increases a worker's purchasing power and causes an increase in the quantity demanded of all normal goods including leisure. Therefore, the income effect of a wage increase causes a worker to reduce the quantity of labour supplied. The labour supply curve becomes downward sloping if the income effect of a wage increase is greater than the substitution effect of the wage increase. Diff: 3 Type: SA Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking

24) Serafina was earning $75 per hour and working 50 hours per week. Serafina's wage rose to $90 per hour, and as a result, she now works 60 hours per week. What can you conclude from this information about the income effect and the substitution effect of a wage change for Serafina? Answer: We can conclude that Serafina's substitution effect (higher wages lead to higher opportunity cost of leisure, leads to lower leisure, leads to more labour) is greater than her income effect (higher wages lead to higher income, leads to more leisure, leads to less labour). As a result, Serafina works more hours as her wage increases. Diff: 2 Type: SA Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills 25) Suppose that Québec legalizes privately owned casino gambling. By imposing a tax on casino revenues, the provincial government is able to eliminate the provincial income tax on wages. What is likely to be the effect on the labour supply curve in Québec? Answer: Eliminating the income tax on wages increases the opportunity cost of leisure because the after-tax wage is now higher than it was. Workers will also earn more income for any given number of hours worked. Whether workers will end up supplying more hours at each wage rate depends on whether the substitution effect of this increase in the after-tax wage is greater than the income effect. Diff: 2 Type: SA Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 26) The labour supply curve A) shows the relationship between the wage rate and the quantity of labour supplied. B) shows the quantity of jobs supplied at various wage rates. C) is unit-elastic. D) is U-shaped. E) is always upward sloping. Answer: A Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 27) In general, the labour supply curve A) slopes downward because firms will hire fewer workers at higher wages. B) slopes upward because as the wage rises the opportunity cost of leisure increases. C) is vertical at the equilibrium wage rate. D) is negatively sloped. E) is perfectly elastic at the equilibrium wage rate. Answer: B Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking

28) The wage rate is the opportunity cost of A) working. B) working overtime. C) leisure. D) consumption. E) an alternative job. Answer: C Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 29) Which of the following helps to explain why the supply curve of labour is upward sloping? A) The supply curve of labour is a derived supply curve; since the output supply curve is upward sloping, so is the labour supply curve. B) As the wage rate rises, the income effect causes the quantity of labour supplied to increase. C) The substitution effect of a price change makes a good more expensive relative to other goods. D) As the wage rate rises, the opportunity cost of leisure rises. E) None of the above. Answer: D Diff: 2 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 30) Which of the following statements is true? A) As the wage rate rises, the substitution effect decreases the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure. B) As the wage rate rises, the substitution effect increases the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure. C) As the wage rate rises, the income effect increases the opportunity cost of leisure and causes a worker to devote more time to working and less time to leisure. D) As the wage rate rises, the income effect causes a worker to devote more time to work and less time to leisure. E) None of the above. Answer: B Diff: 3 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking

31) The typical labour supply curve is upward sloping, but it is possible for the curve to be backward bending (negatively sloped) at very high wage levels. Which of the following would cause a backwardbending supply curve? A) This would occur when the income effect from an increase in the wage becomes larger than the substitution effect. B) This would occur when the substitution effect from an increase in the wage becomes larger than the income effect. C) This would occur if leisure was an inferior good. D) This would occur when people have accumulated a lot of savings. E) This would occur if a large number of workers chose leisure rather than employment at low wages; only a very large increase in the wage would lead these workers to prefer employment to leisure. Answer: A Diff: 2 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 32) Because leisure is a normal good, an increase in the wage rate will result in A) an increase in the quantity of labour supplied because of both the substitution effect and the income effect. B) a decrease in the quantity of labour supplied because of the substitution effect, and an increase in the quantity of labour supplied because of the income effect. C) an increase in working overtime to take advantage of higher wage. D) an increase in the quantity of labour supplied because of the substitution effect, and a decrease in the quantity of labour supplied because of the income effect. E) an increase in the quantity of labour supplied because of the substitution effect. At low wages the income effect causes an increase in the quantity of labour supplied, but at high wages the income effect causes a decrease in the quantity of labour supplied as the wage rises. Answer: D Diff: 3 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 33) In order for a labour supply curve to be backward bending at high wages, A) leisure must be an inferior good. B) the substitution effect of a wage increase must be greater than the income effect. C) workers must have an irrational response to wage increases. D) the income effect of a wage increase must be greater than the substitution effect. E) workers should have enough saving. Answer: D Diff: 2 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking

34) Which of the following would cause the supply curve for labour to have a negative slope? A) If leisure is an inferior good. B) Labour supply curve always have a positive slope. C) The substitution effect of a wage increase is larger than the income of effect of a wage increase. D) Workers anticipation further wage rises in the future. E) The opportunity cost of leisure rising more quickly than wages. Answer: A Diff: 3 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 35) The market supply curve for labour is A) derived from the market supply curve for the output produced with labour. B) perfectly inelastic if leisure is an inferior good. C) same as an individual firm's supply curve. D) determined by adding up the quantity of labour supplied by each worker at each wage, holding constant all other variables that affect the willingness of workers to supply labour. E) determined by adding up the wages each worker is willing to work for at a given quantity supplied, holding constant all other variables that affect the willingness of workers to supply labour. Answer: D Diff: 2 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking

Figure 14.5

36) Refer to Figure 14.5. Which of the following is true if the wage rate increases from W0 to W1? A) The income effect is larger than the substitution effect. B) The substitution effect is larger than the income effect. C) The income effect and the substitution effect are equal. D) The supply curve has elasticity greater than one. E) The supply curve is unit-elastic. Answer: B Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills 37) Refer to Figure 14.5. Which of the following is true at W2? A) The income effect is larger than the substitution effect. B) The substitution effect is larger than the income effect. C) Workers like to work overtime. D) The income effect and the substitution effect are equal. E) The supply curve is positively sloped. Answer: A Diff: 3 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Analytic Skills

38) For most low-wage earners, A) the income effect of a wage rate increase is likely to be larger than the substitution effect. B) the substitution effect of a wage rate increase is likely to equal the income effect. C) the opportunity cost of leisure is high. D) government gives subsidies. E) the substitution effect of a wage rate increase is likely to be larger than the income effect. Answer: E Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 39) Francis Crawford recently received a 20 percent wage increase and desires to work less. We can conclude that at his current wage, his supply of labour curve A) has a positive slope. B) has a negative slope. C) is U-shaped. D) is vertical. E) is perfectly elastic. Answer: B Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 40) The income effect of a wage increase will cause a worker to devote A) more time to labour and more time to leisure. B) more time to labour and less time to leisure. C) less time to labour and more time to leisure. D) less time to labour and less time to leisure. E) equal time to labour and leisure. Answer: C Diff: 2 Type: MC Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking

41) Along an upward sloping labour supply curve, as the wage rate increases, the opportunity cost of leisure ________, causing individuals to supply a ________ quantity of labour. A) increases; greater B) increases; lower C) decreases; greater D) decrease; lower E) remains constant; constant Answer: A Diff: 2 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 42) Leisure is A) an inferior good. B) a complementary good to labour. C) wasteful to society. D) a normal good. E) a luxury good. Answer: D Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 43) Which of the following variables will not cause the market supply curve of labour to shift? A) increases in population B) a favourable change in consumer tastes C) a change in wage rate D) a change in the labour participation rate of women E) an increase in the number of people between the ages of 16 and 65 Answer: B Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 44) Which of the following factors has significantly increased the supply of labour in Canada since 1950? A) a large increase in the substitution effect as a result of higher wages B) a low birth rate and an aging population C) an increase in the number of people who have received university degrees D) an increase in immigrants E) an increase in the labour force participation rate of women Answer: E Diff: 1 Type: MC Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 48 Copyright © 2024 Pearson Canada Inc.

45) The substitution effect of a wage decrease examines the effect of the decrease in wage income on a worker's ability to consume goods and services. Answer: FALSE Diff: 2 Type: TF Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 46) If the income effect of a wage increase equals the substitution effect, the labour supply curve is horizontal at the equilibrium wage. Answer: FALSE Diff: 2 Type: TF Topic: Substitution and Income Effects of a Wage Change Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 47) Increases in population shift the market supply curve for labour to the right. Answer: TRUE Diff: 1 Type: TF Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 48) In many European countries it is much easier than in Canada for unemployed workers to receive generous wage replacement income from their governments. Answer: TRUE Diff: 1 Type: TF Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 49) What is the shape of the labour supply curve implied by the following statements? a. "I'm sorry, kids, but now that I'm earning more, I just can't afford to come home early in the afternoon, so I won't be here when you get home from school." b. "They can pay me a lot or they can pay me a little. I'll still put in my 8 hours a day." c. "Now that I have received a salary increase, I am going to work 36 hours instead of 40 hours a week" Answer: a. upward-sloping b. vertical c. backward-bending Diff: 1 Type: SA Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking

50) a. What are the two effects of an increase in the wage rate on an individual's labour supply decision? Briefly explain each effect. b. Explain how a labour supply curve could be backward bending. Answer: a. There are two effects of a wage rate increase: a substitution effect and an income effect. The substitution effect raises the price of leisure, which causes a worker to consume less leisure and supply more labour. Since leisure is a normal good, the income effect leads the worker to choose more leisure and supply less labour. b. When the wage rate is low, an increase in the wage rate leads to an increase in the quantity of labour supplied because the substitution effect is greater than the income effect. Therefore, the labour supply curve slopes upward. When the wage rate is high, the income effect may be greater than the substitution effect. If this is so, the quantity of labour supplied will decrease as the wage increases and the labour supply curve would be backward bending. Diff: 2 Type: SA Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking 51) What are the three most important variables that cause the market supply curve of labour to shift? Answer: The most important factors that cause the supply curve of labour to shift are: 1) changes in population, 2) changing demographics, and 3) changing alternatives to work in general or work within a particular sector of the economy. Diff: 2 Type: SA Topic: The Supply of Labour Learning Outcome: 14.2 Explain how people choose the quantity of labour to supply AACSB: Reflective Thinking

14.3

Explain how equilibrium wages are determined in labour markets

1) The equilibrium wage and quantity of labour in the market for skilled workers is determined by A) the strength of labour unions. B) the monopsony power of firms. C) the demand and supply of labour. D) the market value created by the output of these skilled workers. E) their skills and qualification. Answer: C Diff: 1 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking 2) What happens to the equilibrium wage and quantity of labour if output price rises? A) The equilibrium wage and the equilibrium quantity of labour rise. B) The equilibrium wage and the equilibrium quantity of labour fall. C) The equilibrium wage falls and the equilibrium quantity of labour rises. D) The equilibrium wage rises and the equilibrium quantity of labour falls. E) Nothing happens to the equilibrium wage due to change in output prices. Answer: A Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills 3) Consider the market for opticians. What is likely to happen to the equilibrium wage and quantity of opticians if more and more people turn to laser eye surgery instead of wearing glasses or contact lenses? A) The equilibrium wage and the equilibrium quantity of opticians rise. B) The equilibrium wage and the equilibrium quantity of opticians fall. C) The equilibrium wage rises and the equilibrium quantity of opticians falls. D) The equilibrium wage falls and the equilibrium quantity of opticians rises. E) The equilibrium wage and equilibrium quantity of opticians stay the same. Answer: B Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

4) Suppose the government grants child care subsidies to mothers entering the labour force. What is likely to happen to the equilibrium wage and quantity of labour? A) The equilibrium wage and the equilibrium quantity of labour rise. B) The equilibrium wage and the equilibrium quantity of labour fall. C) The equilibrium wage falls and the equilibrium quantity of labour rises. D) The equilibrium wage rises and the equilibrium quantity of labour falls. E) The equilibrium wage and the equilibrium quantity of labour stays the same. Answer: C Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills 5) Consider the market for pilots. What is likely to happen to the equilibrium wage and quantity of pilots if the government enforces a lower mandatory retirement age, say from age 65 to age 62? A) The equilibrium wage and the equilibrium quantity of pilots rise. B) The equilibrium wage and the equilibrium quantity of pilots fall. C) The equilibrium wage falls and the equilibrium quantity of pilots rises. D) The equilibrium wage rises and the equilibrium quantity of pilots falls. E) The equilibrium wage and the equilibrium quantity of pilots remain the same. Answer: D Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills 6) Suppose the following two events occur in the domestic market for radiologists: a. Some hospitals are outsourcing some radiology services such as reading X-rays. b. Some medical schools have closed down their radiology departments as fewer students enroll in this field. What is likely to happen to the equilibrium wage and quantity of radiologists following these two events? A) The equilibrium wage and the equilibrium quantity of radiologists rise. B) The equilibrium wage and the equilibrium quantity of radiologists fall. C) The equilibrium quantity falls and the effect on the equilibrium wage of radiologists is indeterminate. D) The equilibrium wage falls and the effect on equilibrium quantity of radiologists is indeterminate. E) The equilibrium wage and the equilibrium quantity of radiologists stay the same. Answer: C Diff: 3 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

7) Suppose the following two events occur in the market for elementary school teachers: a. Overcrowded schools and education budget cuts have discouraged young university students from pursuing careers in teaching. b. With an increasing birth rate, the number of children entering the elementary school system is expected to increase significantly over the next ten years. What is likely to happen to the equilibrium wage and quantity of teachers as a result of these two events? A) The equilibrium quantity and the equilibrium wage of elementary school teachers fall. B) The equilibrium wage rises and the effect on the equilibrium quantity of elementary school teachers is indeterminate. C) The equilibrium quantity falls and the effect on the equilibrium wage of elementary school teachers is indeterminate. D) The equilibrium quantity falls and the equilibrium wage of elementary school teachers rises. E) The equilibrium wage and the equilibrium quantity of teachers stay the same. Answer: B Diff: 3 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills 8) Consider this quote from an article in the Wall Street Journal: "The stock of educated workers isn't increasing fast enough to keep up with rising demand. ... Employers are paying the typical four-year college graduate [without graduate school] 75% more than they pay high-school grads. Twenty-five years ago, they were paying 40% more. Employers insist on ever better-educated, skilled workers." Source: David Wessel, "Lack of Well-Educated Workers Has Lots of Roots, No Quick Fix," Wall Street Journal, April 19, 2007, Page A2. Which of the following best explains the rapid increase in the wage differential between college graduates and high school graduates? A) The demand for college educated workers shifted to the right while the supply of college educated workers shifted to the left. B) The supply of high-school educated workers shifted to the right faster than the demand for college educated workers shifted to the right. C) The demand for college educated workers shifted to the right faster than the supply of college educated workers shifted to the right. D) The demand for high-school educated workers shifted to the left faster than the supply of college educated workers shifted to the right. E) None of the above. Answer: C Diff: 3 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

9) The "Lump of Labour Falacy" refers to A) the idea that labour has to be done in discrete units (hours). B) the idea that there is only a fixed amount of work to be performed in an economy. C) the idea that labour is the primary source of value in economies. D) the idea that lumping capital and labour together (as in a firm) will increase productivity. E) the idea that there is only a fixed number of skilled worker in an economy. Answer: B Diff: 2 Type: MC Topic: Labour Fallacy Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills Special Feature: Apply the Concept: Will You Compete with a Robot for a Job - Or Work with One? 10) Why might the invention of effective robots and further advances in automation increase the wages of highly skilled workers? A) The loss of jobs for lower skilled workers will increase the supply of highly skilled workers. B) The use of robots and automation will increase the productivity of highly skilled workers, increasing demand for them. C) The increase in the availability of substitutes for highly skilled workers will decrease demand for highly skilled workers. D) Government regulation will require firms to hire more highly skilled workers in the future. E) There is less supply of skilled workers which increases their wages. Answer: B Diff: 2 Type: MC Topic: Labour Fallacy Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking Special Feature: Apply the Concept: Will You Compete with a Robot for a Job - Or Work with One? 11) The success of Nelvana's animated children's programming (Babar, Care Bears, Eek! The Cat etc.) in the late 80's and early 90's, increased production of animated features, increasing the demand for animators much faster than the supply of animators was increasing. As a result, in the market for animators, the equilibrium wage fell and the equilibrium quantity increased. Answer: FALSE Diff: 2 Type: TF Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills 12) Since Poland joined the European Union in 2004, many young and educated Poles have emigrated to the United Kingdom. As a result, the labour supply curve in the United Kingdom shifts to the right and the equilibrium wage rises. Answer: FALSE Diff: 2 Type: TF Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

13) The signaling hypothesis of education states that education is a costly activity that enhances a worker's productivity. Answer: FALSE Diff: 2 Type: TF Topic: Labour Fallacy Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking Special Feature: Apply the Concept: Will You Compete with a Robot for a Job - Or Work with One? 14) If the labour demand curve shifts to the right and the labour supply curve remains unchanged, what will happen to the equilibrium wage and the equilibrium level of employment? Illustrate your answer with a graph. Answer: The equilibrium wage will rise from W1 to W2 and the equilibrium level of employment will rise from L1 to L2.

Diff: 2 Type: SA Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

15) If the labour supply curve shifts to the left and the labour demand curve remains unchanged, what will happen to the equilibrium wage and the equilibrium level of employment? Illustrate your answer with a graph. Answer: The equilibrium wage will rise from W1 to W2 and the equilibrium level of employment will fall from L1 to L2.

Diff: 2 Type: SA Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

16) Consider the market for blackjack dealers in Niagara, Ontario. In each of the following cases, explain what happens to the equilibrium wage rate and the quantity of blackjack dealers hired. a. Three new large resort casinos open in Niagara. b. Fewer students are attending classes to learn to become blackjack dealers. c. Traditionally, blackjack dealing is a field that attracts foreign workers. However, changes in immigration laws have made it more difficult for foreign workers to come to Niagara to obtain jobs. The demand for blackjack dealers, however, does not change. d. Advances in technology have increased the popularity of electronic blackjack machines and decreased the popularity of live table games which require the use of a dealer. Answer: a. The demand curve for labour shifts to the right. The equilibrium wage increases and the equilibrium quantity of blackjack dealers hired increases. b. The supply curve for labour shifts to the left. The equilibrium wage increases and the equilibrium quantity of blackjack dealers hired decreases. c. The supply curve for labour shifts to the left. The equilibrium wage increases and the equilibrium quantity of blackjack dealers hired decreases. d. The demand curve for labour shifts to the left. Both the equilibrium wage and the quantity of blackjack dealers hired decrease. Diff: 2 Type: SA Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills 17) What is the signaling hypothesis of education? Answer: The signaling hypothesis of education is the idea that education provides employers with information about otherwise unobservable characteristics of potential employees. For example, a university education conveys to employers that the holder has some desirable characteristics based on the belief that on average, university graduates were quicker learners and are more productive before they went to university than those who didn't go. Diff: 3 Type: SA Topic: Labour Fallacy Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking Special Feature: Apply the Concept: Will You Compete with a Robot for a Job - Or Work with One? 18) If the labour supply is unchanged, an increase in the demand for labour will A) increase the equilibrium wage and decrease the number of workers employed. B) increase the equilibrium wage and increase the quantity of jobs demanded. C) decrease the equilibrium wage and increase the number of workers employed. D) increase the equilibrium wage and increase the number of workers employed. E) not change the equilibrium wage but increase the number of workers employed. Answer: D Diff: 1 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

19) Why has automation increased the number of low skilled jobs but reduced the wages of low skilled workers? A) Low skilled workers are easily replaced by robots, which means demand for low skilled workers has shifted to the left. B) Robots are complements to the tasks of low skilled workers as well as substitutes. C) Robots have reduced the demand for medium skilled workers causing many of them to find work in low skill occupations. D) The increased wages of highly skilled workers has increased demand for the goods and services that low skilled workers produce. E) The low skilled workers are replaced by the robots and their demand decreases hence wage decreases. Answer: C Diff: 1 Type: MC Topic: Labour Fallacy Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking Special Feature: Apply the Concept: Will You Compete with a Robot for a Job - Or Work with One? 20) Which group of workers is likely to see the least benefit from increased automation and increasing use of robots? A) Highly skilled workers who are complements to robots. B) Medium skilled workers who are substitutes for robots. C) Low skilled workers who are substitutes for robots in some situations and complements in others. D) The owners of capital who will also own the robots. E) Producers who will have to spend a lot of money to use new technology. Answer: B Diff: 1 Type: MC Topic: Labour Fallacy Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking Special Feature: Apply the Concept: Will You Compete with a Robot for a Job - Or Work with One? 21) Which of the following summarizes the impact of population growth on the labour market? A) Population growth will increase the labour supply, reduce the equilibrium wage, and increase the quantity of labour demanded. B) Population growth will increase in the demand for labour. As a result, the wage rate will rise and the quantity of workers supplied will decrease. C) Population growth will increase the demand for jobs. This will result in an increase in the equilibrium wage rate and a movement along the labour supply curve. D) Population growth will increase in both the demand for labour and the supply of labour. As a result, the equilibrium wage will not change. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

22) Which of the following would cause an increase in the equilibrium wage? A) The supply of labour increases more than the demand for labour. B) The supply of jobs increases more than the demand for jobs. C) The demand for labour increases faster than the supply of labour. D) The supply of labour increases and the demand for labour decreases. E) The demand for labour is perfectly inelastic. Answer: C Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking 23) Suppose the labour market is in equilibrium. Which of the following statements is false? A) The equilibrium wage rate is equal to the marginal revenue product of labour. B) At the equilibrium wage, the quantity of labour demanded equals the quantity of labour supplied. C) Some workers will earn more than the equilibrium wage. D) At the equilibrium wage, the demand for labour is equal to the supply of labour. E) None of the above. Answer: D Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking 24) If the demand for labour is unchanged, an increase in the supply of labour will lead to A) a decrease in the quantity of labour demanded and a decrease in the equilibrium wage. B) an increase in the quantity of labour demanded and a decrease in the equilibrium wage. C) an increase in the quantity of labour demanded and an increase in the equilibrium wage. D) a decrease in the quantity of labour demanded and an increase in the equilibrium wage. E) no change in quantity of labour demanded or in the equilibrium wage. Answer: B Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking 25) How will an increase in labour productivity affect equilibrium in the labour market? A) The supply of labour will increase and the equilibrium wage and quantity of labour will increase. B) The demand for jobs will increase and the equilibrium wage and quantity of labour will increase. C) The demand for labour will increase and the equilibrium wage and quantity of labour will increase. D) The demand for labour will decrease because fewer workers will be needed to produce the same output. The equilibrium wage and quantity of labour will decrease. E) The demand for labour and the equilibrium wage and quantity of labour will stay the same. Answer: C Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking 59 Copyright © 2024 Pearson Canada Inc.

26) All else equal, if job turnover has people leaving jobs and finding new jobs in the same industry, this will A) increase the demand for labour and the supply of labour. B) increase the demand for labour and decrease the supply of labour. C) decrease the supply of labour but not change the demand for labour. D) not change demand or supply in the labour market. E) decrease in demand for labour and increase the supply of labour. Answer: D Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking 27) If the number of employees who quit, are fired, or retire increases while the hiring of new employees declines, this indicates that the A) labour demand curve is shifting to the right. B) labour supply curve is shifting to the right. C) labour demand curve is shifting to the left. D) labour supply curve and labour demand curve are both shifting to the right. E) labour supply curve is shifting to the left. Answer: C Diff: 2 Type: MC Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking 28) In 2020, full-time workers aged 25 and over with a university degree earned ________ high school dropouts. A) roughly the same amount as B) more than twice as much as C) 5 times as much as D) 10 times as much as E) 20 times as much as Answer: B Diff: 1 Type: MC Topic: Future Income Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytical Thinking Special Feature: Apply the Concept: Does It Matter Which University You Attend?

29) The economists in the estimate that United States estimated the return the typical person receives from an investment in a university education is A) 4.5 percent per year. B) 12.5 percent per year. C) 15 percent per year. D) more than 40 percent per year. E) 10 percent per year. Answer: C Diff: 1 Type: MC Topic: Future Income Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytical Thinking Special Feature: Apply the Concept: Does It Matter Which University You Attend? 30) In economic recessions when unemployment in the economy rises, the unemployment rate tends to be lowest for those people A) who are high school dropouts. B) who are high school graduates but have no university education. C) who have some university or an Associate Degree. D) who have graduated university with a Bachelor's Degree or higher. E) who are self-employed. Answer: D Diff: 1 Type: MC Topic: Future Income Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytical Thinking Special Feature: Apply the Concept: Does It Matter Which University You Attend? 31) Research has found that, holding constant students' characteristics, the earnings of people who graduate from highly selective universities are ________ 30 years after graduation than are the earnings of people who graduated from less selective universities. A) no higher B) fifteen percent higher C) almost 60 percent higher D) surprisingly much lower E) at least 20 percent higher Answer: A Diff: 1 Type: MC Topic: Future Income Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytical Thinking Special Feature: Apply the Concept: Does It Matter Which University You Attend?

32) All else equal, a decrease in the supply of labour will shift the labour supply curve to the left and decrease the equilibrium wage. Answer: FALSE Diff: 1 Type: TF Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking 33) If the demand for labour is unchanged, population growth will increase the supply of labour and increase the equilibrium wage. Answer: FALSE Diff: 1 Type: TF Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Reflective Thinking 34) According to the U.S. Bureau of Labour Statistics, between 2000 and 2005, real wages in concrete work fell by 16.5%, despite a soaring demand for workers. This implies that the supply of workers in this field increased faster than the demand for workers. Answer: TRUE Diff: 2 Type: TF Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

35) If the labour demand curve shifts to the left and the labour supply curve remains unchanged, what will happen to the equilibrium wage and the equilibrium level of employment? Illustrate your answer with a graph. Answer: The equilibrium wage will fall from W1 to W2 and the equilibrium level of employment will fall from L1 to L2.

Diff: 2 Type: SA Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills

36) If the labour supply curve shifts to the right and the labour demand curve remains unchanged, what will happen to the equilibrium wage and the equilibrium level of employment? Illustrate your answer with a graph. Answer: The equilibrium wage will fall from W1 to W2 and the equilibrium level of employment will rise from L1 to L2.

Diff: 2 Type: SA Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills 37) Consider the market for nurses in a given city. In each of the following cases, explain what happens to the equilibrium wage rate and the quantity of nurses hired. a. One of the major hospitals in the city closes. b. A record number of students graduate with bachelor's degrees in nursing. c. Traditionally, nursing is a field that attracts women. However, changes in access to education and to the labour force participation rate by women have led to a greater demand for the services of women in a wide range of occupations. The demand for nurses, however, does not change. d. Advances in medical technology reduce the amount of time physicians must spend with patients in intensive care and increase the time that nurses spend with patients. Answer: a. The demand curve shifts to the left. The equilibrium wage decreases and the equilibrium quantity of nurses hired decreases. b. The supply curve shifts to the right. The equilibrium wage decreases and the equilibrium quantity of nurses hired increases. c. The supply curve shifts to the left. The equilibrium wage increases and the equilibrium quantity of nurses hired decreases. d. The demand curve shifts to the right. Both the equilibrium wage and the quantity of nurses hired increase. Diff: 2 Type: SA Topic: Labour Market Equilibrium Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills 64 Copyright © 2024 Pearson Canada Inc.

38) Economist Michael Spence uses a concept called the "signaling hypothesis" to argue that university graduates earn high incomes because the skills they learned while in university serve to increase their productivity. Explain the signaling hypothesis. Is there evidence that the signaling hypothesis is not valid? Answer: Spence used the signaling hypothesis to argue that employers use university degrees as evidence that workers acquired or honed skills while they were in university that will make them good employees. Successful students must study, show up on time, and occasionally work with other students in order to complete projects - all skills that will make them successful after graduation. The signaling hypothesis suggests that it is these skills, rather than skills acquired while taking specific subjects (calculus, history, or accounting), that employers value most. Research by several economists has contradicted the signaling hypothesis because the studies have shown that earnings of university graduates vary based on the type and number of courses they take in specific disciplines (for example, science and mathematics). Diff: 2 Type: ES Topic: Labour Fallacy Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills Special Feature: Apply the Concept: Will You Compete with a Robot for a Job - Or Work with One? 39) People pay huge cost to attend a University and delay their entry into the labour force. Explain whether it is a good idea or they should enter the labour force as soon as possible to maximize their labour income without taking the university degree into consideration? Answer: Most people pay for university education because they realize the value of a university education. Research shows that in the United States in 2017, full time workers aged 25 and over with a college or university degree earned more per week than other workers and the earning premium has persisted over time. People think about university education as an investment they make to increase human capital which makes them more valuable to potential employers and helps them earn a higher income throughout their working life. Diff: 2 Type: SA Topic: Human Capital Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills Special Feature: Apply the Concept: Does It Matter Which University You Attend?

40) Spending time and money on a university education is usually considered an investment in human capital. If this is the case, does getting any degree at the postsecondary level will leave people with same return on their investment? Explain on the basis of research conducted by Daniel Hamermesh and Stephen G. Donald. Answer: Research by Daniel Hamermesh and Stephen G. Donald of the University of Texas shows that, taking science and math courses has a large effect on future earnings regardless of their majors. They suggest, " A student who takes 15 credits of upper-division science and math courses and obtains a B average in them will earn about 10% more than an otherwise identical student in the same major... who takes no upper-division classes in these areas." They further argued that during an economic recession when unemployment is rising, university students are less likely to lose their jobs and likely to experience smaller declines in wages than high school graduates. Diff: 2 Type: SA Topic: Human Capital Learning Outcome: 14.3 Explain how equilibrium wages are determined in labour markets AACSB: Analytic Skills Special Feature: Apply the Concept: Does It Matter Which University You Attend?

14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ 1) Painters who paint water towers earn higher wages relative to painters who paint houses because A) the demand for tower painters is greater than the demand for residential painters. B) painting water towers is more risky than painting houses. C) the tower painters' union is probably more powerful than the house painters' union. D) the supply of water tower painters exceeds the supply of house painters. E) painting water towers requires higher skills than painting houses. Answer: B Diff: 2 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 2) Wage differentials between occupations can be explained by all of the following except A) the fact that some occupations require higher levels of human capital than others. B) the fact that some occupations are more desirable than others. C) the market power of different employers. D) the relative differences between demand and supply in various occupations. E) all of the above explain wage differentials between occupations. Answer: C Diff: 2 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

3) A study by Price Fishback and Shawn Kantor of the University of Arizona shows that after the passage of workers' compensation laws, wages received by workers in the coal and lumber industries fell. Source: Price V. Fishback and Shawn Everett Kantor, "Did Workers Pay for the Passage of Workers' Compensation Laws?" Quarterly Journal of Economics, Vol. 100, No. 3, August 1995, pp. 713-742. Which of the following could explain why passage of workers' compensation laws led to a fall in wages in some industries? A) The passage of the workers' compensation laws made it more expensive for firms to employ workers, thus reducing the demand for workers. B) The passage of the workers' compensation laws allowed employers in hazardous industries to reduce compensating differentials which, in turn, reduced wages. C) Employers reduced wages to partially offset the cost of having to purchase insurance that would compensate workers for injuries suffered on the job. D) The supply of labour in these hazardous industries increased following the passage of the workers' compensation laws because jobs in these industries now pose less risk. E) None of the above. Answer: B Diff: 3 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills 4) Some superstar athletes in the sports industry earn very high levels of income relative to other occupations, and over time the wage differential has been increasing. What could have caused this? A) The supply of star athletes has decreased. B) The supply of star athletes has increased due to college athletic programs. C) Technological advances such as cable television have increased the demand for sports entertainment. D) The market power of athletes' unions has increased. E) All of the above. Answer: C Diff: 2 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Apply the Concept: Technology and the Earnings of "Superstars"

5) Which of the following explains why talented national hockey league players command much higher salaries than neurosurgeons? A) because the total value of hockey games is much higher than the total value of neurosurgery B) because it takes far more skill and training to be a national hockey league player than to be a neurosurgeon C) because the supply of talented national hockey league players is relatively low compared to the supply of neurosurgeons. Therefore, national hockey league players exert far more market power than neurosurgeon. D) because the supply of talented national hockey league players is low relative to its demand compared to the supply of neurosurgeons relative to demand for their services. Therefore, adding another player yields far greater marginal benefit than adding another neurosurgeon. E) All of the above. Answer: D Diff: 2 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Prices and Wages Are Determined at the Margin 6) Which of the following technologies are most likely to increase Connor McDavid's salary for playing hockey in the NHL? A) The NHL Network begins streaming games over the internet. B) Bauer develops a new hockey stick allowing players to score more goals. C) The NHL allows goalies to use larger equipment, making goals harder to score. D) NHL teams start hiring more European players. E) None of the above. Answer: A Diff: 2 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Apply the Concept: Technology and the Earnings of "Superstars"

7) The gap in pay between superstar actors and those playing small roles has grown significantly over the last 30 years. Which of the following can explain the rising difference in pay? A) The rise of computer generated graphics has eliminated the need for actors to play small roles. B) Increases in the way movies and television shows can be watched as increased the marginal revenue product of star actors. C) Fewer films make a profit for their investors, which allows stats to demand extra pay. D) The opportunity cost of an actors time has increased due to the growth of alternative professions, like economics instructor. E) All of the above. Answer: B Diff: 2 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Apply the Concept: Technology and the Earnings of "Superstars" 8) Compensating differentials are A) non-monetary benefits from being employed, such as health-care benefits. B) wages paid to workers where the supply of labour is great relative to demand. C) higher wages that compensate workers for unpleasant aspects of a job. D) higher wages that compensate the more experienced workers in a field. E) compensation hat is paid to workers if they have an accident at work. Answer: C Diff: 2 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 9) Which of the following is an example of a compensating wage differential? A) Nurse anesthetists are paid less than anesthesiologists (who have medical degrees). B) Workers in a dynamite mine receive higher wages than if they worked in other jobs that require the same level of skills. C) In the market for lawyers, top graduates from the top programs earn starting salaries that are significantly higher than the starting salaries earned by lower-ranked graduates from the lower-ranked programs. D) Popular movie stars like George Clooney command much higher salaries than other talented but lesser-known actors. E) All of the above. Answer: B Diff: 2 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking, Multicultural and Diversity

10) If national laws protecting the health and safety of workers completely eliminate any and all risk, then A) workers in risky occupations become better off. B) compensating wage differentials disappear and workers in risky occupations may be no better off. C) compensating differentials would grow because workers could not be compensated by being given lower risk jobs. D) more people would be employed. E) people who love taking risks will be worse off. Answer: B Diff: 2 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking, Communication 11) If workers in nuclear power plants underestimate the true risk of their jobs, A) employers will pay compensating differential to compensate employees fully for the risk they have assumed. B) safety legislation will not make workers better off. C) the wages of these workers will not be high enough to compensate them fully for the risk they have assumed. D) the supply of workers in this occupation will exceed demand. E) they will demand higher wages to work in this field because it is specialized field. Answer: C Diff: 2 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 12) Compensating differentials may also include benefits such as A) dental and vision plan coverage. B) child-care provided onsite. C) extended health benefits. D) All of the above. E) None of the above. Answer: D Diff: 1 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

13) If labour markets determine equilibrium compensation, a reduction in employer contributions for health insurance should A) lead to an offsetting increase in wages. B) increase the supply of labour. C) decrease total worker compensation. D) decrease the demand for labour. E) decrease the supply of labour. Answer: A Diff: 1 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 14) If labour markets determine equilibrium compensation, a requirement for employers to provide health insurance will A) lead to an offsetting decrease in wages. B) increase the supply of labour. C) decrease total worker compensation. D) increase the demand for labour. E) decrease the supply of labour. Answer: A Diff: 1 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 15) Economic discrimination takes place when an employer A) pays workers the lowest wage possible. B) pays workers different wages on the basis of some arbitrary characteristics of workers that are irrelevant to the job performed. C) pays lower wages to workers who are not as productive as other workers. D) pays workers compensating wage differentials. E) pays higher wages to favourite workers. Answer: B Diff: 2 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills, Multicultural and Diversity

16) Wage differences among workers of different races and gender could be due to all of the following except A) differences in preferences for jobs. B) differences in work experience. C) differences in education. D) labour unions. E) differences in skills and training. Answer: D Diff: 2 Type: MC Topic: Labour Unions Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 17) Women typically earn less than men, even in the same occupation. Which of the following is an explanation for this discrepancy? A) Women do not work as hard as men because of cultural influences. B) Women have, on average, less workforce experience than men of the same age. C) Women are, on average, less motivated than men and therefore tend to avoid taking on more responsibilities. D) Women tend to take riskier jobs and earn compensating wage differentials. E) Women have less time available to work due to their household responsibilities. Answer: B Diff: 2 Type: MC Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking, Multicultural and Diversity Special Feature: Solved Problem: Is Passing "Comparable Worth" Legislation a Good Way to Close the Gap between Men's and Women's Pay? 18) Worker discrimination occurs when A) workers refuse to perform risky tasks. B) workers refuse to work with persons of a different race. C) customers refuse to buy products produced by a racially diverse workforce. D) employers pay different employees different wages based on race. E) workers don't get along with minorities. Answer: B Diff: 2 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills

19) Customer discrimination occurs when A) a firm pays workers different wages based on irrelevant factors. B) customers refuse to buy products produced by a racially diverse workforce. C) customers refuse to buy products they believe to be of poor quality. D) workers refuse to serve customers of a different race. E) customers refuse to buy from a cashier of a different race. Answer: B Diff: 2 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 20) Which of the following is a reason why it is difficult to estimate the extent of economic discrimination in the labour market? A) Employers who discriminate are likely to do so in overt ways such as awarding some workers with benefits-in-kind. B) Ultimately, employers who discriminate cannot remain profitable. C) Employers who discriminate pay an economic penalty. D) Differences in wages can be attributed to many other factors as well, such as differences in productivity and preferences. E) None of the above. Answer: D Diff: 2 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 21) That some talented people may not enter an occupation because they have heard that people with their personal characteristics do not get hired in that occupation is known as A) economic discrimination. B) a compensating difference. C) a negative feedback loop. D) worker discrimination. E) pessimism. Answer: C Diff: 1 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills

22) Consider the following pieces of information: a. According to Bonnie Reyes, president and chief operating officer of Better Investing, a national organization of investment clubs, women have traditionally made up about 60 percent of the membership of investment clubs. By contrast, less than a third of team-managed mutual funds on Wall Street have even one woman on the management team. b. Research conducted by professors E. Brooke Harrington and Max Planck concluded that mixed investment clubs, on average, outperformed the typical single-sex investment club. c. The lack of gender diversity in Wall Street could be influenced by its reputation, according to professor Harrington, "for being inhospitable to women." Source: Michael Hulbert, "Strategies: At some Funds, a Gender Communications Gap", The New York Times, October 7, 2007, Sunday Money, page 5. The information presented is an example of A) economic discrimination. B) a negative feedback loop. C) marginal productivity theory. D) the absence of comparable worth. E) a compensating wage differential. Answer: B Diff: 2 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills 23) The primary purpose of labour unions is to A) ensure that workers receive adequate safety training. B) ensure that all members earn identical incomes. C) negotiate with employers about wages and working conditions. D) endorse candidates and donate money to them. E) make money for union executives. Answer: C Diff: 1 Type: MC Topic: Labour Unions Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

24) Comparable worth legislation A) will eliminate the earnings gap between men and women. B) mandate that employers pay the same wages to workers, regardless of their gender, for jobs that have comparable worth. C) mandate that potential employers demonstrate that they are worth the wages they expect to earn. D) guide markets toward the economically efficient wage. E) mandate that employers can pay different wages to men than women of comparable worth. Answer: B Diff: 1 Type: MC Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills Special Feature: Solved Problem: Is Passing "Comparable Worth" Legislation a Good Way to Close the Gap between Men's and Women's Pay? Scenario 14.1 In academia, professors in some disciplines receive higher salaries than others. For example, professors teaching in business schools receive higher salaries than professors in the English department. Suppose at the University of Lethbridge, assistant professors in the business school earn $80,000 while assistant professors in the English department earn $50,000. Now suppose the government passes comparable worth legislation that requires academic institutions to pay all faculty the same salaries. 25) Refer to Scenario 14.1. Following the passage of comparable worth legislation, the University of Lethbridge responds by placing salaries for all assistant professors at $80,000. Which of the following is the result of the legislation? A) The supply of English professors increases; the market for business professors is not affected. B) The demand for English professors decreases; the market for business professors is not affected. C) There will be a surplus in the market for English professors and a shortage in the market for business professors. D) There will be a surplus in the market for English professors and the market for business professors will not be affected. E) The supply of business professors increases; the market for English professors is not affected. Answer: D Diff: 3 Type: MC Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills Special Feature: Solved Problem: Is Passing "Comparable Worth" Legislation a Good Way to Close the Gap between Men's and Women's Pay?

26) Refer to Scenario 14.1. Following the passage of comparable worth legislation, The University of Lethbridge responds by placing salaries at $65,000. Which of the following is the result of the legislation? A) The supply of English professors increases and the supply of business professors decreases. B) The demand for English professors decreases and the demand for business professors increases. C) There will be a surplus in the market for English professors and a shortage in the market for business professors. D) There will be a surplus in the market for English professors and the market for business professors will not be affected. E) The supply of business professors increases; the market for English professors is not affected. Answer: C Diff: 3 Type: MC Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills Special Feature: Solved Problem: Is Passing "Comparable Worth" Legislation a Good Way to Close the Gap between Men's and Women's Pay? 27) In a study conducted by Marianne Bertrand and Sendhil Mullianthan, identical resumes were sent in response to help wanted ads in newspapers, with half of the resumes assigned an African-Americansounding name and half assigned a white-sounding name. The study found that A) employers were equally likely to interview workers with white-sounding names and with AfricanAmerican-sounding names. B) employers were 50 percent more likely to interview workers with African-American-sounding names. C) employers were 50 percent more likely to interview workers with white-sounding names. D) no employers chose to interview workers with African-American-sounding names. E) employers only care about the qualifications and skills, they don't care about the names. Answer: C Diff: 1 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills, Multicultural and Diversity Special Feature: Apply the Concept: Does Greg Have an Easier Time Finding a Job Than Jamal? 28) In labour economics, the term "customer discrimination" refers to a situation where customers are charged different prices for services rendered by a firm. Answer: FALSE Diff: 1 Type: TF Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills

29) The most important factor contributing to wage differences in the labour market is differences in the level of education and training among workers. Answer: TRUE Diff: 2 Type: TF Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills 30) While labour unions tend to negotiate above-equilibrium wage rates for their members, they also tend to reduce the quantity of labour hired. Answer: TRUE Diff: 2 Type: TF Topic: Labour Unions Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills 31) What is a compensating differential? Answer: A compensating differential exists when a higher wage compensates workers for unpleasant aspects of a job. Diff: 1 Type: SA Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

32) Why do professional hockey players earn more than police officers? Illustrate this situation graphically. Answer: Wages are based on the marginal revenue product of labour and the supply of labour. The marginal revenue product of professional hockey players is very high and the supply of people with the ability to play professional hockey is very low, whereas the marginal revenue product of police officers is much lower and the supply of people with the ability to be police officers is much higher.

Diff: 2 Type: SA Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

Figure 14.6

33) Refer to Figure 14.6 to answer the following questions. a. What is the equilibrium quantity of firefighters hired, and what is the equilibrium wage? b. What is the equilibrium quantity of paralegals hired, and what is the equilibrium wage? c. Explain why firefighters might earn a higher weekly wage than paralegals. d. Suppose that comparable worth legislation is passed, and the government requires that firefighters and paralegals be paid the same wage, $800 per week. Now how many firefighters will be hired and how many paralegals will be hired? Answer: a. 8,000 firefighters at a wage of $1,000 per week. b. 11,000 paralegals at a wage of $600 per week. c. The marginal revenue product of the two types of work may differ. There may also be a compensating differential because the work of firefighters is more dangerous than the work of paralegals. d. 6,000 firefighters and 9,000 paralegals. Diff: 2 Type: SA Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 34) One reason why the average salary of National Hockey League players is higher than the average salary of university professors is A) the careers of most hockey players are much shorter than the careers of most university professors. B) the marginal revenue product of hockey players is greater than the marginal revenue product of university professors. C) universitye professors accept lower salaries in exchange for better working conditions. D) competition among hockey club owners forces player salaries to be much higher than the players' marginal revenue products. E) supply of university professors is much higher than the supply of hockey players. Answer: B Diff: 1 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

35) One reason why the average salary of National Hockey League players is higher than the average salary of college professors is A) the careers of most hockey players are much shorter than the careers of most college professors. B) very few college professors can attract 20,000 people to a lecture, but NHL teams regularly attract 20,000 people to game. C) college professors accept lower salaries in exchange for better working conditions. D) competition among hockey club owners forces player salaries to be much higher than the players' marginal revenue products. E) college professor are providing an essential service whereas National Hockey League is providing a luxury. Answer: B Diff: 1 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 36) Roberto Luongo's marginal product as a hockey player would be about the same as a Vancouver Canucks and a Florida Panther. Why were the Canucks willing to pay Luongo a higher salary than he was paid as a Florida Panther? A) The Canucks needed a superstar to attract fans to their games. The Panthers had no need to attract fans to their games. B) The Canucks play more home games than the Panthers. As a result, the Canucks earn more revenue from ticket sales that they can use to pay player salaries. C) Luongo's marginal revenue product was higher as a Canuck than it was as a Panther. D) The owner of the Canucks was under more pressure from the fans and the Vancouver media to pay Luongo a higher salary than the Panthers were willing to pay. E) All of the above. Answer: C Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

37) The total value to society of having garbage removed is greater than the value of baseball games. Why, then, are baseball players paid more than garbage collectors? A) Although the total value of garbage removal is greater than the total value of baseball, wages are determined by average values. B) Garbage removal results in significant external benefits that are not captured in the price paid for garbage removal. As a result, wages of garbage collectors do not reflect their social benefits. C) There is greater competition in the garbage collection industry than there is in Major League Baseball. D) Wages do not depend on total values but marginal values. The marginal revenue product of baseball players exceeds the marginal revenue product of garbage collectors. E) Wages are determined by the level of education and training and a baseball player needs more skills than a garbage collector. Answer: D Diff: 1 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That Prices and Wages Are Determined at the Margin 38) The difference between the salaries paid to movie stars and to actors who play supporting roles is much greater today than it was in the 1930s and 1940s. What factor explains this increase in relative salaries over time? A) Technological advances, such as home video and video-on-demand services, in the entertainment industry increase the revenue that successful movies can earn. This has increased the movie studios' willingness to pay high salaries to movie stars. B) Agents of movies stars are effective in obtaining large salaries for their clients today. Few movie stars had agents to negotiate for them in the 1930s and 1940s. C) The studio system that dominated the industry in the 1930s and 1940s no longer exists. The studio system allowed movie studios to sign actors to long-term contracts that kept salaries down. D) There was no actors' union in the 1930s and 1940s. The rise of strong actors' unions has caused salaries of movies stars to be greater today than in previous years. E) In 1930s and 1940s, not many actors were willing to play supporting roles unless they are paid higher salaries, now there is more supply of supporting actors in the market. Answer: A Diff: 1 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Apply the Concept: Technology and the Earnings of "Superstars"

39) Differences in marginal revenue products are the most important factor in explaining wage differences. Other factors that explain wage differences include all but one of the following. Which factor does not help explain differences in wages? A) cognitive differentials B) compensating differentials C) discrimination D) labour unions E) All of the above explain differences in wages. Answer: A Diff: 1 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 40) Most economists believe that a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Which of the following factors is not another factor that explains part of this gap? A) differences in education B) geographic location C) differences in experience D) differing preferences for jobs E) None of the above explains the gap. Answer: B Diff: 2 Type: MC Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 41) The equilibrium level of employee compensation is determined by A) the supply of labour and the supply of goods and services. B) the demand for labour and the demand for goods and services. C) the supply of goods and services and the demand for goods and services. D) the supply of labour and the demand for labour. E) the demand for labour only. Answer: D Diff: 1 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

42) In labour markets, the value of fringe benefits, such as health insurance, A) is part of employee compensation. B) is part of employee compensation only if employees are required to directly pay for the benefits. C) is not a part of employee compensation. D) is part of employee compensation only if its value is not allowed to be deducted from the employee's personal income tax. E) is part of employee compensation only if the premium is paid hundred percent by the employer. Answer: A Diff: 2 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 43) If an employer provides fringe benefits (such as health insurance) to employees, the costs of those fringe benefits are borne A) primarily by the employees. B) primarily by the employer. C) primarily by the government. D) equally by the employees, the employer, and the government. E) hundred percent by the employees. Answer: B Diff: 2 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 44) An organization of employees that has the legal right to bargain with employers about wages and working conditions is called a A) closed shop. B) guild. C) labour union. D) monopsony. E) bargaining unit. Answer: C Diff: 1 Type: MC Topic: Labour Unions Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

45) Competitive markets tend to eliminate economic discrimination, but there are many historical examples of firms that hired few, or no, black or female workers. Which of the following is not a reason for the persistence of this form of discrimination? A) In many cases, white workers refused to work with black workers. B) Some white consumers were unwilling to buy from companies that employed black workers. C) If discrimination makes it difficult for a member of a group to be hired in a particular occupation, there is less incentive for members of the group to be trained to enter that occupation. D) Laws passed by the federal government made it more expensive to hire black or female workers. As a result, it was less expensive for employers to hire mostly white male workers. E) All of the above are reasons for persistence of discrimination. Answer: D Diff: 2 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 46) Paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as race or gender A) is economic discrimination. B) violates federal comparable worth laws. C) can be explained by negative feedback loops. D) creates differences in wages that economists call "compensating differentials." E) is considered the violation of basic human rights. Answer: A Diff: 1 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 47) Larry and Mike are equally skilled construction workers employed by the Brown and Root Company. Larry's job is riskier because he typically works on a scaffold 1,000 feet above ground. Larry's higher wage rate is the result of A) economic discrimination. B) a compensating differential. C) a negative feedback loop. D) a higher marginal revenue product. E) a higher skill level. Answer: B Diff: 1 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

48) Wage differences can be explained by all of the following except A) compensating differentials. B) differences in marginal revenue products. C) economic discrimination. D) comparable worth. E) all of the above explain wage differences. Answer: D Diff: 1 Type: MC Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 49) According to two economists, George Ackerlof and William Dickens, how can cognitive dissonance affect workers' perceptions of their jobs? A) Cognitive dissonance makes workers believe that measures to improve their health and safety in the workplace are ineffective. B) Cognitive dissonance causes workers to perceive they are victims of discrimination when, in fact, they are not. C) Cognitive dissonance might cause workers to underestimate the true risks of their jobs. D) Cognitive dissonance causes a worker to believe his marginal revenue product is greater than it really is. E) Cognitive dissonance makes workers believe they are paid less than they deserve. Answer: C Diff: 3 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 50) One implication of compensating differentials is that laws passed to protect the health and safety of workers may not make workers better off than they were prior to the passage of the laws. Why is this so? A) Workers may suffer from cognitive dissonance, which means that the perception workers have that their jobs are hazardous is not true. B) If the laws make the work environment safer, there is no reason to pay workers a compensating differential for the risk associated with their jobs. C) The principal-agent problem that exists in the workplace may cause workers to shirk more after the work environment becomes safer. D) In non-competitive markets, workers are unlikely to receive a compensating differential to compensate for jobs with extra risk. As a result, after the laws are passed their wages will not change. E) If there are no risks but workers exaggerate the risks, then employers may refuse to pay higher wages. Answer: B Diff: 2 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

51) Phil Harrison is a welder who works on skyscrapers and extension bridges. Phil's brother William is also a welder but he works in a manufacturing plant where he does all of his welding on ground level. Which of the following would not explain why Phil earns a higher wage than his brother? A) cognitive dissonance B) Phil has greater experience as a welder than his brother has. C) Phil's marginal revenue product is greater than William's marginal revenue product. D) Phil's job is more hazardous than William's job. E) None of above explains why Phil earns a higher wage than his brother. Answer: A Diff: 2 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 52) Sarah Hawbreen complained, "Many jobs that are filled mostly by men offer higher wages than most jobs that are typically filled by women. In many cases, the jobs men have require the same education and skills as the jobs women have. This is clearly unfair. Women should be paid the same wages as men are paid for jobs that are equivalent in terms of their qualifications." Which of the following statements describes Sarah's position? A) Sarah believes that women's wages should include a compensating differential. B) Sarah believes employers assume that men and women have different job preferences. C) Sarah believes that employers are reluctant to hire women for certain jobs because of cognitive dissonance. D) Sarah endorses a concept called comparable worth. E) None of the above. Answer: D Diff: 2 Type: MC Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Solved Problem: Is Passing "Comparable Worth" Legislation a Good Way to Close the Gap between Men's and Women's Pay?

53) Assume that a comparable worth law is passed that determines that kindergarten teachers and bricklayers have comparable jobs; therefore, workers in both of these occupations should be paid the same wages. Assume that prior to the law, bricklayers were paid a higher wage than kindergarten teachers. Which of the following is the most likely result of the comparable worth law? A) The equilibrium wage will be the same for kindergarten teachers and bricklayers. B) Some former bricklayers will become kindergarten teachers and some former kindergarten teachers will become bricklayers. C) There will be a shortage in the market for bricklayers and a surplus in the market for kindergarten teachers. D) There will be surplus in the market for bricklayers and a shortage in the market for kindergarten teachers. E) The equilibrium wage will increase for the bricklayers and the kindergarten teachers. Answer: C Diff: 2 Type: MC Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Solved Problem: Is Passing "Comparable Worth" Legislation a Good Way to Close the Gap between Men's and Women's Pay? 54) Many economists are critical of proposals to pass comparable worth legislation. Which of the following is the best explanation for this criticism? A) Comparable worth legislation will only lead to efficient market outcomes if women in low-paying jobs suffer from cognitive dissonance. B) Proposals for comparable worth legislation assume that wages for low-paying women's jobs should include compensating differentials. Economists believe that compensating differentials should be part of the wages for all jobs held by women. C) Proposals for comparable worth legislation call for increases in the wages of jobs held predominantly by women. Economists believe that this legislation should be used to increase the wages of all workers. D) Many economists believe that allowing markets to determine wages, rather than the rules required by comparable worth legislation, results in more efficient outcomes. E) All of the above. Answer: D Diff: 2 Type: MC Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Solved Problem: Is Passing "Comparable Worth" Legislation a Good Way to Close the Gap between Men's and Women's Pay?

55) Canada has a relatively high level of unionization. A number of economists have estimated the impact of unionization on workers' wages. Which of the following is one conclusion reached by these studies? A) Union workers earn less than they would if they were not unionized. This is because of the impact of workers' strikes, during which union members do not receive wages. B) Holding constant the impact of other factors that affect wages, being in a union has no impact on a worker's wages. C) Being in a union increases a worker's wages by about 10 percent, holding constant other factors that influence wages. D) The share of national income received by workers has increased significantly over time; unions have been responsible for about one-half of the increase in workers' share of national income from the end of World War II to 2000. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Labour Unions Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 56) Compensating differentials are associated most closely with which of the following? A) hazardous jobs B) comparable worth C) economic discrimination D) differences in education E) high skilled jobs Answer: A Diff: 1 Type: MC Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 57) In a study conducted by Marianne Bertrand and Sendhil Mullianthan, identical resumes were sent in response to help wanted ads in newspapers, with half of the resumes assigned an African-Americansounding name and half assigned a white-sounding name. The study found that A) employers were equally likely to interview workers with white-sounding names and with AfricanAmerican-sounding names. B) employers were 50 percent less likely to interview workers with African-American-sounding names. C) employers were 50 percent less likely to interview workers with white-sounding names. D) no employers chose to interview workers with African-American-sounding names. E) employers did not pay attention to the names and only looked at the qualifications. Answer: B Diff: 1 Type: MC Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills, Multicultural and Diversity Special Feature: Apply the Concept: Does Greg Have an Easier Time Finding a Job Than Jamal? 88 Copyright © 2024 Pearson Canada Inc.

58) Higher wages that compensate workers for unpleasant aspects of a job are called compensating differentials. Answer: TRUE Diff: 1 Type: TF Topic: Compensating Differentials Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 59) Most economists believe that only a small gap between the wages of white males and the wages of other groups is due to education. Most of the gap is explained by discrimination. Answer: FALSE Diff: 1 Type: TF Topic: Discrimination Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking 60) As nonunion construction workers replace a unionized work force, the average wage in the construction sector is likely to rise. Answer: FALSE Diff: 2 Type: TF Topic: Labour Unions Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills 61) Why are there superstar hockey players but no superstar chiropractors? Answer: The increase in the relative incomes of superstars is mainly due to technological advances. For instance, the spread of cable television has greatly increased the number of potential viewers of baseball games. But many of those viewers will watch only if their team is winning. This increases the value to the owners of baseball teams of winning games and, therefore, increases the marginal revenue product of the best baseball players and the salaries they can earn. The difference between the marginal revenue products of the best chiropractors and the marginal revenue products of average chiropractors is much smaller. Even the best chiropractor can only work on one person at a time, but a superstar athlete can perform for millions of fans simultaneously. Diff: 2 Type: ES Topic: Differences in Wages Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking Special Feature: Apply the Concept: Technology and the Earnings of "Superstars"

62) Pay equality, guaranteed by the Canadian Human Rights Act, requires that men and women be given equal pay for equal work in the same establishment. Most people agree that gender discrimination in the workplace is unfair, but many economists have criticized advocates of comparable worth. Is paying the same wages for jobs that have comparable worth mandated by the pay equality? Why don't most economists support proposals to force employers to pay their male and female employees based on comparable worth rules? Answer: It would be hard to find anyone, economists included, who would argue against paying men and women equal pay for the same job in the same establishment. It is unfair, and illegal under the Equal Pay Act, to pay different wages to a male and a female employee who work next to each other on an assembly line doing similar tasks. A difficulty arises when the jobs performed by male and female workers are not the same, but have "comparable worth." The Equal Pay Act does not require employers to pay their male and female workers the same wages for different jobs that have comparable worth. Economists who disagree with comparable worth proposals argue that wages are determined in the market by the demand and supply for jobs that call for different skills. Mandating that jobs with different skills pay the same wages in effect argues for price controls to be used to either reduce wages that are "too high" (jobs that have traditionally been filled by males) or raise wages that are "too low" (jobs that have traditionally been filled by females) or both. Most economists believe that such controls will lead to outcomes that are less efficient than outcomes determined by markets without controls. Diff: 2 Type: ES Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Reflective Thinking

63) In the medical profession, pediatricians receive lower salaries than cardiologists. Suppose the government passes comparable worth legislation that requires hospitals to pay pediatricians the same salaries as cardiologists. Explain the effect of this legislation and illustrate your answer with demand and supply graphs for the following two scenarios: a. hospitals respond by placing salaries at a level between the two existing salaries b. hospitals respond by placing pediatricians' salaries at the initial level of cardiologists.

Answer: a. Refer to the diagram below. Panel A

Panel B

Panel A shows the market for cardiologists. Without comparable worth legislation, the equilibrium wage for cardiologists is W0 per year, and the equilibrium number of cardiologists hired is L0. Setting the wage for cardiologists below equilibrium at W1 reduces the quantity willing to work in this occupation from L0 to L1 but increases the quantity demanded by employers from L0 to L2. The result is a shortage of cardiologists equal to L2 - L1, as shown in Panel A. Panel B shows the market for pediatricians. Without comparable worth legislation, the equilibrium wage for pediatricians is W0 and the equilibrium quantity hired is L0. Setting the wage for pediatricians above equilibrium at W1 increases the number who want to work in this occupation from L0 to L2, but reduces the quantity demanded by employers from L0 to L1. The result is a surplus of pediatricians equal to L2 L1, as shown in Panel B. b. Refer to the diagram below. Panel C

Panel D

Panel C shows the market for cardiologists where the equilibrium wage is W2 per year, and the equilibrium quantity of cardiologists hired is L2. Panel D shows the market for pediatricians. Without comparable worth legislation, the equilibrium wage for pediatricians is W1 per year and the equilibrium quantity hired is L1. With comparable worth legislation, the wage for pediatricians is set at W2 per year. Quantity supplied increases from L1 to Lb, but quantity demanded by employers falls from L1 to La, resulting in a surplus of pediatricians equal to Lb La, as shown in Panel D. Diff: 3 Type: SA Topic: Comparable Worth Learning Outcome: 14.4 Use demand and supply analysis to explain how compensating differentials, discrimination, and labour unions cause wages to differ AACSB: Analytic Skills Special Feature: Solved Problem: Is Passing "Comparable Worth" Legislation a Good Way to Close the Gap between Men's and Women's Pay?

14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues 1) Personnel economics is A) the study of the factors that determine wage rates. B) the study of how workers are affected by tax law changes. C) the application of economic analyses to human resource issues. D) the application of economic analysis to the hiring decision. E) the study of the factors of production. Answer: C Diff: 2 Type: MC Topic: Personnel Economics Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 2) A successful compensation scheme A) must pay workers with comparable skills a comparable wage. B) must induce effort from workers and ensure that both employer and employees benefit. C) must enable workers to enjoy a certain standard of living and must enable employers to earn a normal rate of return. D) must allow employees to participate in a firm's profits. E) must have fringe benefits included in it. Answer: B Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking

3) Which of the following is a reason why some firms do not use commission pay? A) It gives workers incentive to produce more. B) It increases firm profits. C) It is difficult to measure the output and attribute output to a particular worker. D) The best workers stay and less productive workers leave. E) The firms save money by not paying constant wages. Answer: C Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking Special Feature: Apply the Concept: A Better Way to Sell Contact Lenses 4) Which of the following statements about commission systems of compensation is false? A) They increase the risk to workers because sometimes output declines for reasons not connected to the worker's effort. B) During sluggish periods, an employer's payroll expenses will decline along with sales. C) If workers are paid on the basis of the number of units produced, they may become less concerned about quality. D) The lack of income stability will induce the more productive workers to leave in search of more secure employment. E) None of the above. Answer: D Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 5) Despite evidence that companies will find it more profitable to use a commission system of compensation rather than a salary system, many companies continue to pay their workers salaries. Which of the following is one reason why firms choose a salary system? A) Most business owners and managers are not trained economists; therefore, they are unaware of the research that shows a commission system is more profitable than a salary system. B) Firms often use salary systems to overcome their principal-agent problems. C) Firms that have salary systems do not have to use compensating differentials to attract employees to do hazardous jobs. D) Many workers dislike risk and prefer to be paid a salary rather than to be paid by commission. E) It is easier for firms to manage the payroll. Answer: D Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking

Figure 14.7

Figure 14.7 shows two different compensation schemes for the Safelite Glass Corporation, an installer of auto glass windshields. Under Scheme I, the firm pays a consistent wage of $160 per day based on an 8hour workday. Qmin represents the cut-off point under the hourly-wage system: if a worker installed fewer than Qmin windshields, the worker was fired. Scheme II represents a piece-rate scheme with an earnings floor: no worker would get less than $160 per day (for an 8-hour workday) and would have to produce at least Qmin. For any output level beyond Q* the worker earned an additional $20 for each unit produced. 6) Refer to Figure 14.7. Under Scheme I, A) workers compete with each other to see who can produce beyond Qmin in the shortest possible time. B) workers have no incentive to produce beyond Qmin. C) workers signal their productivity to the firm by consistently producing above Qmin. D) the incentive to increase productivity depends on where Qmin is set; if it is at a very high level, then workers will rise to the challenge for fear of losing their jobs. E) workers will try to produce more than Qmin to please the employer. Answer: B Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Analytic Skills Special Feature: Apply the Concept: A Better Way to Sell Contact Lenses

7) Refer to Figure 14.7. Which of the following statements about Scheme II is false? A) It is likely to draw highly productive workers who see the opportunity to increase their wages. B) It could discourage less productive workers and induce them to leave the firm. C) It allows workers to increase their daily wage without penalizing those who are content with their daily wage. D) It is more risky for senior employees. Answer: D Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Analytic Skills Special Feature: Apply the Concept: A Better Way to Sell Contact Lenses 8) Refer to Figure 14.7. Suppose Qmin = 2 windshields and Q* = 5 windshields. Under Scheme II, a worker has to install Q* windshields before she earns an additional $20 per windshield installed. What is a potential problem with this scheme? A) Workers might be more concerned with increasing output beyond Q* and less concerned with the quality of their work. B) Any increase in output between Qmin and Q* benefits the employer only. C) It violates labour laws because workers are not compensated for output between Qmin and Q*. D) Workers have no incentive to produce output to between Qmin and Q*. Answer: A Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Analytic Skills Special Feature: Apply the Concept: A Better Way to Sell Contact Lenses 9) A commission system of compensation reduces the risk to workers during seasonal periods when business is sluggish. Answer: FALSE Diff: 2 Type: TF Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 10) When workers are paid on a piece-rate basis, an employer must be able to easily measure each worker's output. Answer: TRUE Diff: 1 Type: TF Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 96 Copyright © 2024 Pearson Canada Inc.

11) A firm might prefer a commission system of compensation when the nature of the work is repetitive and monotonous and can be performed by an individual. Answer: TRUE Diff: 2 Type: TF Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 12) What is personnel economics? Answer: Personnel economics is the application of economic analysis to human resource issues, such as compensation packages, promotions, training, and pensions. Diff: 1 Type: SA Topic: Personnel Economics Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 13) What is the difference between "straight-time pay," "commission pay," and "piece-rate pay"? Answer: Straight-time pay refers to pay based on the amount of time spent working, such as an hourly wage or weekly salary. Commission pay and piece-rate pay are wages based on actual output produced. Diff: 1 Type: SA Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 14) If commission or piece-rate systems of compensating workers have important advantages for firms, why don't more firms use them? Answer: Many firms don't use piece-rates (despite their advantages) because of difficulty in measuring individuals' outputs, concerns about product quality, and workers' aversion toward risk. Diff: 1 Type: SA Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking

15) The application of economic analysis to human resources issues is called A) resource economics. B) personnel economics. C) human economics. D) labour economics. E) industrial economics. Answer: B Diff: 1 Type: MC Topic: Personnel Economics Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 16) Mel's House of Cars is an automobile dealership that sells both new and used cars. Two other dealerships located nearer Mel's pay their salespeople a straight salary - they receive no commission for each car they sell. Mel has decided to pay all of his salespeople a commission on all car sales. Which of the following is most likely to occur as a result of Mel's decision? A) Mel will have difficulty finding salespeople. Research by labour economists has found that most employees prefer the security of a salary to the uncertainty of being paid based on how much revenue they generate for their employers. B) Mel will experience a principal-agent problem. Some of his salespeople will tend to shirk because they will not be paid if they sell no cars, regardless of how hard they work. C) Mel will be able to hire some of the most productive salespeople who work for the other two dealerships. D) Mel risks violation of federal law that regulates firms' compensation policies. E) Mel will loose some of his salespeople who are not willing to take an uncertain income. Answer: C Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 17) Which of the following economists is best known for exploring the application of economic analysis to human resources issues? A) Edward Lazear B) Claudia Goldin C) David Hamermesh D) Alan Krueger E) Adam Smith Answer: A Diff: 1 Type: MC Topic: Personnel Economics Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking

18) Some firms advertise that their sales staff does not work on commission. What is the trade-off involved with not offering commissions to sales staff? A) Sales staff on commission have highly stable incomes while those on salary have unstable incomes. B) Commissions may induce extra effort, but may also mean paying workers more. C) Salaried staff are impossible to motivate to put effort into their jobs, but tend to report higher job satisfaction. D) Sales staff on salary may put less effort into a sale, but may also be willing to spend more time with each customer. E) More workers will be attracted to job and will be willing to work with a fixed salary. Answer: D Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Analytic Skills 19) Edward Lazear analyzed data provided by the Canada Pro Group, the nation's largest installer of auto glass, after the company changed the way it paid its glass installers beginning in the mid-1990s. Instead of paying workers hourly wages, Canada Pro began to pay workers on the basis of how many windows they installed. Based on the experience of contact lens sales in the text what do you think Lazear found? A) Although workers installed more windows under the new system, Lazear found that there was also an increase in the number of workmanship-related defects. Lazear attributed this to workers taking shortcuts in order to earn higher wages. As a result, productivity did not improve and Canada Pro went back to paying hourly wages. B) Lazear found that worker productivity increased with the new system; about half of the increase in productivity was due to workers who continued with the company and half was due to new workers being more productive than those who left the company. C) Although worker productivity improved, the increase in hourly wages resulted in a significant decline in Canada Pro's profits. D) Because of a principal-agent problem, worker productivity was not affected by the new compensation system. However, Lazear attributed this to management problems that had nothing to do with Canada Pro's compensation system. E) Lazear found that workers lost incentive under the new system and newly hired workers were less productive than those who left the company. Answer: B Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking Special Feature: Apply the Concept: A Better Way to Sell Contact Lenses

20) Which of the following is not a reason for firms to choose a salary system rather than a commission system to compensate their employees? A) Research has shown that most companies will find that a salary system will be more profitable than a commission system. B) It is often difficult to attribute output to particular workers. C) If workers are paid on the basis of the number of units of output they produce, they may become less concerned about quality. D) Commission compensation systems are riskier for employees than a salary system, and many workers dislike risk. E) All of the above are reasons for firms to choose a salary system over a commission based system. Answer: A Diff: 2 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 21) If it is difficult for a firm to attribute the output it produces to a particular worker then A) its employees are likely to form a union. B) a commission system of compensation will be preferable to a salary system. C) a salary compensation system will be preferable to a commission system. D) a piece-rate system of compensation will be preferable to a salary system. E) the firm will lose a lot of money because of low productivity workers. Answer: C Diff: 1 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 22) Workers who dislike risk A) prefer to be paid monthly rather than weekly or daily. B) prefer a piece-rate compensation system to a salary system. C) prefer a salary system to a commission compensation system. D) prefer to be paid a salary rather than a wage. E) are usually those who are not highly skilled. Answer: C Diff: 1 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking

23) Which is the most likely reason that university professors are not paid a commission? A) University professors are highly risk averse. B) University professors are not motivated by money. C) It is very difficult to measure the productivity of a university professor. D) It is feared that university administrators would "ratch u" the commission requirements. E) University professor will not be willing to work if their jobs are commission based. Answer: C Diff: 1 Type: MC Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 24) The application of economic analysis to human resources issues is called personnel economics. Answer: TRUE Diff: 1 Type: TF Topic: Personnel Economics Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 25) A firm might prefer to choose a salary system rather than a commission or piece-rate system of compensation when there are concerns about output quality. Answer: TRUE Diff: 2 Type: TF Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 26) One reason why firms would choose a salary system rather than a commission compensation system is that their employees might become less concerned about the quality of their work. Answer: TRUE Diff: 2 Type: TF Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking

27) Companies often find it to be more profitable to use a commission or piece-rate system of compensation rather than a salary system, yet many firms continue to pay their workers salaries. List three reasons why a firm would choose a salary system of compensation. Answer: 1) Firms may find it difficult to attribute output to a particular worker. 2) Firms may be concerned that quality will suffer if does not use a salary system of compensation. 3) Workers may dislike the financial risk associated with a commission or a piece-rate compensation system. Diff: 2 Type: SA Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Reflective Thinking 28) Wally, Vijay, Sandra, and Consuela make up a software development team at Javasoft. The firm is considering implementing one of two incentive compensation schemes. In scheme A, each programmer receives an annual bonus if he or she meets all individual programming deadlines. In scheme B, members of the team share equally in a joint bonus if the team meets all of its product delivery deadlines. All four employees are equally talented but Wally is a slacker who does as little work as he can get away with. Which scheme might team members prefer? Which scheme will management prefer? Answer: Team members (except Wally) prefer scheme A since it ensures that they are not denied the bonus because of one slacker. Team-based pay is only effective when the product is truly a team effort. In this case, scheme B may cause some resentment among team members especially since Wally is likely to be a "free-rider." Management favours scheme B because it is tied to the firm's goal of product delivery. Diff: 2 Type: SA Topic: Compensation Systems Learning Outcome: 14.5 Discuss the role personnel economics can play in helping firms deal with human resources issues AACSB: Analytic Skills

14.6 Show how equilibrium prices are determined in the markets for capital and natural resources 1) If a firm is the sole employer of a factor of production, it is known as A) a monopoly. B) a competitor. C) a monopsony. D) an economically discriminating firm. E) a monopolistically competitive. Answer: C Diff: 1 Type: MC Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 2) The marginal revenue product of capital is A) the cost to the firm of renting an additional unit of capital. B) the change in the firm's revenue as a result of employing one more unit of capital, such as a machine. C) the economic rent received by hiring an additional unit of capital. D) the revenue generated by substituting capital for labour in the production process. E) equal to the marginal revenue of output. Answer: B Diff: 1 Type: MC Topic: The Market for Capital Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 3) Which of the following statements regarding equilibrium in the markets for capital and for a natural resource used in producing a good is true? A) The marginal revenue product of capital will equal the marginal revenue product of the natural resource. B) The rental price of capital will equal the price of the natural resource. C) The marginal product of capital will equal the rental price of capital, and the marginal product of the natural resource will equal the price of the natural resource. D) The marginal revenue product of capital will equal the rental price of capital, and the marginal revenue product of the natural resource will equal the price of the natural resource. E) None of the above. Answer: D Diff: 2 Type: MC Topic: The Market for Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking

4) The Buda Agri Corporation is the sole employer in rural Hungary. In the labour market, Buda Agri is a A) monopolistic competitor. B) monopsony. C) monopoly. D) perfect competitor. E) government enterprise. Answer: B Diff: 1 Type: MC Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 5) Economic rent is defined as A) what you pay to rent your apartment or house. B) the revenue received by a factor of production with an upward-sloping supply curve. C) the price of a factor of production that is fixed in supply. D) the surplus received by employing a factor of production in its highest valued use. E) the surplus producers receive by producing and selling a good at a higher price than their cost to produce it. Answer: C Diff: 1 Type: MC Topic: The Market for Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 6) The town of Banff has a fixed supply of mountain view lots. In this case, the price per square foot of mountain view lots is A) determined only by supply. B) determined only by demand. C) set by government officials of Banff. D) negotiated by environmental groups and property developers. E) determined by supply and demand together. Answer: B Diff: 2 Type: MC Topic: The Market for Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Analytic Skills

7) According to the marginal productivity theory of income, A) the greater the quantity of resources owned by an individual, the greater his incentive to increase productivity and his income. B) the average income received by an individual who supplies resources is influenced by the resources owner's marginal productivity. C) the income received by an individual who supplies labour services equals the incremental benefit generated to the firm by that individual's labour. D) the income received by an individual who supplies labour services equals the profit generated to the firm by that individual's labour. E) the wage rate workers receive should be according to their qualifications and skills. Answer: C Diff: 2 Type: MC Topic: Marginal Productivity Theory of Income Distribution Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 8) The marginal productivity theory of income states that a person's total income is determined by A) the amount and productivity of factors of production the individual owns. B) how much the individual works. C) how profitable the firm the individual works for is. D) how much the individual has inherited. E) how much qualification and skill the individual has. Answer: A Diff: 2 Type: MC Topic: Marginal Productivity Theory of Income Distribution Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 9) The marginal productivity theory of income states that differences between two people's income will be due to A) one person owning more productive factors of production. B) one person owns more factors of production than the other. C) based on arbitrary characteristics like skin colour or sex. D) how much the individual has inherited. E) discrimination on the basis of country of origin. Answer: A Diff: 2 Type: MC Topic: Marginal Productivity Theory of Income Distribution Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking

10) The supply curve of a uniquely talented actor or superstar athlete will be perfectly inelastic. Answer: TRUE Diff: 2 Type: TF Topic: The Market for Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 11) The market price of a factor of production that is in fixed is determined only by demand. Answer: TRUE Diff: 2 Type: TF Topic: The Market for Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 12) A monopsony is a firm which is the sole producer of a product. Answer: FALSE Diff: 2 Type: TF Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 13) What is a monopsony? Answer: A monopsony is a market with only one buyer of a factor of production. Diff: 1 Type: SA Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 14) What is the marginal productivity theory of income distribution? Answer: The marginal productivity theory of income distribution concludes that each individual's income is determined by the marginal productivity of the factors of production (such as labour, capital and natural resources) that the individual owns. Diff: 2 Type: SA Topic: Marginal Productivity Theory of Income Distribution Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking

Table 14.7 Output of Pencils Product Number (boxes Marginal Price of per Product (dollars Total Machines week) of Capital per box) Revenue L Q MP P TR 0 0 − $40 1 10 40 2 18 40 3 25 40 4 31 40 5 36 40 6 40 40

Marginal Revenue Product of Capital MRP −

Additional Profit from Renting Rental One Cost per Additional Machine Machine R $240 240 240 240 240 240 240

15) Refer to Table 14.7. Dante owns a pencil factory and faces the situation shown in the table and the cost of renting a machine is $240 per week. a. Fill in the blanks in the table and determine the profit-maximizing number of machines for Dante to rent. Explain why renting this number of machines is profit maximizing. b. Draw Dante's demand curve for capital.

Answer: Output Additional of Profit from Pencils Product Marginal Renting Number (boxes Marginal Price Revenue Rental One of per Product (dollars Total Product of Cost per Additional Machines week) of Capital per box) Revenue Capital Machine Machine L Q MP P TR MRP = P × MP R MRP − R 0 0 − $40 $0 − $240 − 1 10 10 40 400 $400 240 $160 2 18 8 40 720 320 240 80 3 25 7 40 1,000 280 240 40 4 31 6 40 1,240 240 240 0 5 36 5 40 1,440 200 240 −40 6 40 4 40 1,600 160 240 −80 a. Dante should rent 4 machines to maximize his profit because this is where the additional profit from renting one additional machine is zero. b.

Diff: 3 Type: SA Topic: The Market for Capital Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Analytic Skills

16) Marginal productivity theory implies that in a perfectly competitive market economy, a worker will receive income A) equal to the value of her marginal contribution to the production process. B) that is greater than the value of her marginal contribution to production process. C) that is less than the value of her marginal contribution to the production process. D) greater than, less than, or equal to the value of her marginal contribution to the production process, depending on her ability to negotiate with employers. E) that is sufficient for her to make ends meet. Answer: A Diff: 1 Type: MC Topic: Marginal Productivity Theory of Income Distribution Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 17) Compared to a competitive market, a firm that has a monopsony in a labour market would A) hire fewer workers and pay higher wages. B) hire more workers and pay lower wages. C) hire fewer workers and pay lower wages. D) hire more workers and pay higher wages. E) determine the pay based on demand and supply equilibrium. Answer: C Diff: 1 Type: MC Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 18) The labour market of the National Hockey League features A) a monopoly by the League in employing professional hockey players that is offset by the players' membership in a labour union. B) a monopsony by the League in employing professional hockey players that is offset by the players' membership in a labour union. C) an oligopoly by the League in employing professional hockey players that is offset by an oligopsony by the players in the labour market. D) monopolistic competition between the teams and professional hockey players. E) perfect competition between the team and professional hockey players. Answer: B Diff: 1 Type: MC Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking

19) The marginal productivity theory of income distribution was developed by A) Edward Lazear. B) George Akerlof. C) William Stanley Jevons. D) John Bates Clark. E) Milton Friedman. Answer: D Diff: 1 Type: MC Topic: Marginal Productivity Theory of Income Distribution Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 20) The marginal productivity theory of income distribution states that A) as more and more units of labour are added to a fixed quantity of capital, eventually labour's contribution to a firm's income will decrease. B) income distribution is determined by the marginal productivity of the factors of production that individuals own. C) factors of production in short supply command higher prices than those available in abundant quantities. D) capital owners receive the bulk of a nation's income because capital-intensive production generates productivity gains. E) wages are determined by the marginal productivity of labour. Answer: B Diff: 1 Type: MC Topic: Marginal Productivity Theory of Income Distribution Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 21) A firm chooses its profit-maximizing quantity of capital by A) comparing the marginal revenue product of capital with the rental price of capital. B) comparing the price of capital with the price of labour. C) examining the total cost of capital equipment. D) determining the rate at which the firm can borrow funds to purchase plant and equipment. E) the profit it is making by producing the good using the capital. Answer: A Diff: 1 Type: MC Topic: The Market for Capital Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking

22) The demand for capital is similar to the demand for labour in that A) the marginal product of labour is derived from the marginal product of capital. B) the marginal revenue product curve for labour is the same as the marginal revenue product curve for capital. C) both are derived demands. D) both are inelastic at high prices and elastic at low prices. E) both have highly inelastic demand. Answer: C Diff: 1 Type: MC Topic: The Market for Capital Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 23) In general, the supply curve for a natural resource A) is vertical. B) is horizontal. C) slopes downward to reflect decreasing available quantities over time. D) slopes upward. E) There is no supply curve for natural resources because they are provided by nature, there is no price for them. Answer: D Diff: 1 Type: MC Topic: The Market for Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 24) The price of a factor of production that is in fixed supply is called A) economic rent. B) economic profit. C) a compensating differential. D) opportunity cost. E) fixed factor price. Answer: A Diff: 1 Type: MC Topic: The Market for Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking

25) If you were to ask your employer for a raise, which of the following would be your most effective argument? A) "I have a job offer at another firm that will pay me more than my current wage." B) "I am willing to work more hours each week." C) "Increases in my productivity have resulted in greater revenue and profits for your business." D) "My marginal product is greater than my current wage." E) "I will quit the job if I don't get a raise." Answer: C Diff: 1 Type: MC Topic: Marginal Revenue Product of Labour Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: When Should You Give an Employee a Raise? 26) A monopsony is a term used to refer to a firm that is the sole seller of a good or service. Answer: FALSE Diff: 1 Type: TF Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 27) A monopsony restricts the quantity of a factor demanded to force down the price of the factor and increase profits. Answer: TRUE Diff: 1 Type: TF Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 28) Economic rent refers to the price of a factor of production that is fixed in supply. Answer: TRUE Diff: 2 Type: TF Topic: The Market for Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking

29) In equilibrium, what determines the price of capital and what determines the price of natural resources? Answer: In equilibrium, the price of capital is determined by the intersection of the supply of capital curve and the demand for capital curve. Similarly, the equilibrium price of natural resources is determined by the intersection of the supply of natural resources curve and the demand for natural resources curve. Diff: 1 Type: SA Topic: The Markets for Capital and Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 30) How will a government-imposed minimum wage affect the equilibrium level of employment in a competitive labour market and in a monopsony labour market? Answer: In a competitive labour market, a minimum wage should reduce the equilibrium level of employment. In the case of a monopsony, imposing a minimum wage removes market power from the single firm and encourages the firm to hire more workers than it would otherwise. Diff: 2 Type: SA Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking 31) Canada is a major supplier of the world's potash. The total amount of potash in the earth is not increasing. Does this mean that in the market for potash, the supply curve is perfectly inelastic? Explain. Answer: The supply of potash is the quantity firms are willing to sell at each price. As price increases, firms are willing to work harder to mine potash, so the quantity supplied will increase as the price of potash rises, even though the total amount of potash in the ground is not increasing. Therefore, the supply curve for potash is not perfectly inelastic. Diff: 2 Type: SA Topic: The Market for Natural Resources Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Reflective Thinking

32) Define Monopsony. Give an example of monopsony. What is the difference between monopoly and monopsony and explain if it is common to have monopsony in factors market. Answer: If a firm is the sole buyer of a factor of production (Labour, Capital, Natural resources), it is called a monopsony. The difference between a monopoly and monopsony is that a monopoly firm is a singer seller of a product whereas a monopsony is a single buyer of a factor of production. An example of monopsony would be a firm in an isolated town — perhaps a lumber mill in a small town in British Columbia — that is the sole employer of labour in that location. Monopsonies are comparatively rare. Diff: 2 Type: ES Topic: Monopsony Learning Outcome: 14.6 Show how equilibrium prices are determined in the markets for capital and natural resources AACSB: Analytic Skills

Microeconomics, 4Ce (Hubbard) Chapter 15 Public Choice, Taxes, and the Distribution of Income 15.1 Describe the public choice model and explain how it is used to analyze government decision making 1) One argument advanced in favour of reducing corporate income tax rates is A) corporations increase the wealth of shareholders, which contributes to increases in GDP. B) reducing corporate income tax will lead to a higher capital stock and a higher standard of living. C) corporate dividends accrue mostly to middle-income and low-income investors who are already paying heavy income taxes. D) corporate income tax is illegal. E) that reduced corporate tax rate increases the profits of big businesses. Answer: B Diff: 2 Type: MC Topic: Income Taxes Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Special Feature: Chapter Opener: Taxes and Trade-Offs 2) One argument advanced in favour of raising corporate income taxes is A) dividends increase the wealth of shareholders, which could lead to inflation. B) the tax revenue gained can be used to pay for social programs. C) corporate dividends accrue mostly to low income individuals, thus increasing income inequality. D) it increases the incentive for corporations to maximize shareholder value. E) it increases the income inequality among the rich and the poor. Answer: B Diff: 2 Type: MC Topic: Income Taxes Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Special Feature: Chapter Opener: Taxes and Trade-Offs 3) One way physicians might react to an increase in the federal income tax rate would be A) they would see more patients. B) the would take more time off. C) they would pay more provincial income tax. D) they would increase the wage they offer their support staff. E) they will work longer hours and will work on weekends too. Answer: B Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Special Feature: Chapter Opener: Taxes and Trade-Offs 1 Copyright © 2024 Pearson Canada Inc.

4) Tax laws affect A) economic efficiency but not equity. B) equity but not economic efficiency. C) consumption and production, not efficiency and equity. D) both efficiency and equity. E) the way people do businesses. Answer: D Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Special Feature: Chapter Opener: Taxes and Trade-Offs 5) What are the two types of taxes that working individuals pay on their earnings? A) individual income tax and sales tax B) payroll tax and sales tax C) individual income tax and social insurance premiums D) property tax and payroll tax E) GST and HST Answer: C Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Special Feature: Economics in Your Life: How Much Tax Should You Pay? 6) According to public choice theory, policymakers A) place the interests of the public above their own self-interest. B) are likely to pursue their own self-interest, even if their self-interest conflicts with the public interest. C) act in ways to maximize economic efficiency. D) act in ways to bring about an equitable distribution of society's wealth. E) care more about public interests than their own interests. Answer: B Diff: 1 Type: MC Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

7) The public choice model A) examines the degree of market power that the public exerts in a market economy. B) examines the public's role in appointing politicians and ensuring that elected officials act in ways to reflect the public's preferences. C) applies economic analysis to government decision making. D) applies economic analysis to the collective decision making of consumers. E) applies to consultation of the government with public to decide about a policy. Answer: C Diff: 1 Type: MC Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Table 15.1 Subsidies for education Research on Alzheimer's Subsidies for daycare

Ivy 2nd 3rd 1st

Jasmine 3rd 1st 2nd

Rose 1st 2nd 3rd

Suppose $1 billion is available in the budget and Parliament is considering allocating the funds to one of the following three alternatives: 1) Subsidies for education, 2) Research on Alzheimer's or 3) Subsidies for daycare. Table 15.1 shows three voters' rankings of the alternatives. 8) Refer to Table 15.1. Suppose a series of votes are taken in which each pair of alternatives is considered in turn. If the vote is between allocating funds to subsidies for education and research on Alzheimer's, A) Ivy and Jasmine vote for education subsidies, Rose votes for Alzheimer's research, and education subsidies wins. B) Ivy and Rose vote for education subsidies, Jasmine votes for Alzheimer's research, and education subsidies wins. C) Jasmine and Rose vote for Alzheimer's research, Ivy votes for education subsidies, and Alzheimer's research wins. D) Jasmine and Ivy vote for Alzheimer's research, Rose votes for education subsidies, and Alzheimer's research wins. E) everyone votes for Alzheimer's research and Alzheimer's research won. Answer: B Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Analytic Skills

9) Refer to Table 15.1. Suppose a series of votes are taken in which each pair of alternatives is considered in turn. If the vote is between allocating funds to research on Alzheimer's and subsidies for daycare, A) Ivy and Jasmine vote for Alzheimer's research, Rose votes for increased subsidies for daycare, and Alzheimer's research wins. B) Ivy and Rose vote for increased subsidies for daycare, Jasmine votes for Alzheimer's research, and increased subsidies for daycare wins. C) Jasmine and Rose vote for Alzheimer's research, Ivy votes for increased subsidies for daycare, and Alzheimer's research wins. D) Jasmine and Ivy vote for increased subsidies for daycare, Rose votes for Alzheimer's research, and increased subsidies for daycare wins. E) everyone votes for increased subsidies for daycare, and increased subsidies for daycare wins. Answer: C Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Analytic Skills 10) Refer to Table 15.1. Suppose a series of votes are taken in which each pair of alternatives is considered in turn. If the vote is between allocating funds to education subsidies and increased subsidies for daycare, A) Ivy and Jasmine vote for education subsidies, Rose votes for increased subsidies for daycare, and education subsidies wins. B) Ivy and Rose vote for increased subsidies for daycare, Jasmine votes for education subsidies, and increased subsidies for daycare wins. C) Jasmine and Rose vote for education subsidies, Rose votes for increased subsidies for daycare, and education subsidies wins. D) Jasmine and Ivy vote for increased subsidies for daycare, Rose votes for education subsidies, and increased subsidies for daycare wins. E) everyone votes for education subsidies and education subsidies win. Answer: D Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Analytic Skills

11) Refer to Table 15.1. Suppose a series of votes are taken in which each pair of alternatives is considered in turn. The first pair considered is between subsidies for education and research on Alzheimer's. The second pair considered is between Alzheimer's research and increased subsidies for daycare. The third pair considered is between education subsidies and increased subsidies for daycare. In this case, the collective preferences of the voters A) turn out to be transitive and will yield a consistent outcome. B) turn out to be transitive but will not result in a consistent outcome. C) turn out not to be transitive and will not result in a consistent outcome. D) turn out not to be transitive but will yield a consistent outcome. E) more information is required to determine the answer. Answer: C Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Analytic Skills 12) Suppose $1 billion is available in the budget and Parliament is considering allocating the funds to one of the following three alternatives: a. subsidies for education b. research on Alzheimer's c. increased subsidies for daycare If voters prefer a to b and b to c, then if preferences are transitive, A) they should prefer a to c. B) they should prefer c to a. C) it is not possible to conclude. D) they should be indifferent between a and c. E) it is not always possible to rank voters' preferences between a and c. Answer: A Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Analytic Skills

13) The voting paradox suggests that the "voting market," as represented by elections, A) leads to a superior outcome in representing consumer preferences compared to the private market for goods and services. B) may often lead to an inefficient outcome in representing consumer preferences compared to the private market for goods and services. C) is no different from the private market for goods and services in terms of representing consumer preferences. D) may not lead to an efficient outcome but certainly leads to a more equitable outcome in terms of distributing goods and services. E) always lead to an efficient outcome depending upon the voters' turn out. Answer: B Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 14) What is the voting paradox? A) the observation that less than 60 percent of those eligible to vote actually vote B) the observation that majority voting may not always result in consistent choices C) the idea that wealthy corporations are able to sway politicians to act in ways contrary to the desires of the majority D) people are aware that their votes will not change the political outcome since these outcomes are predetermined by a group of influential politicians E) the observation that voting does not always result in efficient outcome because most people vote without proper knowledge Answer: B Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 15) The median voter theorem states that the outcome of a majority vote A) tends to favour the preferences of high income individuals and ignore the median voter. B) is likely to represent the preferences of society's middle-income voter. C) is likely to represent the preferences of the voter who is in the political middle. D) is determined by the average consumer and producer in an economy. E) leads the winning party to rule. Answer: C Diff: 2 Type: MC Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

16) The Arrow impossibility theorem states that A) no system of voting can be devised that will always consistently represent the underlying preferences of voters. B) it is impossible for a majority voting system not to consistently represent the preferences of voters. C) it is impossible to separate corporate desires from public bureaucracy. D) no system of voting can be devised that will ensure a 100 percent voter turnout. E) no system of voting can be fair when it comes to choosing a good leader. Answer: A Diff: 2 Type: MC Topic: Arrow Impossibility Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 17) Throughout 2016, the federal government consulted Canadians in an effort to find the ideal voting system. The political parties and most Canadians do not agree on what an ideal voting system is. The theory that states there is no ideal voting system is called A) Arrow's Impossibility Theorem. B) The Median Voter Theorem. C) Rational Ignorance. D) Public Choice Theory. E) Logrolling. Answer: A Diff: 2 Type: MC Topic: Arrow Impossibility Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 18) The median voter theorem will be an accurate predicator of the outcomes of elections A) only when voter turnout is very high. B) when a majority of voters have preferences very similar to those of the median voter. C) when a majority of voters have preferences different from those of the median voter. D) regardless of whether preferences among voters are similar or different from those of the median voter. E) only if all eligible voters vote. Answer: D Diff: 2 Type: MC Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

19) Why is a typical person likely to gather more information when buying a new car than when voting for a Member of Parliament? A) because a person's preferences are more likely to be met with little effort in the political sphere but this is not the case when buying a car in the private marketplace B) because it is less costly to acquire information about consumer items than it is about political candidates C) because buying a new car affects a person more immediately and personally compared to voting for a Member of Parliament; in the latter, a person's vote is only one of many voters and therefore, not likely to have a large impact on the outcome D) because the effects of buying a car are long term while a Member of Parliament has a relatively short tenure E) Member of Parliament does not affect the person directly while car purchase does Answer: C Diff: 2 Type: MC Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 20) The median voter model implies that A) many people will be satisfied with the amount of spending on government funded projects. B) many people will be dissatisfied with the amount of spending on government funded projects. C) people in the political middle will be dissatisfied with the amount of spending on government funded projects. D) spending on government funded projects reflects the preferences of only those far away from the median. E) fifty percent voters will be satisfied with spending on government funded projects. Answer: B Diff: 2 Type: MC Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 21) Which of the following is not an example of rent-seeking behaviour? A) competition for subsidies B) lobbying the government to impose tariffs on certain imported products C) competition for the exclusive right to import a product D) engaging in aggressive advertising that slams a competitor's product E) All of the above are examples of rent seeking behaviour. Answer: D Diff: 2 Type: MC Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

22) Which of the following statements about rent seeking is false? A) Rent seeking often involves governments because governments transfer huge amounts of funds that economic agents must compete for. B) A person is engaging in rent-seeking behaviour when he uses the political process to acquire ownership of a resource that belongs to the public. C) Because rent seeking redistributes society's resources, anyone engaging in such behaviour is violating the law. D) If a firm can benefit from government intervention in the economy, it is more likely to spend resources attempting to secure this intervention than toward innovating its product to gain a competitive edge in the market. E) None of the above is false. Answer: C Diff: 3 Type: MC Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 23) A situation where a Member of Parliament votes to approve a bill in exchange for favourable votes from other members on other bills is called A) rent seeking. B) logrolling. C) regulatory capture. D) special interest legislation. E) the median voter theorem. Answer: B Diff: 1 Type: MC Topic: Logrolling Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 24) What is logrolling? A) a situation where a policymaker votes to approve a bill in exchange for favourable votes from his colleagues on other bills B) a situation where policymakers transfer resources from those voters who are unlikely to have a huge impact on the political outcome to those who contribute to political campaigns C) a situation where a policymaker accepts bribes to prevent proposed legislation from coming to a vote D) a situation where a policymaker gets the government to fund a non-essential project benefiting her family members E) All of the above are examples of logrolling. Answer: A Diff: 2 Type: MC Topic: Logrolling Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

25) Logrolling may result in A) legislation that yields economy-wide benefits, the funding for which is borne primarily by a few of the smallest states. B) a majority of Parliament supporting legislation that benefits the economic interests of a few, while harming the economic interests of a much larger group. C) members of Parliament selling their votes on proposed legislation to the highest bidder. D) creating limited incentives for policymakers to consider the immediate consequences of their proposed legislation. E) corrupt behaviour on part of members of Parliament. Answer: B Diff: 2 Type: MC Topic: Logrolling Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 26) What is meant by the term "rational ignorance"? A) It refers to the absence of a negative incentive, for example, a fine for not voting, which results in a low voter turnout. B) It refers to a situation where one policymaker deliberately approves a bill he does not support in exchange for a future favourable vote for his own cause. C) It means the lack an economic incentive for voters to become informed about a pending legislation. D) It refers to the fact that policymakers and their constituents have different ideas of what it means to behave rationally and each party deliberately ignores the other's view. E) It refers to the failure of majority voting to always result in consistent choices. Answer: C Diff: 2 Type: MC Topic: Rational Ignorance Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 27) Rational ignorance A) explains why consumers ignore sunk costs when they vote. B) explains the Arrow impossibility theorem. C) refers to attempts by special interests to use government action to make themselves better off at the expense of others. D) helps to explain why rent seeking by special interest groups occurs. E) explains the voting paradox. Answer: D Diff: 2 Type: MC Topic: Rational Ignorance Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

28) One important difference between the political process and the market process is that A) the political process results in collective actions in which not everyone is required to participate, while in the market process individuals are obliged to participate. B) the political process results in collective actions in which everyone is obliged to participate, while in the market process individuals are free to participate or not. C) the political process results in collective actions that maximize economic surplus, while the market process may lead to efficiency losses. D) the political process results in collective actions in which everyone is made better off, while the market process results in actions that favour some groups only. E) the political process is important for the overall economy's success whereas the success or failure of market process does not affect the overall economy. Answer: B Diff: 3 Type: MC Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 29) What is regulatory capture? A) It is a situation in which a policy maker seeks to improve his election prospects by aligning himself with a powerful special interest group which will finance his political campaign. B) It is the exchange of political support between a regulatory agency and the regulated firm resulting in both parties capturing economic rents. C) It is a situation in which a firm being regulated successfully influences the regulatory agency's actions to benefit the interests of the firm, rather than the public interest. D) It is a situation in which a regulatory agency uses its authority to force actions that are not favoured by the regulated firms but are in the public's interest. E) It is a situation in which the outcome of a majority vote is likely to represent the preferences of the median voter. Answer: C Diff: 2 Type: MC Topic: Regulatory Capture Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

30) Some people think that only those who have teaching experience should be hired by a province's Department (or Ministry) of Education. They believe that only teachers can understand the needs of an education system. One risk of this thinking is A) rent seeking behaviour. The members of the Department of Education will lobby the government to increase education spending. B) logrolling. The members of the Department of Education will accept policies that harm education in exchange for future considerations. C) rational ignorance. Former educators have no reason to invest the time and energy needed to understand the workings of government. D) regulatory capture. The former teachers may enact policies that benefit teachers at the expense of students. E) voting paradox. The failure of majority voting to always result in consistent choices. Answer: D Diff: 2 Type: MC Topic: Regulatory Capture Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 31) The public choice model asserts that the self-interest of policymakers is likely to cause them to take actions that are inconsistent with the preferences of voters, even where those preferences are clear. Answer: TRUE Diff: 2 Type: TF Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 32) When the majority of voters have preferences very different from those of the median voter, then the median voter theorem will lead to accurate predictions of the outcomes of elections. Answer: FALSE Diff: 2 Type: TF Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 33) If voters lack an economic incentive to become informed about pending legislation, then their preferences become a constraint on legislators voting for rent-seeking legislation. Answer: FALSE Diff: 2 Type: TF Topic: Rational Ignorance Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

34) Unlike the market process, in the political market it is possible for some individuals to receive very large benefits from the political process without any significant impact on their tax bills. Answer: TRUE Diff: 2 Type: TF Topic: Logrolling Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 35) What is the difference between the voting paradox and the Arrow impossibility theorem? Answer: The voting paradox is the failure of majority voting to always result in consistent choices. The Arrow impossibility theorem is a mathematical theorem that holds that no system of voting can be devised that will consistently represent the underlying preferences of voters. Diff: 2 Type: ES Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Analytic Skills 36) What is the relationship between market failure and government failure? Answer: Market failure is a case where the market fails to provide the economically optimal outcome. Government failure is a case where the government fails to provide the economically optimal outcome. It is not necessarily the case that governments can always fix market failure. Diff: 2 Type: ES Topic: Government Failure Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Analytic Skills 37) Define logrolling. Explain why logrolling often results in legislation that benefits the economic interests of a few, while harming the interests of a larger group of people. Answer: Logrolling refers to the situation where a member of Parliament votes to approve a bill in exchange for votes from other members of Parliament on other bills. Members of Parliament often sponsor legislation that benefits constituents in their own districts; for example, a new highway. The costs of the highway are paid by taxpayers from all districts. Most of these taxpayers will see little or no benefit from the highway, which creates jobs and provides services mostly within a single federal riding. Taxpayers outside of the riding typically do not oppose the highway for two reasons. First, they often are rationally ignorant; the costs of the highway are spread widely so that each taxpayer incurs a very small part of the total cost. Second, taxpayers in other ridings are the beneficiaries of their own projects, which receive, through logrolling, the votes of a majority of members of Parliament. Diff: 2 Type: ES Topic: Logrolling Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

Table 15.2

Bart Lisa Maggie

Highway Employment Improvements Insurance Benefits 1st 3rd 2nd 1st 3rd 2nd

Social Safetynet Reform 2nd 3rd 1st

38) Refer to Table 15.2. The table above outlines the rankings of three members of Parliament on three spending alternatives. Assume that Parliament can spend additional revenue on only one of the three spending alternatives and that Bart, Lisa, and Maggie, all members of Parliament, participate in a series of votes in which they are to determine which of the spending alternatives should receive funding. Three votes will be taken: (1) Highway Improvements and Employment Insurance Benefits (2) Highway Improvements and Social Safetynet Reform and (3) Employment Insurance Benefits and Social Safetynet Reform. Show the results of each vote and determine whether the voting paradox will occur as a result of these votes.

Answer: First vote: Highway Employment Improvements Insurance Benefits Selection Bart 1st 3rd Highway Improvements Employment Insurance Lisa 2nd 1st Benefits Employment Insurance Maggie 3rd 2nd Benefits First vote: the majority votes for spending on Employment Insurance Benefits. Second vote: Highway Improvements

Social Safetynet Reform

Bart

1st

2nd

Lisa Maggie

2nd 3rd

3rd 1st

Selection Highway Improvements Highway Improvements Social Safetynet Reform

Second vote: the majority votes for spending on Immigration Reform. Third vote: Employment Insurance Benefits

Social Safetynet Reform

Bart

3rd

2nd

Lisa

1st

3rd

Maggie

2nd

1st

Selection Social Safetynet Reform Employment Insurance Benefits Social Safetynet Reform

Third vote: the majority votes for spending on Social Safetynet Reform. The results of the voting process do illustrate the voting paradox because the preferences of Bart, Lisa, and Maggie are not transitive. If their preferences were transitive, we would find that if the voters prefer to spend on Employment Insurance Benefits rather than Highway Improvements (the result of the first vote), and they prefer to spend on Highway Improvements rather than Social Safetynet Reform result of the second vote), they should prefer to spend on Employment Insurance Benefits rather than Social Safetynet Reform. In fact, they prefer to spend on Social Safetynet Reform rather than Employment Insurance Benefits (the result of the third vote). This is an example of the voting paradox, which is defined as the failure of majority voting to always result in consistent choices. Diff: 3 Type: ES Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 15 Copyright © 2024 Pearson Canada Inc.

39) Is a typical person likely to gather more information when buying a new computer or when voting for a member of Parliament? Why? Answer: The typical person is likely to gather more information when buying a new computer as he or she will be significantly and immediately affected by this decision. When voting for a member of Parliament, the person is only one of many voters and his or her vote is therefore diluted among all other votes and is likely to have very little impact. Because of this, there is little incentive to invest the time and energy to gather information about the candidates. Diff: 2 Type: ES Topic: Rational Ignorance Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 40) The Conference Board of Canada argues that lower corporate income taxes will A) decrease corporate investment and increase future productivity. B) increase corporate investment and increase future productivity. C) increase corporate investment and decrease future productivity. D) decrease corporate investment and decrease future productivity. E) attract more businesses from abroad which will reduce the overall well being of Canadians. Answer: B Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Special Feature: Chapter Opener: Taxes and Trade-Offs 41) Taxation involves a trade-off. Higher taxation (all else equal) means A) decreased private sector activity and decreased public sector spending. B) increased private sector activity and increased public sector spending. C) a less equal distribution of wealth. D) decreased private sector activity and increased public sector spending. E) less people will be willing to work. Answer: D Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Special Feature: Chapter Opener: Taxes and Trade-Offs

42) Corporate income taxes can change the behaviour of corporations. How might a drop in corporate income taxes impact the behaviour of firms? A) Lower taxes make firms more likely to invest in capital. B) The tax cut would make firms less likely to pay dividends. C) The tax cut would make firms more likely to move their headquarters to other countries. D) Lower taxes mean lower living standards for all Canadians. E) Lower taxes will increase their profits and make income distribution more unequal. Answer: A Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Analytic Skills Special Feature: Chapter Opener: Taxes and Trade-Offs 43) Economists James Buchanan and Gordon Tullock are well-known for developing A) the impossibility theorem. B) the voting paradox. C) the public choice model. D) the concept of government failure. E) the Arrow impossibility theorem. Answer: C Diff: 1 Type: MC Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 44) The public choice model assumes that government policy makers A) must promote the public interest at the expense of their own self-interests in order to be re-elected. B) will pursue their self-interests in personal affairs but only if it does not conflict with the public interest. C) will often act irrationally in their personal affairs, but will act rationally when they promote the public interest. D) are likely to pursue their own self-interests, even if their self-interests conflict with the public interest. E) care only about the well-being of general public when making policies because they are public servants. Answer: D Diff: 2 Type: MC Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

45) When members of Parliament vote to pass new legislation, they will A) always vote for the alternative favoured by a majority of the voters. B) fail to consistently represent the underlying preferences of voters. C) always vote for the alternative favoured by a plurality of the voters if there is no majority position. D) always fail to represent the underlying preferences of voters. E) decide on the basis of the most important votes, not on the basis of majority votes. Answer: B Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 46) Economist Kenneth Arrow has shown mathematically that no system of voting will consistently represent the underlying preferences of voters. This finding is called A) the Arrow impossibility theorem. B) Arrow's median voter model. C) Arrow's Amendment to the public choice model. D) Arrow's majority vote paradox. E) Arrow's rational ignorance model. Answer: A Diff: 1 Type: MC Topic: Arrow Impossibility Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 47) The Arrow impossibility theorem explains A) why there is no system of voting that will consistently represent the underlying preferences of voters. B) why government regulation of private markets will always result in a reduction in economic efficiency in these markets. C) why voters are always rationally ignorant. D) why it is not possible to provide the economically efficient amount of any public good. E) why it is not possible to find consistent choices on the basis of majority voters. Answer: A Diff: 1 Type: MC Topic: Arrow Impossibility Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

48) The proposition that the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle is called A) the mean (or average) voter theorem. B) the voting paradox. C) the Arrow impossibility theorem. D) the median voter theorem. E) logrolling. Answer: D Diff: 1 Type: MC Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Table 15.3 Policy RCMP Education Medical research

John Cornyn 1st 2nd 3rd

Herb Kohl 2nd 3rd 1st

Ben Nelson 3rd 1st 2nd

49) Refer to Table 15.3. The table above lists three policy alternatives that Parliament will vote on, along with the ranking of these alternates. Parliament must decide which of these alternatives should receive an additional $1 billion of funding. There is only enough money in the federal budget for one of these alternatives. If a series of votes is taken in which each pair of alternatives is considered (the RCMP and education; the RCMP and medical research; education and medical research), which of the following will result from these votes? A) When the vote is between RCMP and education, Members of Parliament will vote for education to receive funding. B) The Members of Parliament's votes will demonstrate transitivity. C) The results will illustrate the voting paradox. D) The results from the voting will illustrate the median voter theorem. E) The result will illustrate the Arrow impossibility theorem. Answer: C Diff: 3 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

50) The Arrow impossibility theorem A) explains why people can be rational as well as ignorant at the same time. B) explains why voting systems do not consistently represent the preferences of voters. C) explains why candidates for public office must represent the preferences of the political middle. D) explains why it is impossible, in most cases, to eliminate special-interest legislation after it has become law. E) explains the failure of majority voting to always result in consistent choices. Answer: B Diff: 2 Type: MC Topic: Arrow Impossibility Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 51) A common belief among political analysts is that someone running for his or her party's nomination for Member of Parliament must choose a different strategy once the nomination is secured. To be nominated, the candidate must appeal to voters from one party — Conservative, Liberal, New Democrat, Bloc Quebecios, Green, etc. — but in a general election, a party's nominee must appeal to voters from more than one party, as well as independent voters. Which of the following offers the best explanation for this change in strategy? A) the Arrow impossibility theorem B) the voting paradox C) the median voter theorem D) rent seeking E) logrolling Answer: C Diff: 1 Type: MC Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 52) MP Gallstone seeks support from his colleagues for a bill he sponsors that will establish a new national park in his riding. He offers to support MP Disrail's proposal to move federal government jobs to her riding in exchange for her vote for his national park bill. This is an example of A) regulatory capture. B) logrolling. C) rational ignorance. D) government failure. E) voting paradox. Answer: B Diff: 1 Type: MC Topic: Logrolling Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

53) The political process is more likely to serve the interests of individuals whose preferences are in the middle, rather than individuals with preferences that are much to the left or right of the political centre. This statement is best explained by which of the following? A) logrolling B) the voting paradox C) the Arrow impossibility theorem D) the median voter theorem E) the rational ignorance Answer: D Diff: 1 Type: MC Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 54) Which of the following is used to argue that the self-interest of public policymakers will often lead to actions that are inconsistent with the preferences of the voters they represent? A) the voting paradox B) the median voter theorem C) rent seeking D) transitivity of voters' preferences E) Arrow impossibility theorem Answer: A Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 55) Some individuals seek to use government action to make themselves better off at the expense of others. The actions of these individuals A) are examples of fraud; but these individuals usually avoid prosecution because of logrolling and rational ignorance. B) are examples of rent seeking. C) offer proof that Adam Smith's "invisible hand" is not valid. D) are evidence of the voting paradox. E) are examples of Arrow impossibility theorem. Answer: B Diff: 2 Type: MC Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

56) Which of the following is an example of rent-seeking behaviour? A) Apple earned large profits from the development and sale of the iPhone. B) Chapters introduced the Kobo to compete with Amazon's Kindle Digital Reader. Chapters was motivated by the desire to earn profits from the Kobo but also increased the choice of digital readers available to consumers. C) Canadian dairy farmers and cheese producers convinced Parliament to impose a quota on imports of foreign cheese. D) Recent increases in cigarette taxes faced little opposition from voters, many of whom were rationally ignorant with respect to the tax. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 57) Which of the following statements refers to rent seeking? A) "Laws passed by the federal government often provide benefits for a small number of individuals. These individuals, in turn, have an incentive to contribute to the campaigns of politicians who pass these laws." B) "The federal government should spend more money on programs that help low income citizens and less money on national defense." C) "The role of the federal government in the Canadian economy grew significantly after the Great Depression. Government spending and taxes are a much greater proportion of total income today than they were in 1929." D) "There is an opportunity cost whenever the federal government spends tax revenue. For example, an additional $1 billion spent on national defense means there will be less revenue for highway construction and maintenance or some other program." E) "Government spending on infrastructure is more important than on social welfare programs." Answer: A Diff: 2 Type: MC Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

58) Which of the following statements refers to rent seeking? A) Real estate agents contributing to the campaign of a city councilor who promises to strictly enforce zoning laws. B) People protesting a proposed pipeline route that will run near their property. C) Organizations like Mothers Against Drunk Driving campaigning for stricter penalties for drunk drivers. D) Civil servants going on strike for higher wages. E) University professors going on strike for equal rights. Answer: A Diff: 2 Type: MC Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 59) Which of the following is a consequence of the voting paradox? A) A majority of voters elect a candidate that does not represent the preferences of the voter who is in the political middle. B) Politicians support small groups of individuals and firms that benefit from special interest legislation, rather than a much larger group of voters who pay the cost for this legislation. C) Individuals and firms who benefit from government actions engage in rent seeking. D) The collective preferences of voters are not transitive and voting outcomes are inconsistent. E) None of the above. Answer: D Diff: 2 Type: MC Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 60) What is the term that explains why voters often lack knowledge of pending legislation and lack knowledge of the views of candidates for office on a range of issues that affect their own (the voters') welfare? A) the voting paradox B) logrolling C) rational ignorance D) regulatory capture E) the Arrow impossibility theorem Answer: C Diff: 1 Type: MC Topic: Rational Ignorance Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

61) The public choice model can be used to examine voting models that contrast the manner in which collective decisions are made by governments (provincial, local, and federal) and the manner in which individual choices are made in markets. Which of the following descriptions is consistent with the difference between collective decision making and decision making in markets? A) Everyone who votes must agree with a decision made collectively through government, but in markets individuals can make their own choices. B) Individuals are less likely to see their preferences represented in the outcomes of government policies than in the outcomes of markets. C) The cost of a government policy is determined by a majority vote of members of the public; decisions made in markets are based on individual willingness to pay. D) Choices made through government policies are more important than decisions individuals make through markets. E) None of the above is consistent with the difference between collective decision making and market decision making. Answer: B Diff: 2 Type: MC Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 62) Economists often analyze the interaction of individuals and firms in markets. Economists also examine the actions of individuals and firms as they attempt to use government to make themselves better off at the expense of others, a process that is referred to as A) rent seeking. B) logrolling. C) government failure. D) the public choice initiative. E) the voting paradox. Answer: A Diff: 2 Type: MC Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

63) Financial contributions to the campaigns of Members of Parliament, Provincial Legislatures, and other elected officials by firms that seek special interest legislation to make firms better off are A) examples of rent seeking. B) illegal. C) the result of the voting paradox. D) irrational because elected officials will almost always act in the interest of the voters who have to pay the cost of the legislation. E) the result of rational ignorance. Answer: A Diff: 1 Type: MC Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 64) MP Flack votes for a program that will benefit the constituents of MP Walpole's riding. Which of the following explanations for Flack's vote is most consistent with the public choice model? A) MP Flack did not have time to read and understand all of the legislation he voted on. Members of Parliament often depend on their staff to read proposed legislation and recommend how they should vote. B) Legislators such as MP Flack are similar to other decision-makers in that they sometimes make irrational choices. C) MP Flack will support programs of legislators from his own party, regardless of who benefits from these programs. D) MP Flack expects MP Walpole's support for programs that will benefit Flack's constituents. E) All of the above are equally consistent with public choice model. Answer: D Diff: 2 Type: MC Topic: Logrolling Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 65) MP Flack votes for a program that will benefit the constituents of MP Walpole. The public choice model suggests that Flack's vote is best explained by which of the following? A) rational ignorance B) party loyalty C) logrolling D) the voting paradox E) rent seeking Answer: C Diff: 1 Type: MC Topic: Logrolling Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

66) Many economists believe that when the federal government establishes an agency to regulate a particular industry, the regulated firms try to influence the agency even if these actions do not benefit the public. Economists refer to this result of government regulation by which of the following terms? A) regulatory capture B) logrolling C) special interest regulation D) the regulatory paradox E) rent seeking Answer: A Diff: 2 Type: MC Topic: Regulatory Capture Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 67) One result of the public choice model is that most economists believe that A) when market failure occurs, government intervention will always lead to a more efficient outcome. B) government intervention will always result in a reduction in economic efficiency in regulated markets. C) policymakers may have incentives to intervene in the economy in ways that do not promote economic efficiency. D) the voting paradox will prevent voters from selecting the best person for public office. E) policymakers always work in favour of economic efficiency even if they have to compromise their own self interests. Answer: C Diff: 1 Type: MC Topic: Government Failure Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

68) The public choice model raises questions about the government's ability to regulate economic activity efficiently. Which of the following statements represents the views of most economists with regard to the role of government? A) Parliament should abolish Health Canada (responsible for food safety), Environment Canada, and other agencies and commissions because the costs of their actions exceed the benefits they provide to the public. B) Government should do more to regulate markets. The public choice model has shown that rent seeking and rational ignorance affect more markets than are currently subject to regulation. C) Canadian citizens can afford more government regulation if the cost of this regulation is borne mostly by taxpayers with the highest incomes. D) Agencies such as Health Canada and Environment Canada can serve a useful purpose, but we need to take the costs of regulation into account along with the benefits. E) None of the above. Answer: D Diff: 2 Type: MC Topic: Government Failure Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 69) A key insight of the public choice model is that public policymakers are likely to pursue the public's interest, even if their self-interests conflict with the public interest. Answer: FALSE Diff: 1 Type: TF Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 70) The median voter theorem states that the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle. Answer: TRUE Diff: 1 Type: TF Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 71) Logrolling refers to attempts by individuals to use government action to make themselves better off at the expense of others. Answer: FALSE Diff: 1 Type: TF Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

72) Rent-seeking behaviour, unlike profit-maximizing behaviour in competitive markets, wastes society's scarce resources. Answer: TRUE Diff: 1 Type: TF Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 73) A key assumption of the public choice model is that government policymakers will pursue their own self-interests. Economists assume that consumers and firms pursue their own self-interests when they interact in competitive markets and this interaction results in efficient economic outcomes. Does the pursuit of self-interest by policymakers result in efficient economic outcomes? Answer: The public choice model can be used to explain why the actions of self-interested policymakers often do not result in efficient economic outcomes. The model assumes that the self-interest motives of policymakers lead them to take actions that result in their being elected, or re-elected. Because elections are won by candidates who receive a majority (or, in most Canadian elections cases, a plurality) of the votes cast, candidates must appeal to the preferences of the voter who is in the political middle. Once in office, policymakers take actions that affect all of their constituents, not just those who agree with these actions. This is in contrast with private markets, where consumers are under no obligation to pay for a good or service they do not want. Other reasons why a policymaker's self-interest motives lead to economically inefficient outcomes are: (a) rent seeking by individuals and firms for the purpose of supporting special interest legislation to make themselves better off at the expense of others, and (b) the rational ignorance of voters who pay the costs of this legislation. Since the benefits of legislation are concentrated among a small number of individuals and firms, this small group has an incentive to use resources to convince policymakers to support their interests. Most voters who must pay to support the legislation have little incentive to oppose it, since the cost to each individual voter is low. As a result, policymakers often support legislation that results in greater costs to taxpayers than the value of the benefits the legislation provides. Diff: 3 Type: ES Topic: Public Choice Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Analytic Skills

74) It is common to hear people complain that there isn't any real difference between the Conservative Party and the Liberal Party on most policies. How does this comment relate to the median voter theorem? Answer: To win his party's nomination (or leadership), a candidate can proclaim his support for the party's position on important domestic and foreign policy issues, but to be elected, a candidate must receive a majority of the votes in a general election. This typically requires candidates from both of the largest parties to reach out to voters from other parties as well as independent voters. This is consistent with the median voter theorem and is one reason why many people believed that the observation was valid. Third-party candidates can become popular because their views on important issues differentiate themselves from mainstream politicians, but this also places them away from the political middle in a general election. As a result, it is very difficult for a third-party to win enough seats in Parliament to form the government. Diff: 3 Type: SA Topic: Median Voter Theorem Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking Table 15.4

Tom Dick Harriet

Foreign Aid 3rd 2nd 1st

Post-Secondary Education 1st 3rd 2nd

Roads and Bridges 2nd 1st 3rd

75) Refer to Table 15.4. The table above outlines the rankings of three members of Parliament on three spending alternatives. Assume that Parliament can spend additional revenue on only one of the three spending alternatives and that Tom, Dick and Harriet, all Members of Parliament, participate in a series of votes in which they are to determine which of the spending alternatives should receive funding. Three votes will be taken: (1) Foreign Aid and Post-Secondary Education (2) Foreign Aid and Roads and Bridges and (3) Post-Secondary Education and Roads and Bridges. Determine whether the voting paradox will occur as a result of these votes. Answer: First vote: Post-Secondary Foreign Aid Education Selection Tom 3rd 1st Post-Secondary Education Dick 2nd 3rd Foreign Aid Harriet 1st 2nd Foreign Aid First vote: the majority votes for spending on Foreign Aid. Second vote: Tom Dick Harriet

Foreign Aid 3rd 2nd 1st

Roads and Bridges Selection 2nd Roads and Bridges 1st Roads and Bridges 3rd Foreign Aid

Second vote: the majority votes for spending on Roads and Bridges. Third vote:

Tom Dick Harriet

Post-Secondary Education 1st 3rd 2nd

Selection Roads and Bridges 2nd Post-Secondary Education 1st Roads and Bridges 3rd Post-Secondary Education

Third vote: the majority votes for spending on Post-Secondary Education. The results of the voting process do illustrate the voting paradox because the preferences of Tom, Dick, and Harriet are not transitive. If their preferences were transitive, we would find that if the voters prefer to spend on Foreign Aid rather than Post-Secondary Education (the result of the first vote), and they prefer to spend on Roads and Bridges rather than Foreign Aid (the result of the second vote), they should prefer to spend on Roads and Bridges rather than Post-Secondary Education. In fact, they prefer to spend on Post-Secondary Education rather than Roads and Bridges (the result of the third vote). This is an example of the voting paradox, which is defined as the failure of majority voting to always result in consistent choices. Diff: 3 Type: ES Topic: Voting Paradox Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking 30 Copyright © 2024 Pearson Canada Inc.

76) What is rent seeking and how is it related to regulatory capture? Answer: Rent seeking is the attempt by individuals and firms to use government action to make themselves better off at the expense of others. Regulatory capture is one way of accomplishing rent seeking, as it allows firms to influence a regulatory agency to make decisions that are in the best interest of the firms, even if these actions are not in the public interest. Diff: 2 Type: ES Topic: Rent Seeking Learning Outcome: 15.1 Describe the public choice model and explain how it is used to analyze government decision making AACSB: Reflective Thinking

15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy 1) The largest source of revenue for the federal government of Canada is A) tariffs collected on imported goods. B) property taxes imposed on private property. C) sales taxes on items purchased for consumption. D) individual income taxes. E) corporate taxes from businesses. Answer: D Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 2) Local governments in Canada receive most of their revenue from A) individual income taxes. B) property tax on real estate. C) transfers from the federal government. D) sales taxes. E) corporate taxes. Answer: B Diff: 1 Type: MC Topic: Sales Taxes Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

3) An example of an excise tax in Canada is A) the extra you pay for alcoholic drinks. B) taxes on corporate profit. C) employment insurance premiums. D) property taxes on real estate. E) taxes that big corporations pay. Answer: A Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 4) Provincial governments get most of their operating funds from A) transfers from the federal government and personal income taxes. B) corporate taxes and personal income taxes. C) taxes on products and personal income taxes. D) investment income and taxes on products. E) property taxes. Answer: C Diff: 1 Type: MC Topic: Property Taxes Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 5) If, as your taxable income decreases, you pay a smaller percentage of your taxable income in taxes, then the tax is A) regressive. B) proportional. C) progressive. D) unfair. E) employment tax. Answer: C Diff: 1 Type: MC Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

6) If, as your taxable income decreases, you pay a larger percentage of your taxable income in taxes, then the tax is A) regressive. B) proportional. C) progressive. D) unfair. E) unemployment tax. Answer: A Diff: 1 Type: MC Topic: Regressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 7) If you pay a constant percentage of your taxable income in taxes, the tax is A) regressive. B) proportional. C) progressive. D) random. E) unfair. Answer: B Diff: 1 Type: MC Topic: Proportional Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 8) If you pay $2,000 in taxes on an income of $20,000, and a tax of $2,700 on an income of $30,000, then over this range of income the tax is A) regressive. B) proportional. C) progressive. D) fair. E) There is insufficient information to answer the question. Answer: A Diff: 2 Type: MC Topic: Regressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills

9) If you pay $2,000 in taxes on an income of $20,000, and a tax of $3,000 on an income of $30,000, then over this range of income the tax is A) regressive. B) proportional. C) progressive. D) unfair. E) There is insufficient information to answer the question. Answer: B Diff: 2 Type: MC Topic: Proportional Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 10) If you pay $2,000 in taxes on an income of $20,000, and a tax of $3,500 on an income of $30,000, then over this range of income the tax is A) regressive. B) proportional. C) progressive. D) unfair. E) There is insufficient information to answer the question. Answer: C Diff: 2 Type: MC Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 11) A tax bracket is A) the percent of taxable income paid in taxes at a specific income bracket. B) the income range within which a particular tax rate applies. C) the type of tax structure for which a range of taxes applies. D) the range, from the high to the low tax rate, of a particular type of tax. E) all of the above. Answer: B Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

12) A personal exemption refers to A) the tax rate that applies to a particular tax bracket. B) the tax bracket that represents basic living expenses. C) an amount representing basic living expenses that can be subtracted from income. D) a dispensation that allows certain qualifying individuals not to pay federal taxes. E) the type of tax structure for which a range of taxes applies. Answer: C Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 13) Exemptions and deductions are used A) to add to taxes that must be paid. B) by taxpayers to reduce the amount of income subject to tax. C) to determine the type of tax structure. D) to determine what items are subject to sales taxes. E) to determine social welfare payments. Answer: B Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking Table 15.5 Taxable Income $20,000 25,000 32,000 42,000

Tax Payments $2,000 2,250 2,560 2,940

Table 15.5 shows the amount of taxes paid on various levels of income in Notrealia. 14) Refer to Table 15.5. Notrealia's tax system is A) progressive throughout all levels of income. B) proportional throughout all levels of income. C) regressive throughout all levels of income. D) progressive between $20,000 and $25,000 of income and regressive between $32,000 and $42,000. E) regressive between $20,000 and $25,000 of income and progressive between $32,000 and $42,000. Answer: C Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 35 Copyright © 2024 Pearson Canada Inc.

Table 15.6 Income Tax Bracket $0 - 8,000 8,001 - 22,000 22,001 - 48,000 48,001 and over

Marginal Tax Rate 12% 17% 25% 38%

Table 15.6 shows the income tax brackets and tax rates for single taxpayers in Madeupistan. 15) Refer to Table 15.6. Calculate the income tax paid by Sasha, a single taxpayer with an income of $60,000. A) $22,800 B) $14,399 C) $13,800 D) $13,642 E) $12,250 Answer: B Diff: 3 Type: MC Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 16) Refer to Table 15.6. Sasha is a single taxpayer with an income of $60,000. What is his marginal tax rate and what is his average tax rate? A) marginal tax rate = 38%; average tax rate = 23% B) marginal tax rate = 17%; average tax rate = 21% C) marginal tax rate = 38%; average tax rate = 24% D) marginal tax rate = 23%; average tax rate = 38% E) marginal tax rate = 25%; average tax rate = 33% Answer: C Diff: 3 Type: MC Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills

17) Income tax's share of spending was largest for which of these groups? A) Lowest quintile B) Second quintile C) Third quintile D) Fourth quintile E) Highest quintile Answer: E Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Which Groups Pay the Most in Federal Taxes? 18) An average tax rate is calculated as A) total taxable income × taxes paid. B) total taxable income ÷ taxes paid. C) taxes paid ÷ total taxable income. D) (total taxable income - taxes paid) ÷ taxable income. E) (taxes paid × total taxable income)/100. Answer: C Diff: 1 Type: MC Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 19) A marginal tax rate is calculated as A) total taxable income ÷ by taxes paid. B) taxes paid ÷ total taxable income. C) change in taxes paid ÷ the change in total taxable income. D) change in taxable income ÷ change in taxes paid. E) change in taxes paid ÷ total taxable income. Answer: C Diff: 2 Type: MC Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

20) A marginal tax rate is A) the fraction of income that must be paid in taxes. B) the fraction of each additional dollar of income that must be paid in taxes. C) the incremental income one must earn to offset each additional dollar of tax. D) the ratio of a change in income to a change in taxes paid. E) the minimum tax that you must pay regardless of your income. Answer: B Diff: 1 Type: MC Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 21) If the marginal tax rate is less than the average tax rate as taxable income increases, the tax structure is A) regressive. B) proportional. C) progressive. D) unfair. E) none of the above. Answer: A Diff: 1 Type: MC Topic: Regressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 22) If the marginal tax rate is equal to the average tax rate as taxable income increases, the tax structure is A) regressive. B) proportional. C) progressive. D) unfair. E) none of the above. Answer: B Diff: 1 Type: MC Topic: Proportional Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

23) Policymakers focus on marginal tax rate changes when making changes in the tax code because the marginal tax rate A) determines how tax revenue will change as national income increases. B) affects people's willingness to work, save, and invest. C) always equals the average tax rate which is harder to measure. D) determines how much revenue the government will have to spend. E) is the biggest source of revenue for the government. Answer: B Diff: 2 Type: MC Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 24) The federal corporate income tax is A) regressive. B) proportional. C) progressive. D) unfair. E) none of the above. Answer: B Diff: 1 Type: MC Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 25) All of the following occur whenever a government taxes a product except A) the quantity consumed of that product falls. B) the price of that product rises. C) the marginal benefit of the last unit sold exceeds the marginal cost of producing it. D) there will be no excess burden if the government's tax revenue is sufficiently large to offset the deadweight loss. E) none of the above. Answer: D Diff: 2 Type: MC Topic: Excess Burden of a Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

26) The "ability-to-pay" principle of taxation is the normative idea that A) an equitable tax system is one in which high income individuals should bear a greater burden of taxes than low income individuals. B) each individual should voluntarily contribute according to her ability to pay taxes. C) progressive taxes are more equitable than regressive taxes. D) two individuals earning the same income should have equal ability to pay, all else constant. E) regressive taxes are better for low income individuals. Answer: A Diff: 2 Type: MC Topic: Ability-to-Pay Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 27) The idea that two taxpayers in the same economic circumstances should pay the same level of taxes is known as the A) ability-to-pay principle. B) vertical-equity principle. C) horizontal-equity principle. D) benefits-received principle. E) average tax principle. Answer: C Diff: 2 Type: MC Topic: Horizontal-Equity Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 28) Users fees for ports and marinas are an example of A) the ability-to-pay principle. B) the horizontal-equity principle. C) the vertical-equity principle. D) the benefits-received principle. E) attaining social objectives principle. Answer: D Diff: 2 Type: MC Topic: Benefits-Received Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

29) The idea that individuals should be taxed in proportion to the marginal benefits that they receive from public goods is called A) the ability-to-pay principle. B) the horizontal-equity principle. C) the vertical-equity principle. D) the benefits-received principle. E) attaining social objectives principle. Answer: D Diff: 2 Type: MC Topic: Benefits-Received Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 30) The government of Notrealia raises revenue through a general income tax paid by all its residents to operate the city's marina. The marina is used by private boat owners. This method of raising revenue to operate the marina is A) consistent with the benefits-received principle. B) consistent with the ability-to-pay principle. C) inconsistent with the benefits-received principle. D) inconsistent with the ability-to-pay principle. E) consistent with horizontal equity principle. Answer: C Diff: 2 Type: MC Topic: Benefits-Received Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 31) The federal goods and services tax A) is consistent with the benefits-received principle because low-income individuals spend less on goods and services than do high-income people. B) is not consistent with the ability-to-pay principle because low-income individuals tend to spend a larger fraction of their income than do high-income individuals. C) is not consistent with the ability-to-pay principle because low-income individuals tend to purchase a smaller bundle of goods and services compared to high-income individuals. D) is not consistent with the benefits-received principle because low-income individuals spend less on goods and services than do high-income individuals, yet pay the same sales tax rate. E) is consistent with horizontal equity principle by charging everyone same rate of tax. Answer: B Diff: 2 Type: MC Topic: Sales Taxes Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills

32) Consider a public good such as fire protection services. Rich people may benefit more than the poor from such a service because rich people stand to lose more from a fire that destroys property. In this case, A) the ability-to-pay principle may support the rich paying more taxes than the poor, but not the benefitsreceived principle. B) the benefits-received principle may support the rich paying more taxes than the poor, but not the ability-to-pay principle. C) both the benefits-received and the ability-to-pay principles may support the rich paying more taxes than the poor. D) neither the benefits-received nor the ability-to-pay principles may support the rich paying more taxes than the poor. E) government should provide the fire protection services regardless of people pay taxes or not. Answer: C Diff: 3 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 33) "Sin taxes," such as taxes on alcoholic beverages, are intended to A) increase the amount of the products supplied. B) generate money to subsidize production of the products taxed. C) reduce the quantity demanded. D) generate funds to aid in the medical care of those harmed by the product. E) make people feel ashamed of consuming alcoholic beverages. Answer: C Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 34) Under a consumption tax, households A) are exempt from taxes on interest earned on savings. B) pay taxes only on the part of income they spend. C) pay higher taxes on the part of income they spend and lower taxes on the part of income they save. D) pay taxes only on their purchases of luxury items. E) pay taxes on all their income whether they spend it or not. Answer: B Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Federal Government Raise Income Taxes or the GST?

35) The federal government is currently running large deficits. In order to reduce the deficit while limiting the decrease in household savings, the federal government should increase which type of tax? A) capital gains taxes B) consumption taxes C) income taxes D) wealth taxes E) corporate income taxes Answer: B Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Federal Government Raise Income Taxes or the GST? 36) Which of the following statements about a consumption tax is false? A) Compared to an income tax, a consumption tax would necessarily produce lower revenues for the government in a given year because the portion of income saved is not taxed. B) A consumption tax encourages saving, which when invested could lead to increased economic activity. C) Under a consumption tax, current consumption is taxed at a lower rate than future consumption. D) A consumption tax could favour high-income individuals who are likely to save more than lowincome individuals. E) None of the above. Answer: C Diff: 3 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Federal Government Raise Income Taxes or the GST? 37) If the marginal tax rate is greater than the average tax rate, the tax structure is described as regressive. Answer: FALSE Diff: 1 Type: TF Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 38) Horizontal equity means that two people in identical economic situations should pay the same amount of taxes. Answer: TRUE Diff: 1 Type: TF Topic: Horizontal-Equity Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

39) The government of Silverado raises revenue to operate the city's hospital, open to all residents, through a general income tax paid by its residents. This method of raising revenue is consistent with the benefits-received principle. Answer: TRUE Diff: 2 Type: TF Topic: Benefits-Received Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 40) Exempting food purchases from sales tax is consistent with the ability-to-pay principle, although not necessarily consistent with vertical equity. Answer: TRUE Diff: 3 Type: TF Topic: Ability-to-Pay Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 41) If you pay $3,000 in taxes on an income of $28,000, and $4,450 in taxes on an income of $38,000, what is your marginal tax rate? Show your work. Answer: Marginal tax rate = ($4,450 - $3,000)/($38,000 - $28,000) = 0.145 or 14.5 percent. Diff: 2 Type: SA Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 42) If your income is $40,000 and you pay taxes of $4,650, what is your average tax rate? Show your work. Answer: Average tax rate = $4,650/$40,000 = 0.11625 or 11.625 percent. Diff: 2 Type: SA Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills

Table 15.7 Income Tax Bracket on the first $6,000 of taxable income on the next $14,000 of taxable income on the next $24,500 of taxable income on the next $30,500 of taxable income

Tax Rate 10% 15% 25% 30%

Table 15.7 shows the income tax brackets and tax rates for single taxpayers in Bauxhall. 43) Refer to Table 15.7. A tax exemption is granted for the first $10,000 earned per year. Suppose you earn $75,000. a. What is the amount of taxes you will pay? b. What is your average tax rate? c. What is your marginal tax rate? Answer: a. ($6,000 × 0.10) + ($14,000 × 0.15) + ($24,500 × 0.25) + ($20,500 × 0.30) = $600 + $2,100 + $6,125 + $6,150 = $14,975 b. approximately 20% c. 30% Diff: 3 Type: SA Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 44) Suppose, on average, a family in Church Falls earning $60,000 per year paid 6 percent of its income in provincial taxes. A family earning $80,000 paid, on average, $4,760 in provincial income taxes. Are provincial taxes in Church Falls progressive or regressive? Be sure to explain the difference between a progressive tax and a regressive tax. Answer: A regressive tax is a tax for which people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes. A progressive tax is a tax for which people with lower incomes pay a lower percentage of their income in tax than do people with higher incomes. If a family earning $80,000 paid $4,760 in taxes, then the average tax rate at this income level is $4,760 ÷ $80,000 = 5.95%. This means people with lower incomes pay a slightly higher percentage of their income in state taxes than do people with higher incomes. Therefore, the provincial tax in Church Falls is regressive. Diff: 3 Type: SA Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills

45) What is the difference between a marginal tax rate and an average tax rate? Which is more important in determining the impact of the tax system on economic behaviour? Answer: A marginal tax rate is the fraction of each additional dollar that is paid in taxes. An average tax rate is the fraction of all income that is paid in taxes. Because people make their decisions by comparing marginal costs to marginal benefits, the marginal tax rate plays a bigger role than the average tax rate in influencing economic behaviour. For example, when contemplating whether or not to work an extra hour, a person will make the decision based on the after-tax wage earned from working the last hour, which is found by multiplying the marginal tax rate by the wage rate and subtracting the result from the wage rate. Diff: 2 Type: SA Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 46) Describe each of the principles governments consider when deciding which taxes to use. Answer: In deciding which taxes to use, a government will consider the effect of the tax on economic efficiency (whether the tax inflicts a small or large deadweight loss), the ability-to-pay principle (whether people who can afford to pay more do pay more), the horizontal equity principle (whether people in the same economic situation are treated equally), the benefits-received principle (whether people receiving benefits from a government project are the ones paying the taxes and fees to support it), and other social objectives (such as curtailing activities with high external costs). Diff: 2 Type: SA Topic: Evaluating Taxes Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 47) Which of the following is the largest source of revenue for the Canadian federal government? A) personal income tax B) the corporate income tax C) the GST D) property taxes E) the HST Answer: A Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

48) In Canada, the largest source of funds for local governments is A) transfers from the federal government. B) property taxes. C) income taxes. D) sales taxes. E) the GST. Answer: B Diff: 1 Type: MC Topic: Property Taxes Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 49) Which of the following is the largest source of revenue for provincial governments in Canada? A) individual income taxes B) transfers from the federal government C) social insurance taxes D) property taxes E) the GST Answer: A Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 50) A tax imposed by a federal or provincial government on retail sales of most products is A) corporate income tax. B) transfers from the federal government. C) sales of goods and services. D) a consumption tax. E) the income tax. Answer: D Diff: 1 Type: MC Topic: Sales Taxes Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

51) The federal government and provincial governments levy taxes on specific goods such as gasoline, cigarettes, and beer. These are known as A) sales taxes. B) consumption taxes. C) specific taxes. D) excise taxes. E) property taxes. Answer: D Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 52) In 2020, more than 50 percent of the revenue of the Canadian federal government was raised through A) personal income tax. B) social insurance premiums. C) the GST. D) property taxes. E) consumption taxes. Answer: A Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 53) In Canada, the most important source of revenue for the federal government is A) the Goods and Services Tax. B) personal income taxes. C) corporate income taxes. D) social insurance premiums. E) the excise tax. Answer: B Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

54) The term "payroll taxes" is often used to refer to A) individual income taxes that are withheld from paycheques. B) corporate income taxes. C) taxes levied on firms by the number of employees. D) sales taxes. E) general sales taxes. Answer: C Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 55) The largest source of tax revenue for local governments in Canada in 2015 was A) sales taxes. B) sales of goods and services. C) the property tax. D) the individual income tax. E) income tax. Answer: C Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 56) A regressive tax is a tax for which people with lower incomes A) pay a lower percentage of their incomes in tax than do people with higher incomes. B) pay a higher percentage of their incomes in tax than do people with higher incomes. C) pay the same percentage of their incomes in tax as do people with higher incomes. D) do not have to pay unless their income exceeds a certain amount. E) pay a lumpsum minimum amount of tax up to a certain threshold level of income. Answer: B Diff: 1 Type: MC Topic: Regressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

57) Since lower-income people spend a larger proportion of their incomes on groceries than do higherincome people, if grocery stores were required by law to charge a 10-cent fee for disposable bags, this fee could be considered A) a proportional tax. B) a progressive tax. C) a regressive tax. D) an income tax. E) a consumption tax. Answer: C Diff: 2 Type: MC Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 58) In reference to the federal income tax system, a tax bracket is A) the estimated amount of federal income tax firms withhold from their employees' paycheques. B) the formula the federal government uses to determine the dollar amount of the personal exemption and the amounts taxpayers are allowed for deductions from their incomes. C) used to determine the average tax rate. D) the income range within which a tax rate applies. E) used to determine how much tax will be collected. Answer: D Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 59) The personal exemption is A) the right of specific individuals not to pay federal personal income tax. B) the right to exclude basic income from federal personal income tax. C) the right to exclude certain people from some federal government programs. D) the right not to report certain personal details to the Canada Revenue Agency. E) the right to exclude certain types of expenses from income tax. Answer: B Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

60) A proportional tax is a tax for which people with lower incomes A) pay a higher percentage of their incomes in tax than people with higher incomes. B) pay a lower percentage of their incomes in tax than people with higher incomes. C) pay the same percentage of their incomes in tax as people with higher incomes. D) pay the same amount of taxes as people with higher incomes pay. E) do not pay any taxes until they reach a certain threshold level of incomes. Answer: C Diff: 1 Type: MC Topic: Proportional Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 61) In Canada, taxpayers are allowed to exclude from taxation a certain amount of income, called A) the personal income exclusion. B) the income allowance. C) the income tax credit. D) the personal exemption. E) social welfare. Answer: D Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

Table 15.8 Income $20,000 24,000

Consumption Spending $18,000 20,700

Table 15.8 contains data on household spending at different income levels. Suppose that a 3 percent tax is levied on all consumption spending. 62) Refer to Table 15.8. Calculate the percent of income paid in taxes by a family with $20,000 income and by a family with $24,000 income. A) The family with a $20,000 income pays 2.7 percent of its income in consumption taxes and the family with a $24,000 income pays 2.6 percent of its income in consumption taxes. B) Each family pays 3 percent of their respective incomes in consumption taxes. C) The family with a $20,000 income pays 15 percent of its income in consumption taxes and the family with a $24,000 income pays 33.3 percent of its income in consumption taxes. D) The family with $24,000 income pays 13 percent of its income in consumption taxes and the family with $20,000 income pays 11 percent of its income in consumption taxes. E) There is insufficient information to make these calculations. Answer: A Diff: 3 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills Special Feature: Apply the Concept: Should the Federal Government Raise Income Taxes or the GST? 63) Refer to Table 15.8. The consumption tax is A) proportional. B) progressive. C) income neutral. D) regressive. E) fair. Answer: D Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Federal Government Raise Income Taxes or the GST?

Table 15.9 Taxable Income $10,000 12,000 16,000 22,000

Tax Payments $1,000 1,240 1,780 2,740

Table 15.9 shows the amount of taxes paid on various levels of income. 64) Refer to Table 15.9. The tax system is A) progressive throughout all levels of income. B) proportional throughout all levels of income. C) regressive throughout all levels of income. D) progressive between $10,000 and $12,000 of income and regressive between $16,000 and $22,000. E) unfair as it is imposed with the same percentage on lower and higher income people. Answer: A Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 65) According to Statistics Canada's data, the 20 percent of Canadian taxpayers who make the highest incomes A) pay 1.3% of all their spending in income taxes. B) pay 29.4% of all their spending in income taxes. C) pay about 90 percent of federal income taxes but only about 20 percent of social security premiums. D) pay more in GST than they pay in income tax. E) pay 40 percent of all their incomes in income taxes. Answer: B Diff: 2 Type: MC Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

Table 15.10 Taxable Income $10,000 12,000 16,000 22,000

Tax Payments $1,000 1,080 1,360 1,760

Table 15.10 shows the amount of taxes paid on various levels of income. 66) Refer to Table 15.10. The tax system is A) progressive throughout all levels of income. B) proportional throughout all levels of income. C) regressive throughout all levels of income. D) progressive between $10,000 and $12,000 of income and regressive between $12,000 and $22,000. E) fair because people with higher income are making higher tax payments. Answer: C Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 67) In Canada, the federal personal income tax is an example of a A) progressive tax. B) regressive tax. C) proportional tax. D) flat tax. E) lumpsum tax. Answer: A Diff: 1 Type: MC Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 68) The average tax rate is calculated as A) total income divided by the total tax paid. B) the change in total tax paid divided by the change in income. C) total tax paid divided by total income. D) the change in income divided by the change in total tax paid. E) total tax paid divided by number of people employed. Answer: C Diff: 1 Type: MC Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 54 Copyright © 2024 Pearson Canada Inc.

69) When considering changes in tax policy, economists usually focus on A) the average tax rate. B) the marginal tax rate. C) people's willingness to pay taxes. D) people's ability to pay taxes. E) total tax revenues. Answer: B Diff: 1 Type: MC Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 70) The marginal tax rate is A) the amount of taxes paid as a percentage of income. B) the amount of per-capita taxes paid. C) the amount of taxes paid as a percentage of gross domestic product (GDP). D) the fraction of each additional dollar of income that must be paid in taxes. E) the tax that is collected by low income people. Answer: D Diff: 1 Type: MC Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 71) An income tax system is ________ if marginal tax rates increase as income increases. A) progressive B) regressive C) efficient D) equitable E) unfair Answer: A Diff: 1 Type: MC Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

Table 15.11 Income Tax Bracket $0 - 6,000 6,001 - 20,000 20,001 - 44,500 44,501 and over

Marginal Tax Rate 10% 15% 22% 30%

Table 15.11 shows the income tax brackets and tax rates for single taxpayers in Monrovia. 72) Refer to Table 15.11. Calculate the income tax paid by Sylvia, a single taxpayer with an income of $70,000. A) $21,000 B) $15,740 C) $15,400 D) $13,475 E) $12,350 Answer: B Diff: 3 Type: MC Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 73) Refer to Table 15.11. Sylvia is a single taxpayer with an income of $70,000. What is her marginal tax rate and what is her average tax rate? A) marginal tax rate = 30%; average tax rate = 30% B) marginal tax rate = 8%; average tax rate = 19.3% C) marginal tax rate = 30%; average tax rate = 22.5% D) marginal tax rate = 20%; average tax rate = 30% E) marginal tax rate = 23%; average tax rate = 25% Answer: C Diff: 3 Type: MC Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills

74) A tax is efficient if A) individuals with the lowest incomes pay proportionately lower taxes than individuals with the highest incomes. B) it is based on profits earned and not on wages. C) it encourages saving and investment. D) it is used for the welfare of society. E) it imposes a small excess burden relative to the revenue it raises. Answer: E Diff: 1 Type: MC Topic: Efficient Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 75) The excess burden of a tax A) measures the efficiency loss to the economy that results from a tax, causing a reduction in the quantity of goods and services produced. B) is measured by the administrative costs required to implement a tax system. C) is a measure of the hardship imposed on low-income individuals in a society. D) is a measure of the foregone consumption as a result of having to pay taxes. E) is a measure of the tax revenue that government has to spend on social welfare programs. Answer: A Diff: 1 Type: MC Topic: Excess Burden of a Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 76) A tax on interest earned from saving is an example of a tax with a high deadweight loss because A) it compels retired individuals to rely more heavily on Old Age Security and Canada Pension programs. B) it encourages people to consume less and save more for their future expenditures. C) it is not used for social welfare programs. D) it amounts to double taxation since savings often come from income that has already been taxed once. E) the savings that are taxed could have been spent on capital goods which will benefit society. Answer: D Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Federal Government Raise Income Taxes or the GST?

77) According to the ability-to-pay principle of taxation, A) individuals who receive the benefit of a good or service should bear a greater share of the tax burden. B) it is fair not to charge any tax from people with lower incomes. C) it is fair to expect a greater share of the tax burden to be borne by people who have a greater ability to pay. D) people in the same economic situation should bear an equal share of the tax burden. E) individuals who are willing to bear a greater share of the tax burden should be compensated with nonmonetary benefits. Answer: C Diff: 1 Type: MC Topic: Ability-to-Pay Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 78) For many Canadian individuals and households, replacing the federal income tax with a consumption tax would not make a major change in their tax liability (the amount they would be taxed). Which of the individuals described would be least affected by replacing the income tax with a consumption tax? A) A person in the lowest income bracket. This person would pay little or no tax under either system. B) A high-income individual who saves 35 percent of this income and uses his savings to purchase stocks and bonds. C) A female head of family, with no husband present. D) A single parent family, with more than 3 kids. E) A taxpayer who puts part of her savings into a Registered Retirement Savings Plan that allows her to defer income taxes until she retires. Answer: E Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills Special Feature: Apply the Concept: Should the Federal Government Raise Income Taxes or the GST? 79) Which of the following explains one difference between a consumption tax and an income tax? A) An income tax is a regressive tax; a consumption tax is a progressive tax. B) An income tax is on savings while consumption tax is on all the income earned. C) Under a consumption tax, households pay taxes only on the part of income they spend; under an income tax, households pay taxes on all income earned. D) Under an income tax, present consumption is taxed more heavily than future consumption; under a consumption tax, future consumption is taxed more heavily than present consumption. E) Savings are taxed more heavily under a consumption tax than under an income tax. Answer: C Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Federal Government Raise Income Taxes or the GST? 58 Copyright © 2024 Pearson Canada Inc.

80) Canadian taxpayers spend many hours during the year maintaining records for tax purposes and preparing their income tax returns. This administrative cost A) is part of the deadweight loss of taxation. B) is equal to the value of consumer surplus associated with the income tax system. C) can be claimed as a deduction on income tax returns. D) should be deducted from income taxes. E) is larger for individuals in the lowest income quintile than for individuals in the highest income quintile. Answer: A Diff: 1 Type: MC Topic: Excess Burden of a Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 81) According to the horizontal-equity principle of taxation, A) individuals who receive the benefits of a good or service should bear a greater share of the tax burden. B) individuals who are most able to pay should bear a greater share of the tax burden. C) people in the same economic situation should be treated equally. D) people pay the same proportion of their income in taxes regardless of their income. E) individuals who are willing to bear a greater share of the tax burden should be compensated with nonmonetary benefits. Answer: C Diff: 1 Type: MC Topic: Horizontal-Equity Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 82) The horizontal-equity principle of taxation is not easy to use in practice because A) some people engage in rent seeking to reduce their taxes below the level other people pay. B) people can use tax loopholes to reduce their incomes below the incomes of other taxpayers. C) different people receive different levels of government benefits even if their incomes are the same. D) the illicit market activities are not easy to tax. E) it is difficult to determine whether people are in the same economic situation. Answer: E Diff: 2 Type: MC Topic: Horizontal-Equity Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

83) According to the benefits-received principle of taxation, A) individuals who receive the benefits from a government program should pay the taxes that support the program. B) because high income individuals receive the most benefits from government programs, they should pay more taxes than lower income individuals. C) people in the same economic situation should bear an equal share of the tax burden. D) the benefits of government programs such as national defense are shared equally by all people; therefore, the burden of paying for these programs should be shared equally. E) people should receive government benefits according the amount of tax they pay. Answer: A Diff: 2 Type: MC Topic: Benefits-Received Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 84) Vertical-equity is most closely associated with which of the following goals or principles? A) the horizontal-equity principle B) the goal of economic efficiency C) the goal of attaining social objectives D) the benefit received principle E) the ability-to-pay principle Answer: E Diff: 1 Type: MC Topic: Ability-to-Pay Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 85) Suppose the government wants to finance housing for low-income families by placing a tax on the purchase of luxury homes. Assume the government defines a luxury home as a home that is purchased for at least $1 million. This tax is consistent with the A) benefits-received principle. B) social equity principle. C) the goal of attaining social objectives. D) ability-to-pay principle. E) horizontal-equity principle. Answer: D Diff: 1 Type: MC Topic: Excess Burden of a Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

86) Gasoline taxes that are typically used for highway construction and maintenance are consistent with which of the following principles of taxation? A) the ability-to-pay principle B) the horizontal-equity principle C) the vertical-equity principle D) the benefits-received principle E) the goal of economic efficiency Answer: D Diff: 2 Type: MC Topic: Benefits-Received Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytical Thinking 87) Interest paid on home mortgages is deductible from individual income taxes. When comparing home owners and renters, the mortgage interest deduction is an example of A) the benefits-received principle. B) the ability-to-pay principle. C) the horizontal-equity principle. D) how the tax code is used to attain a social objective. Answer: D Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytical Thinking 88) Horizontal equity is achieved when taxes are collected from those who benefit from the government expenditure of the tax revenue. Answer: FALSE Diff: 1 Type: TF Topic: Horizontal-Equity Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 89) According to the benefits-received principle, those who receive the benefits from a government program should pay the taxes that support the program. Answer: TRUE Diff: 1 Type: TF Topic: Benefits-Received Principle Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

90) A change from an income tax to a consumption tax system would cause the greatest increase in taxes owed by those who currently put part of their savings into Registered Retirement Savings Plans. Answer: FALSE Diff: 2 Type: TF Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Federal Government Raise Income Taxes or the GST? 91) A tax is efficient if it imposes a small excess burden relative to the tax revenue it raises. Answer: TRUE Diff: 2 Type: TF Topic: Efficient Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 92) In 2020, which type of tax raised the most revenue for the Canadian federal government? Which type of tax raised the most revenue for provincial governments? What was the greatest source of revenue for local governments? Answer: In 2020, personal income taxes raised the most revenue for the federal government; sales taxes (taxes on products) and personal income taxes raised the most revenue for provincial governments (though students may note that this varies widely among the provinces), and local governments received more revenue from transfers from provincial governments than from any other source. Diff: 1 Type: SA Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking 93) Provincial governments use lotteries to raise revenue. If a lottery is viewed as a tax, is it most likely a progressive tax or a regressive tax? What information would you need to determine whether the burden of a lottery is progressive or regressive? Answer: The lottery "tax" is generally considered to be regressive because data show that poorer people spend a greater share of their incomes on lottery tickets than do people with higher incomes. The data we need to determine if the burden of a lottery is progressive or regressive are the different income brackets and the percentage of income people in each income bracket spend on the lottery. Diff: 2 Type: SA Topic: Regressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

94) If you pay $14,000 in taxes on an income of $125,000, and $17,400 in taxes on an income of $144,000, what is your marginal tax rate? Show your work. Answer: Marginal tax rate = ($17,400 - $14,000)/($144,000 - $125,000) = 0.179 or 17.9 percent. Diff: 2 Type: SA Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 95) If your income is $92,000 and you pay taxes of $19,475, what is your average tax rate? Show your work. Answer: Average tax rate = $19,475/$92,000 = 0.21168 or 21.168 percent. Diff: 2 Type: SA Topic: Tax Rates Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills 96) The complexity of the Canadian income tax system results in annual deadweight losses. The opportunity cost of the hours taxpayers spend on record keeping and completing their tax returns amounts to millions of dollars. a. If the tax system was simplified, how would this benefit the economy? b. Why hasn't the tax system been simplified? Answer: a. Reducing the time and effort required for record keeping and completing tax returns could be used to produce additional goods and services. Firms and workers who produce these goods and services would receive additional income. Additional benefits would result because people would have less incentive to engage in activities for the purpose of avoiding or reducing their taxes, and more incentive to engage in activities that produce more goods and services. b. The complexity of the current income tax system is largely the result of the inclusion of provisions that tax people at different rates and allow for income deductions and tax exemptions for specific purposes. For example, homeowners are allowed to deduct from their income real estate taxes and interest paid on their mortgage loans. A simplified tax system that eliminated this and other provisions that reduced the tax liability of various special interest groups would face considerable opposition. Diff: 3 Type: SA Topic: The Tax System Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Reflective Thinking

97) Last year, Anthony Millanti earned exactly $30,000 of taxable income. Assume that the income tax system used to determine Anthony's tax liability is progressive. The table below lists the tax brackets and the marginal tax rates that apply to each bracket. a. Draw a new table that lists the amounts of income tax that Anthony is obligated to pay for each tax bracket, and the total tax he owes the government. (Assume that there are no allowable tax deductions, tax credits, personal exemptions, or any other deductions that Anthony can use to reduce his tax liability). b. Determine Anthony's average tax rate. Tax Bracket Marginal Tax Rate $0-5,000 0.05 (5%) 5,001-10,000 0.10 (10%) 10,001-15,000 0.15 (15%) 15,001-20,000 0.20 (20%) 20,001-25,000 0.25 (25%) 25,001-30,000 0.30 (30%) Answer: a. Tax Bracket $0-5,000 5,001-10,000 10,001-15,000 15,001-20,000 20,001-25,000 25,001-30,000

Marginal Tax Rate 0.05 (5%) 0.10 (10%) 0.15 (15%) 0.20 (20%) 0.25 (25%) 0.30 (30%) Total

Tax Liability $250 500 750 1,000 1,250 1,500 5,250

b. The average tax rate is equal to the total tax paid divided by total income: $5,250 / $30,000 = 0.175 (17.5 %) Diff: 3 Type: SA Topic: Progressive Tax Learning Outcome: 15.2 Understand the tax system in Canada, including the principles that governments use to create tax policy AACSB: Analytic Skills

15.3

Understand the effect of price elasticity on tax incidence

1) The actual division of the burden of a tax is called A) tax credit. B) tax incidence. C) tax burden. D) excess burden. E) tax dispersion. Answer: B Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills 2) Suppose the provincial government imposes an 8 percent sales tax on clothing items and the tax is levied on sellers. Who pays for the tax in this situation? (Assume that the demand curve is downwardsloping and that the supply curve is upward-sloping.) A) The tax is borne entirely by the sellers. B) The sellers will pass on the entire sales tax to consumers and therefore the consumers bear the tax. C) Four percent will be paid by producers and 4 percent by the consumers. D) The tax will be borne partly by consumers and partly by sellers. E) It is not possible to answer the question without further information. Answer: D Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember Not to Confuse Who Pays the Tax with Who Bears the Burden of the Tax 3) Suppose the government imposes a carbon tax on diesel fuel used by transport trucks. Who will end up carrying the burden of the tax? A) The tax is borne entirely by the sellers of diesel fuel. B) Transport companies will carry the entire burden of the tax. C) Transport companies and sellers of diesel fuel will split the burden of the tax. D) The tax will be borne partly by sellers of diesel fuel, partly by transport companies, and partly by all consumers in the economy. E) More information is required to determine the answer. Answer: D Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember Not to Confuse Who Pays the Tax with Who Bears the Burden of the Tax

Figure 15.1

4) Refer to Figure 15.1. The sales tax revenue collected by the government is represented by the area A) B + C. B) F + G. C) E + H. D) B + C + F. E) B + C + F + G. Answer: E Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills 5) Refer to Figure 15.1. Of the tax revenue collected by the government, the portion borne by consumers is represented by the area A) B + C. B) F + G. C) E + H. D) B + C + F. E) B + C + F + G. Answer: A Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills

6) Refer to Figure 15.1. Of the tax revenue collected by the government, the portion borne by producers is represented by the area A) B + C. B) F + G. C) E + H. D) B + C + F. E) B + C + F + G. Answer: B Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills 7) Refer to Figure 15.1. The excess burden of the tax is represented by the area A) B + C. B) F + G. C) B + F. D) E + H. E) B + C + F + G. Answer: D Diff: 2 Type: MC Topic: Excess Burden of a Tax Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills 8) Economists argue that the corporate income tax is an example of a tax with a high deadweight loss because A) some of the burden of the tax is passed on to consumers in the form of higher prices. B) it discourages corporations from undertaking capital investments to enhance market competitiveness. C) taxing a corporation's income amounts to double taxing the earnings on individual shareholders' investments in corporations. D) it encourages corporations to seek ways to evade taxes. E) corporations will pass all the burden to consumers so that their own profits are not affected. Answer: C Diff: 2 Type: MC Topic: Income Taxes Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Corporations Really Bear the Burden of the Federal Corporate Income Tax?

9) The corporate income tax is ultimately paid by all of the following except A) owners of the corporation. B) the corporation's debtors in the form of lower rates of return on the corporation's bonds. C) customers in the form of higher prices. D) employees in the form of lower wages. E) none of the above. Answer: B Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Corporations Really Bear the Burden of the Federal Corporate Income Tax? 10) Consider the following methods of taxing a corporation's income: a. A flat tax, as opposed to a progressive tax, is levied on corporate profits. b. A system whereby a corporation calculates its annual profit and notifies each shareholder of her portion of the profits. The shareholder would then be required to include this amount as taxable income for her personal income tax. The corporation does not pay a tax. c. A system where the federal government continues to tax corporate income through the corporate income tax but allows individual taxpayers to receive, tax free, corporate dividends and capital gains. Which of the methods above would avoid double taxation? A) a and b only B) a and c only C) b and c only D) b only E) a, b, and c Answer: C Diff: 3 Type: MC Topic: The Tax System Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Apply the Concept: Do Corporations Really Bear the Burden of the Federal Corporate Income Tax?

Figure 15.2

Figure 15.2 shows a demand curve and two sets of supply curves, one set more elastic than the other. 11) Refer to Figure 15.2. If the government imposes an excise tax of $1.00 on every unit sold, the consumer's burden of the tax A) is Pa - Pc under either supply curve. B) is Pb - Pc under either supply curve. C) is Pb - Pd under either supply curve. D) is Pa - Pc if the supply curve is S0 and Pb - Pc if the supply curve is S1. E) is Pa - Pd if the supply curve is S0 and Pb - Pe if the supply curve is S1. Answer: D Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax

12) Refer to Figure 15.2. If the government imposes an excise tax of $1.00 on every unit sold, the consumer's burden of the tax A) is greater under the more elastic supply curve S0. B) is smaller under the more elastic supply curve S0. C) is greater under the less elastic supply curve S0. D) is greater under the less elastic supply curve S1. E) is the same under either supply curve because there is a single demand curve that captures buyers' market behaviour. Answer: A Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax 13) Refer to Figure 15.2. If the government imposes an excise tax of $1.00 on every unit sold, the producer's burden of the tax A) is Pa - Pd under either supply curve. B) is Pb - Pe under either supply curve. C) is Pa- Pe under either supply curve. D) is Pa - Pd if the supply curve is S0 and Pb - Pe if the supply curve is S1. E) is Pc - Pd if the supply curve is S0 and Pc - Pe if the supply curve is S1. Answer: E Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax 14) Refer to Figure 15.2. If the government imposes an excise tax of $1.00 on every unit sold, the producer's burden of the tax A) is greater under the more elastic supply curve S0. B) is greater under the less elastic supply curve S0. C) is smaller under the more elastic supply curve S1. D) is greater under the less elastic supply curve S1. E) is the same under either supply curve because there is a single demand curve that captures buyers' market behaviour. Answer: D Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax

15) Refer to Figure 15.2. If the government imposes an excise tax of $1.00 on every unit sold, the government's revenue from the tax is represented by the area A) (PaPc × Qa) if the supply curve is S0 and (PbPc × Qb) if the supply curve is S1. B) (PaPd × Qa) if the supply curve is S0 and (PbPe × Qb) if the supply curve is S1. C) (PaPe × Qa) under either supply curve. D) (PaPb × Qb) under either supply curve. E) (PbPe × Qb) under either supply curve. Answer: B Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax 16) Refer to Figure 15.2. If the government imposes an excise tax of $1.00 on every unit sold, the government's revenue from the tax A) is larger if the supply curve is S0. B) is larger if the supply curve is S1. C) is identical under either supply curve. D) is not maximized. E) cannot be determined. Answer: B Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax 17) Refer to Figure 15.2. If the government imposes an excise tax of $1.00 on every unit sold, what is the size of the deadweight loss, if there is any? A) the area adc if the supply curve is S0 and the area bec if the supply curve is S1. B) the area afcd if the supply curve is S0 and the area bfce if the supply curve is S1. C) the area acf under either supply curve. D) the area becf under either supply curve. E) There is no deadweight loss; revenue raised is used to fund government projects. Answer: A Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax

18) Refer to Figure 15.2. If the government imposes an excise tax of $1.00 on every unit sold, A) the deadweight loss is identical under either supply curve. B) the deadweight loss is greater under the supply curve S1. C) there is no deadweight loss since revenue raised is used to fund government projects. D) the deadweight loss is greater under the supply curve S0. E) the deadweight loss cannot be determined without further information. Answer: D Diff: 3 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax 19) When the elasticity of demand for a product is smaller than the elasticity of supply, sellers pay the majority of the tax on the product. Answer: FALSE Diff: 2 Type: TF Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 20) If the government wants to minimize the welfare loss of a tax, it should tax goods with more inelastic demands or supplies. Answer: TRUE Diff: 2 Type: TF Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 21) For a given supply curve, the deadweight loss from the imposition of a tax is smaller if demand is more elastic. Answer: FALSE Diff: 3 Type: TF Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 22) Explain the effect of price elasticities of supply and demand on tax incidence. Answer: If demand is less elastic than supply, buyers pay the larger share of the tax. If supply is less elastic than demand, sellers pay the larger share of the tax. Diff: 2 Type: SA Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking

23) If the government is most interested in minimizing excess burden of an excise tax, should it impose the tax on goods that are elastic or on goods that are inelastic? Answer: If the government wants to minimize the excess burden of excise taxes, the taxes should be imposed on goods whose demand is inelastic. Diff: 2 Type: SA Topic: Excess Burden of a Tax Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax 24) Suppose the equilibrium price and quantity of a 12-pack of pop are $5.00 and 10,000 12-packs, respectively, and the government decides to impose a $1.00 tax on every 12-pack of carbonated soft drinks in an effort to fight obesity. Draw two supply and demand graphs, one showing the excess burden of the tax when supply is less elastic and the other showing the excess burden of the tax when supply is more elastic. Identify the excess burden of the tax on each graph. On which graph is the excess burden the greatest? Answer:

The excess burden of the tax is represented by area A + B on each graph, and is greatest when supply is more elastic. Diff: 3 Type: SA Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax

25) Suppose in an effort to raise tax revenue, British Columbia decides to legalize the sale of marijuana. The province will charge a tax of $10 per gram on each sale, and the province claims that retailers will bear the entire burden of this tax. Draw a graph illustrating the situation where retail outlets would bear the entire tax burden of $10 per gram of marijuana. Explain what would need to be true about the demand for marijuana for retailers to bear the entire burden of this tax, and if this would likely occur if marijuana sales were actually legalized. Answer: For retailers to bear the entire burden of this tax, the demand for marijuana would have to be perfectly elastic. Most studies indicate that the demand for marijuana is inelastic, so this would likely not occur. The graph shows a perfectly elastic demand curve, which is necessary for the seller to bear the entire burden of the tax. Without the $10-per-gram tax, equilibrium is at Point A, with a price of P1 and a quantity of Q1. The $10-per-gram tax would shift the supply curve up to S2, creating a new equilibrium at Point B, with a price of P1 and a quantity of Q2. Since demand is perfectly elastic, the selling price does not change with the addition of the tax. The amount the retail outlet would receive after paying the $10per-gram tax is represented by P2, which is exactly $10 less than the selling price of P1.

Diff: 3 Type: SA Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking

26) The term "tax incidence" refers to A) the degree of progression of a tax. B) percentage of tax at different income levels. C) the actual division of the burden of a tax between buyers and sellers in a market. D) the amount of revenue government collects from a tax imposed on a good or service. E) whether the burden of a tax rests more heavily on those with higher incomes or those with lower incomes. Answer: C Diff: 1 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 27) When the demand for a product is more elastic than the supply, A) consumers pay the majority of the tax on the product. B) consumers pay the entire tax on the product. C) firms pay the majority of the tax on the product. D) firms pay the entire tax on the product. E) firms and consumers divide the burdens in half. Answer: C Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 28) When the demand for a product is less elastic than the supply, A) consumers pay the majority of the tax on the product. B) consumers pay the entire tax on the product. C) firms pay the majority of the tax on the product. D) firms pay the entire tax on the product. E) firms and consumers divide the burdens in half. Answer: A Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking

29) There is a difference between who is legally required to send a tax payment to the government and who bears the burden of the tax. Which of the following would have the most impact on who bears the burden of an excise tax? A) whether the tax is imposed by the federal government or a provincial government B) whether the tax is based on the ability-to-pay principle or the benefits-received principle C) The motive for the tax. If the tax is designed to raise revenue, more of the burden will fall on firms. If the tax is designed to achieve a social objective (for example, to discourage smoking) more of the burden will fall on consumers. D) the elasticity of demand for the item that is taxed E) None of the above. Answer: D Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 30) How would the elimination of a sales tax affect the market for a product that had been subject to the tax? A) The demand for the product would rise and the equilibrium price would fall by the amount of the tax. B) The demand for product would shift right. C) The equilibrium price for the product would fall by less than the amount of the tax. D) The reduction in government revenue from the tax would be made up by an increase in property taxes. E) The supply of the product would become more elastic. Answer: C Diff: 2 Type: MC Topic: Sales Taxes Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember Not to Confuse Who Pays the Tax with Who Bears the Burden of the Tax 31) The federal government legalized and taxes marijuana. Who will carry the burden of this tax? A) The burden of the tax will be carried solely by marijuana growers. B) The burden will always be divided in half between sellers and buyers of marijuana. C) The burden of the tax will be shared between growers and consumers of marijuana. D) The burden of the tax will be carried solely by marijuana consumers. E) The question cannot be answered with the information given. Answer: C Diff: 2 Type: MC Topic: Sales Taxes Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember Not to Confuse Who Pays the Tax with Who Bears the Burden of the Tax

Figure 15.3

32) Refer to Figure 15.3. Area B + C + F + G represents A) the portion of sales tax revenue borne by consumers. B) the portion of sales tax revenue borne by producers. C) the excess burden of the sales tax. D) the deadweight loss. E) sales tax revenue collected by the government. Answer: E Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills 33) Refer to Figure 15.3. Area B + C represents A) the portion of sales tax revenue borne by consumers. B) the portion of sales tax revenue borne by producers. C) the deadweight loss. D) the excess burden of the sales tax. E) sales tax revenue collected by the government. Answer: A Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills

34) Refer to Figure 15.3. Area F + G represents A) the portion of sales tax revenue borne by consumers. B) the portion of sales tax revenue borne by producers. C) the deadweight loss. D) the excess burden of the sales tax. E) sales tax revenue collected by the government. Answer: B Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills 35) Refer to Figure 15.3. Area E + H represents A) the portion of sales tax revenue borne by consumers. B) the portion of sales tax revenue borne by producers. C) the excess burden of the sales tax. D) the deadweight loss. E) sales tax revenue collected by the government. Answer: C Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills 36) Refer to Figure 15.3. The difference between P3 and P2 represents A) the deadweight loss. B) sales tax revenue collected by the government. C) the portion of sales tax revenue borne by producers. D) the excess burden of the sales tax. E) burden of tax borne by the consumers by paying higher after tax price. Answer: E Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills 37) Refer to Figure 15.3. The difference between P2 and P1 represents A) the deadweight loss. B) sales tax revenue collected by the government. C) burden of tax borne by the producer by receiving lower after tax price. D) the excess burden of the sales tax. E) burden of tax borne by the consumers by paying higher after tax price. Answer: C Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills 78 Copyright © 2024 Pearson Canada Inc.

38) Which of the following statements concerning the federal corporate income tax is true? A) It is an efficient tax because it imposes a small excess burden relative to the tax revenue it raises. B) The incidence of the corporate income tax can be determined by using demand and supply analysis. C) Determining the incidence of the corporate income tax is complicated because it is not certain how corporations respond to the tax. D) The corporate income tax is an example of the benefits-received principle. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Corporations Really Bear the Burden of the Federal Corporate Income Tax? 39) Most economists agree that some of the burden of the corporate income tax A) is reduced because the tax is progressive. B) is shared by the federal government. C) is reduced because the tax is used to attain a social objective. D) is passed on to consumers in the form of higher prices. E) is forgiven upon the request of corporations. Answer: D Diff: 1 Type: MC Topic: Income Taxes Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Corporations Really Bear the Burden of the Federal Corporate Income Tax? 40) While a corporation may be responsible for writing a cheque to the Canada Revenue Agency to pay corporate taxes, the money has to come from somewhere. Which of the following best describes where the money comes from? A) Corporations pass on some of the burden of the tax to investors in the company, to workers, and to consumers. B) The corporations pay taxes solely by reducing the pay of executives. C) The statement is false; corporations have more than enough money to pay taxes. D) Corporations pay taxes solely by reducing dividends paid to stockholders. E) Corporations pay taxes out of their savings for future investments. Answer: A Diff: 2 Type: MC Topic: Income Taxes Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Corporations Really Bear the Burden of the Federal Corporate Income Tax?

41) "For a given supply curve, the excess burden of a tax will be greater when the demand for a product is less elastic than when the demand is more elastic." This statement is A) correct. B) incorrect because the incidence of the tax, not the burden of the tax, is affected by the elasticity of demand. C) incorrect. When demand is less elastic, the burden of the tax is smaller than when the demand is more elastic. D) incorrect. The statement confuses demand with quantity demanded. E) correct or incorrect will be determined after getting more information about the tax burden. Answer: C Diff: 2 Type: MC Topic: Excess Burden of a Tax Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax 42) For a given supply curve, how does the elasticity of demand affect the burden of a tax imposed on a product? A) The excess burden of the tax will be minimized when the demand is unit-elastic. B) The excess burden of the tax will be greater when the elasticity of supply is greater than the elasticity of demand. C) The excess burden of the tax will be greater when the demand is less elastic than when it is more elastic. D) The excess burden of the tax will be greater when the demand is more elastic than when it is less elastic. E) There will be no excess burden of the tax if the demand is horizontal. Answer: D Diff: 2 Type: MC Topic: Excess Burden of a Tax Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax 43) The actual division of a tax between buyers and sellers in a market is the excess burden of the tax. Answer: FALSE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 44) The person or firm that pays a tax bears the burden of the tax. Answer: FALSE Diff: 2 Type: TF Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember Not to Confuse Who Pays the Tax with Who Bears the Burden of the Tax 80 Copyright © 2024 Pearson Canada Inc.

45) When the demand for a product is less elastic than the supply, consumers pay the majority of the tax on the product. Answer: TRUE Diff: 1 Type: TF Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 46) What is meant by "tax incidence"? Answer: Tax incidence refers to the actual division of the burden of a tax between buyers and sellers in a market. Diff: 1 Type: SA Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 47) Explain why it is more difficult to determine the incidence of the corporate income tax than it is to determine the incidence of the tax on gasoline. Answer: You can determine the incidence of the gasoline tax if you know the elasticity of demand and the elasticity of supply of gasoline. If the demand for gasoline is less elastic than the supply, consumers will pay the majority of the tax. If the supply is less elastic than the demand, firms will pay the majority of the tax. Firms pass on some of the burden of the corporate income tax to consumers in the form of higher prices, but there is general agreement among economists that the tax also reduces the rate of return on investment in corporations. If a firm invests less with the tax than it would without the tax, it will have a negative effect on productivity. This can result in lower wages for workers. All of these factors make it difficult to determine the impact of the corporate income tax on any one of the affected groups. Diff: 3 Type: SA Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking 48) If grocery stores were legally required to charge a 10-cent fee for disposable grocery bags, who would bear the largest burden of this fee? Answer: Since consumers need groceries and would most likely continue to purchase them (and the bags to carry them home) even with the 10-cent bag fee, the demand for disposable bags is likely to be relatively inelastic. With an inelastic demand, the consumer would bear the largest burden of the bag fee. Diff: 2 Type: SA Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Reflective Thinking

Figure 15.4

49) Refer to Figure 15.4. The figure above shows a demand curve and two supply curves, one more elastic than the other. Use Figure 15.4 to answer the following questions. a. Suppose the government imposes an excise tax of $1.00 on every unit sold. Use the graph to illustrate the impact of this tax. b. If the government imposes an excise tax of $1.00 on every unit sold, will the consumer pay more of the tax if the supply curve is S1 or S2? Refer to the graphs in your answer. c. If an excise tax of $1.00 on every unit sold is imposed, will the revenue collected by the government be greater if the supply curve is S1 or S2? d. If the government imposes an excise tax of $1.00 on every unit sold, will the deadweight loss be greater if the supply curve is S1 or S2?

Answer: a. The supply curve shifts up by the full amount of the tax. See below. b. The consumer will pay more of the tax if the supply curve is S1 (from Pa to Pb) than if the supply curve is S2 (from Pa to Pf). See graph below. c.

The government will collect more revenue if the supply curve is S2 ($1 × Qf) than if the supply curve

is S1 ($1 × Qb). See graph below. d. The deadweight loss is greater under S1 (represented by the area abe as opposed to the area afg under under S2).

Diff: 3 Type: ES Topic: Tax Incidence Learning Outcome: 15.3 Understand the effect of price elasticity on tax incidence AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Price Elasticity on the Excess Burden of a Tax

15.4 Discuss the distribution of income in Canada and understand the extent of income mobility 1) What is the low income cut-off? A) It is a level of annual income equal to total income in society divided by the population, adjusted for a family of four. B) It is a level of annual income equal to the amount of money necessary to purchase the minimal quantity of food required for adequate nutrition. C) It is the annual income level below which a household is exempt from taxes. D) It is the proportion of people with income below a certain level of income. E) It is the spending of 20 percent more income on food, shelter, and clothing than the average family. Answer: E Diff: 2 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 2) What is the poverty rate? A) the rate at which the number of people relative to the size of the population fall below the poverty line B) the percentage of the population earning an annual income below the low income cut-off C) the percentage of population that is working but still live on social assistance D) the percentage of working adults whose annual income is sufficiently low as to be are exempt from paying income taxes E) the percentage of households who qualify for government assistance to meet the minimal requirement for adequate nutrition Answer: B Diff: 1 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

3) Between 1977 and 2020, income inequality in Canada has increased in part due to rapid technological change. How does technological change contribute to income inequality? A) Advancements in technology displace skilled and unskilled workers in certain fields, leading to higher unemployment rates. B) Technology complements the skills of the well-educated while rendering redundant the labour services of unskilled and low-skilled workers. This causes a decline in the wages of low and unskilled workers relative to other workers. C) Technology needs skills to use which unskilled people don't have and hence they cannot get jobs in those fields and remain low paid. D) The opportunity cost of investing in technology is investments in human capital. The resulting decrease in labour's marginal productivity has led to lower wages. E) Technological change favours the owners of capital, and since high income individuals tend to own capital, income inequality is further exacerbated. Answer: B Diff: 2 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 4) Between 1977 and 2020, income inequality in Canada has increased in part due to expanding international trade. How does expanding international trade contribute to income inequality? A) It increases the demand for a wide array of products which in turn increases prices beyond the reach of average income individuals. B) It allows producers to exploit workers and reduce the wages they are willing to pay workers. C) It allows people buy products from other countries which reduces domestic production and hence employment. D) Domestic firms can now hire low-skilled workers anywhere in the world, putting Canadian workers in competition with foreign workers. This has caused the wages of unskilled workers to be depressed relative to the wages of other workers. E) It reduces the cost of producing goods and therefore lowers the value of labour's services. Answer: D Diff: 2 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

5) A statistical tool used to measure inequality is A) the Lorenz curve. B) Kuznet's curve. C) the Gini coefficient. D) the absolute poverty rate. E) the relative poverty rate. Answer: C Diff: 1 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 6) The Gini coefficient is measured by A) summing up the cumulative income percentages on the Lorenz curve. B) summing up the total income earned by the population and dividing by the size of the population. C) using the formula: area between perfect inequality and Lorenz curve ÷ area between the line of perfect equality to the Lorenz curve. D) by calculating the area under the Lorenz curve. E) using the formula: area between the line of perfect equality and the Lorenz curve ÷ the area under the line of perfect equality. Answer: E Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 7) As the value of the Gini coefficient approaches zero, A) income distribution becomes less unequal. B) poverty rate decreases. C) income distribution becomes more unequal. D) the percentage of the population under the poverty line increases. E) the percentage of the population under the poverty line decreases. Answer: A Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

8) As the value of the Gini coefficient approaches one, A) income distribution becomes less unequal. B) poverty rate goes up. C) income distribution becomes more unequal. D) the percentage of the population under the poverty line increases. E) the percentage of the population under the poverty line decreases. Answer: C Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking Figure 15.5

9) Refer to Figure 15.5. Rank the above panels in terms of most unequal income distribution to least unequal income distribution. A) Panel A, Panel B, Panel C B) Panel B, Panel C, Panel A C) Panel A, Panel C, Panel B D) Panel B, Panel A, Panel C E) Panel C, Panel B, Panel A Answer: B Diff: 2 Type: MC Topic: Lorenz Curve Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills

10) Suppose Canada has a Gini coefficient of 0.4 and Sweden has a Gini coefficient of 0.25. Which of the following statements is true? A) The distribution of income is more equal in Canada. B) The distribution of income is not much different in Sweden and Canada. C) The distribution of income is more equal in Sweden. D) Income distribution is changing faster in Canada. E) Without information on population, it is not possible to compare income distribution among countries. Answer: C Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills Figure 15.6

Figure 15.6 shows the Lorenz curve for a hypothetical country. 11) Refer to Figure 15.6. The middle 20 percent of households A) earn 20 percent of the society's total income. B) earn 36 percent of the society's total income. C) earn 28 percent of the society's total income. D) earn 48 percent of the society's total income. E) earn 50 percent of the society's total income. Answer: A Diff: 2 Type: MC Topic: Lorenz Curve Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills 88 Copyright © 2024 Pearson Canada Inc.

12) Refer to Figure 15.6. The highest 20 percent of households A) earn 24 percent of the society's total income. B) earn 28 percent of the society's total income. C) earn 20 percent of the society's total income. D) earn 42 percent of the society's total income. E) earn 72 percent of the society's total income. Answer: B Diff: 2 Type: MC Topic: Lorenz Curve Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills Figure 15.7

Figure 15.7 shows the Lorenz curves for Islandia and Syldavia. 13) Refer to Figure 15.7. Which country has the more unequal distribution of income? A) Islandia B) Syldavia C) Income equality in both countries is same because the shape of Lorenze curve is same. D) They may have the same absolute income distribution although their relative income distribution is different. E) There is insufficient information to answer the question. Answer: B Diff: 2 Type: MC Topic: Lorenz Curve Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills 89 Copyright © 2024 Pearson Canada Inc.

14) Refer to Figure 15.7. If area X = 2,060, area Y = 240, and area Z = 2,700, calculate the Gini coefficient for Islandia. A) 0.41 B) 0.45 C) 0.70 D) 0.76 E) 0.81 Answer: A Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills 15) Refer to Figure 15.7. If area X = 2,060, area Y = 240, and area Z= 2,700, calculate the Gini coefficient for Syldavia. A) 0.05 B) 0.12 C) 0.23 D) 0.46 E) 0.85 Answer: D Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills 16) In Canada A) the income tax system has little or no impact on the distribution of income. B) the after-tax income distribution of income is more equal than the before-tax distribution. C) once a person is in poverty, it is very difficult for a person to get out of poverty. D) the degree of income mobility is relatively low. E) poverty rate has become equal to zero in recent years. Answer: B Diff: 1 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

17) Which of the following tax systems would help reduce income inequality the most? A) a regressive tax system B) a proportional tax system C) a progressive tax system D) a consumption tax system E) a wealth tax system Answer: C Diff: 1 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 18) Absolute poverty measures vary from country to country. For example, in 2020, the low income cutoff in Canada was an annual income of approximately $26,000 but economists often use a much lower threshold income of $1 per day when calculating the rate of poverty in poor countries. How is this absolute poverty measured? A) by comparing the percentage of households living below the poverty line to the total population B) by comparing a household's income to the income required to maintain the average standard of living in a society at a particular time C) by comparing the amount of goods and services that a household's income can purchase to an objective measure of the amount of income needed to sustain a certain predetermined standard of living D) by comparing the amount of goods and services that a household's income can purchase in one country to the amount of goods and services that a household's income can purchase in another country of comparable living standard E) by calculating the proportion of people with incomes equal to low income cut-off Answer: C Diff: 3 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 19) Absolute poverty is A) not being able to afford the same things as everyone else. B) an income in the bottom 20 percent of the population. C) not being able to purchase anything at all. D) not being able to afford the essentials of life. E) an income below the median. Answer: D Diff: 2 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

20) A focus on relative poverty, rather than absolute poverty, could lead to A) overstating the level of poverty. B) increase poverty further. C) understating the level of poverty. D) correctly identifying the level of poverty. E) having no impact on policy. Answer: A Diff: 2 Type: MC Topic: The Tax System Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 21) Why would most people not consider a university student as suffering from poverty? A) Their low incomes are permanent. B) Most people can't remember what being a student was like. C) Students are likely to have incomes above the median in future. D) Poverty is related to people who are working but cannot earn enough. E) Students make up such a small portion of the population. Answer: C Diff: 1 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 22) Which region has seen the greatest decrease in absolute poverty since 1990? A) Sub-Saharan Africa B) Latin America and the Caribbean C) East Asia and the Pacific D) South Asia E) Europe and Central Asia Answer: C Diff: 1 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 23) If the Gini coefficient for Madeupistan is 1, it means that income distribution is perfectly equal in this society. Answer: FALSE Diff: 2 Type: TF Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

24) Holding all other factors constant, income earned from capital is more unequally distributed than income earned from labour. Answer: TRUE Diff: 1 Type: TF Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 25) Rapid economic growth tends to increase the degree of income mobility. Answer: TRUE Diff: 2 Type: TF Topic: Income Mobility Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 26) Describe the main factors economists believe cause inequality of income. Answer: The distribution of income is based mainly on the marginal revenue product of the factors owned by households, according to the marginal productivity theory of income distribution. Therefore, the causes of income inequality are very complex. Income inequality is determined by the quantities of factors owned by households (including labour, capital, and natural resources) and the prices of these factors of production (which are determined by the interaction of demand and supply). Income inequality is believed to have risen in the past three decades because the wage rates earned at the top end of the income distribution have risen in comparison to those at the bottom end, largely because of the effects of technological change and the globalization of markets. Government policies, especially those dealing with taxes and transfers, also have an effect on income inequality. Diff: 2 Type: SA Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 27) Compare the distribution of income in Canada with the distribution of income in other high-income countries. Answer: Income in Canada is distributed less equally than in most other high-income countries. Diff: 1 Type: SA Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

Figure 15.8

28) Refer to Figure 15.8 to answer the following questions. a. Did the distribution of income become more equal in 2020 that it was in 2019, or did it become less equal? Explain. b. If area A = 1,600, area B = 200, and area C = 3,200, calculate the Gini coefficient for 2019 and the Gini coefficient for 2020. Answer: a. The distribution of income became more equal in 2020. The Lorenz Curve for 2020 is closer to the diagonal line of equality than is the Lorenz Curve for 2019. b. The Gini Coefficient = (the area inside the Lorenz Curve)/(the area beneath the diagonal line of equality). Thus, for 2019, the Gini Coefficient = A + B/(A + B + C) = 1,800 /5,000 = 0.36. For 2020, the Gini Coefficient = (A)/(A + B + C) = 1,600 /5,000 = 0.32. Diff: 2 Type: SA Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills

Table 15.12 Income Quintile Lowest 20% Second quintile Third quintile Fourth quintile Highest 20%

Agraria Percentage of Total Income 3% 9% 14% 24% 50%

Urbana Percentage of Total Income 5% 14% 20% 24% 37%

Table 15.12 shows income distribution data for two countries. Use this data to answer the following questions. 29) Refer to Table 15.12. a. Draw a Lorenz curve for each country. b. Which country has the more equal distribution of income? c. Based on the Lorenz curve for the two countries, can you determine which country has the more progressive tax system? Explain your answer. Answer: a. See diagram below.

b. Urbana c. No, it is not possible to tell which country has the more progressive tax because the Lorenz curve is based on earned income, not on after-tax income. Diff: 3 Type: ES Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills 95 Copyright © 2024 Pearson Canada Inc.

30) Which of the following statements about the distribution of income in Canada is true? A) Canada has the most unequal distribution of income of any high-income country in the world. B) Canada has a more equal distribution of income than Greece and the United States. C) The distribution of income in Canada is more unequal than Greece and the United States. D) The distribution of income in Canada is fairly equal and there have been no dramatic changes over time. E) The distribution of income in Canada is unequal and has become significantly more unequal over time. Answer: B Diff: 1 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 31) Which of the following statements best represents what has happened to the share of GDP captured by the poorest 20 percent of Canadians over the last 40 years? A) The poorest Canadians receive a higher share of GDP now than at any time in the past 40 years. B) Reductions in the marginal income tax rate from those with the highest income have caused the share of income received by the poorest to fall to the lowest level in the past 40 years. C) The share of income received by the poorest 20 percent of Canadians is about the same as it was 40 years ago. D) Increases in the minimum wage have increased the share of GDP received by the poorest 20 percent of Canadians over the last 40 years. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 32) The federal government defines the poverty line as A) a level of annual income equal to the amount necessary to purchase the minimal quantity of food required for adequate nutrition. B) a level of annual income equal to three times the amount of money necessary to purchase the minimal quantity of food required for adequate nutrition. C) the average income level of welfare recipients. D) the average expense on basic needs such as food, shelter and clothing. E) there is no official poverty line in Canada. Answer: E Diff: 1 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

33) Someone is living below the low income cut-off if A) they have an income less than $15,000. B) they have an income that puts them in the lowest 20 percent of the income distribution. C) they qualify for federal welfare payments. D) their income is less than $10,000. E) they spend 20 percent more of their income on food, shelter, and clothing than an average family. Answer: E Diff: 1 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 34) Since 1975, the share of the Canadian population with incomes below the low income cut-off has A) risen. B) fallen during the entire period. C) fallen initially and then risen. D) stayed fairly constant. E) both fallen and risen, but is now lower. Answer: E Diff: 1 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking, Ethical Reasoning 35) What does a Lorenz curve illustrate? A) a comparison of the distribution of income in two different countries B) the distribution of income within a country in a given time period C) the distribution of income globally in a given time period D) the share of taxes paid by different groups of households E) the change over time in the percentage of households with incomes that place them below the poverty line Answer: B Diff: 1 Type: MC Topic: Lorenz Curve Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

36) Which of the following summarizes the information provided by a Lorenz curve? A) the Lorenz coefficient B) the income distribution ratio C) poverty rate D) the Gini coefficient E) the slope (the rise divided by the run) of the Lorenz curve at a particular point on the curve Answer: D Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 37) A Gini coefficient of ________ means that an income distribution is perfectly equal, and a Gini coefficient of ________ means the income distribution is perfectly unequal. A) 0; 1 B) 1; 0 C) 0.5; 0.5 D) 0; 100 E) 100; 0 Answer: A Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 38) Income inequality in Canada has increased somewhat over the past 25 years. Two factors that appear to have contributed to this are A) tax cuts on high income individuals and large increases in prices of stocks. B) strong economic growth and low inflation. C) rich taking control of most of the country's resources and poor getting less skills. D) rapid technological change and expanding international trade. E) outsourcing of jobs by Canadian firms and cuts in taxes on capital gains. Answer: D Diff: 1 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

39) As a group, people with high incomes are likely to have A) greater-than-average family inheritances and greater than average SAT scores. B) greater-than-average holdings of stocks and bonds and lower-than-average productivity. C) greater-than-average productivity and greater-than-average amounts of capital. D) a stable career with no interruptions. E) a stable marriage and no children. Answer: C Diff: 1 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 40) Measures of poverty (for example, the low income cut-off) and the distribution of income (for example, the Lorenz curve and the Gini coefficient) can be misleading for which of the following reasons? A) First, these measures do not take into account income mobility over time. Second, these measures ignore the effects of government programs meant to reduce poverty. B) First, they measure only global inequality. Second, they do not consider comparing different countries. C) First, none of these measures are adjusted for inflation. Second, they do not measure income on a per capita basis. D) First, these measures fail to include the income Canadians earn working for foreign firms that have operations located in Canada. Second, these measures fail to include income foreign citizens earn working for Canadian firms that have operations in foreign countries. E) First, these measures fail to include dividend and interest income earned on stocks and bonds. Second, these measures fail to include the value of goods and services citizens make for their own consumption that are not sold in markets. Answer: A Diff: 2 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 41) All Gini coefficients must lie between 0 and 1. The lower the value, A) the more unequal the income distribution. B) the closer the income distribution is to being equal. C) the lower the level of overall income. D) the greater the degree of poverty. E) the lower the degree of poverty according to the federal government's definition of poverty. Answer: B Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

Figure 15.9

Figure 15.9 shows the Lorenz curve for a hypothetical country. 42) Refer to Figure 15.9. The second lowest 20 percent of households A) earns 12 percent of the society's total income. B) earns 8 percent of the society's total income. C) earns 16 percent of the society's total income. D) earns 28 percent of the society's total income. E) earns 40 percent of the society's total income. Answer: C Diff: 2 Type: MC Topic: Lorenz Curve Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills 43) Refer to Figure 15.9. The second highest 20 percent of households A) earns 24 percent of the society's total income. B) earns 20 percent of the society's total income. C) earns 28 percent of the society's total income. D) earns 42 percent of the society's total income. E) earns 72 percent of the society's total income. Answer: A Diff: 2 Type: MC Topic: Lorenz Curve Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills 100 Copyright © 2024 Pearson Canada Inc.

44) If the low income cut-off included transfer payments individuals receive from the government and other non-cash benefits such as health and dental care, A) the portion of people living below the low income cut-off would be lower. B) poverty rate would be higher. C) poverty would be eliminated. D) income inequality would be greater. E) the poverty rate would be overstated. Answer: A Diff: 2 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 45) A study by the Fraser Institute shows that A) families remain below the poverty line for an average of five years. B) there is significant income mobility in Canada over time. C) income mobility in Canada is minimal. D) over half the people below the poverty line never move out of poverty. E) there is significant level of absolute poverty in Canada. Answer: B Diff: 2 Type: MC Topic: Income Mobility Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 46) Intergenerational Income Elasticity measures A) the likelihood of someone with poor parents being poor. B) the portion of a difference in incomes between two families being transferred to their children. C) the likelihood of inheriting a big fortune from parents. D) the sensitivity of inequality to changes in income tax rates. E) the portion of poor people who escape poverty every year. Answer: B Diff: 2 Type: MC Topic: Income Mobility Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

47) Which of the following is a transfer payment? A) payments to government employees B) a tax deduction C) health benefits D) Social Security payments E) an income tax credit Answer: D Diff: 1 Type: MC Topic: The Effect of Taxes and Transfers Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 48) The Gini coefficient for Canada in 1977 was 0.286. In 2019, the coefficient was equal to 0.299. This means that A) per capita income in Canada rose from 1977 to 2019. B) there was a decrease in the amount of government transfer payments from 1977 to 2019. C) cuts in federal income tax rates in the 1980s and 2000s helped to reduce income inequality. D) poverty increased in Canada from 1977 to 2019. E) income inequality increased from 1977 to 2019. Answer: E Diff: 2 Type: MC Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills 49) Many have argued that poverty creates a cycle of poverty with children of poor parents doomed to be poor themselves. This statement is A) completely incorrect. There is no evidence that children of poor parents become poor themselves. B) completely correct. Virtually all children of poor parents in Canada grow up to be poor themselves. C) mostly correct. The Gini coefficient indicates there is exceptionally low income mobility in Canada. D) mostly incorrect. Studies of intergenerational income mobility show relatively high income mobility in Canada. E) correct because poverty is a vicious circle and poor parents cannot raise their kids by providing them those opportunities that are necessary to get out of the poverty. Answer: D Diff: 2 Type: MC Topic: Income Mobility Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking Special Feature: Solved Problem: Are Many Individuals Stuck in Poverty?

50) Economists caution that conventional statistics used to estimate the extent of poverty in Canada fail to account for benefits people receive that, if considered, would reduce the amount of poverty. Which of the following is an example of these benefits? A) Individuals can use tax credits and the personal exemption to reduce their taxable incomes. This reduces what they owe the government and increases their disposable incomes. B) The federal income tax system is progressive. As a result, the poor have higher after-tax incomes than they would have if the income tax system was proportional or progressive. C) Individuals with low incomes receive non-cash benefits such as free dental and eye care. D) Provincial minimum wages force employers to pay workers with low skills an efficiency wage. E) None of the above. Answer: C Diff: 2 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 51) Which of the following statements is true? A) If transfer payments such as Social Security payments to the retired and disabled were excluded from official statistics used to estimate the percentage of people with incomes below the poverty line, the amount of poverty in Canada would be much greater. B) Because the federal income tax system is progressive, measuring poverty using after-tax incomes results in a higher poverty rate than if poverty is measured using before-tax incomes. C) If non-cash benefits such as dental care and rent subsidies were added to the incomes of low-income families, poverty would be eliminated. D) In Canada, income remaining after federal taxes are paid is more equally distributed than income before taxes. E) None of the above is true. Answer: D Diff: 3 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

52) Between 1990 and 2018, the poverty rate in East Asia declined dramatically, while the poverty rate in sub-Saharan Africa decreased only slightly. The main reason for this is that A) the population growth rate decreased in East Asia and increased in sub-Saharan Africa. B) governments in East Asia increased transfer payments to poor families over this period of time. The governments of sub-Saharan Africa had practically no transfer payment programs from 1990 to 2018. C) the countries of East Asia have progressive income tax systems. The countries of sub-Saharan Africa all have regressive income tax systems. D) East Asia experienced higher economic growth than sub-Saharan Africa. E) East Asia experienced lower economic growth compare to sub-Saharan Africa. Answer: D Diff: 2 Type: MC Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 53) The decision to make the Canadian income tax system progressive would be A) a progressive decision. B) a positive decision. C) a decision that was needed to minimize the excess burden of taxation. D) an unfair decision because it discourages people to work hard. E) a normative decision. Answer: E Diff: 1 Type: MC Topic: The Tax System Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking Special Feature: Economics in Your Life: How Much Tax Should You Pay? 54) The fact that some people cannot afford essentials is an issue of ________, while the fact that some people have much less income than others is an issue of ________. A) income distribution; poverty B) poverty; income distribution C) inequality; government failure D) income distribution; market failure E) poverty; market failure Answer: B Diff: 2 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

55) According to Niels Veldhuis and Amela Karabegovic, focusing on income inequality means A) eliminating poverty. B) we will be able to focus on those who need the most help. C) we will have fewer resources to devote to those living in poverty. D) making the income tax system more progressive. E) we will have more resources to help the poor. Answer: C Diff: 1 Type: MC Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 56) The fact that welfare payments in Canada are much higher than the commonly used international poverty line means A) there is no poverty in Canada. B) little, as the cost of living in Canada is higher than in many other places. C) little, as poverty is measured before considering government transfers. D) poverty is common in Canada. E) poverty is very low in Canada. Answer: B Diff: 2 Type: MC Topic: Income and Substitution Effects Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 57) A Lorenz curve summarizes the information provided by a Gini coefficient. Answer: FALSE Diff: 1 Type: TF Topic: Lorenz Curve Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 58) Income inequality increases as the Gini coefficient approaches 1. Answer: TRUE Diff: 2 Type: TF Topic: Gini Coefficient Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking

59) From 1977 to 2018, the poverty rate in East Asia rose slightly but the level of poverty in sub-Saharan Africa fell dramatically. Answer: FALSE Diff: 1 Type: TF Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 60) What is the difference between the low income cut-off and the poverty rate? Answer: The low income cut-off is the level of annual income level at which a family must spend 20 percentage point more of its income than the average Canadian family of the same size on food, shelter, and clothing. The poverty rate is the percentage of the population that falls below the low income cut-off. Diff: 1 Type: SA Topic: Poverty Rate Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 61) What is a Lorenz curve and what is a Gini coefficient? Answer: A Lorenz curve is a curve that shows the distribution of income by arraying incomes from the lowest to the highest on the horizontal axis and indicating the cumulative fraction of income earned by each fraction of households on the vertical axis. A Gini coefficient is equal to the area between the line of perfect income equality and the Lorenz curve divided by the whole area below the line of perfect equality. Diff: 2 Type: SA Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Reflective Thinking 62) What is intergenerational income elasticity? Explain how it captures the effect of income mobility. Answer: Intergenerational income elasticity explains how the difference in incomes will transfer from parents to children. The greater the degree of intergenerational income elasticity, the better parents' income is at predicting the children's income. For example, if a country has an intergenerational income elasticity of 0.5, if parents earn incomes $10 000 less than average, their children will likely earn incomes $5000 less than average. With an income elasticity of 0.5, it takes many generations for differences in incomes to disappear. The lower the intergenerational income elasticity, the higher the degree of income mobility. Diff: 2 Type: ES Topic: Income Mobility Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills

63) In Canada, after tax (and transfer payments) income distribution is considered more equal than before tax. Explain why this is so and what is the role of taxes and transfers in making the distribution of income more equal? Answer: The Canadian income tax system is progressive which means it taxes people who earn higher incomes at a higher marginal tax rate. People who earn low incomes also receive transfers of money from the government. Together these social assistance payments and the progressive income tax system mean there is a difference between the income people receive from their factor of production and the amount of money they actually have to spend. The transfer payments increase the amount of money those at the low end of the income distribution get to spend whereas progressive taxes reduces the amount of money those at the higher end of the income distribution actually get to spend. Also, low income individuals receive non-cash benefits, such as eye care and dental coverage not paid by general health care, as well as rent subsidies. If we take into account these transfer payments and other benefits, the distribution of income is more equal. Diff: 2 Type: ES Topic: The Effect of Taxes and Transfers Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills

Table 15.13 Income Quintile Lowest 20% Second quintile Third quintile Fourth quintile Highest 20%

Svetlana Percentage of Total Income 8% 12% 16% 20% 44%

Grodsky Percentage of Total Income 4% 10% 16% 24% 46%

Table 15.13 shows income distribution data for two countries. Use this data to answer the following questions. 64) Refer to Table 15.13. a. Draw a Lorenz curve for each country. b. Which country has the more equal distribution of income? c. Based on the Lorenz curve for the two countries, can you determine which country has the more progressive tax system? Explain your answer. Answer: a. See diagram below.

b. Svetlana c. No, it is not possible to tell which country has the more progressive tax because the Lorenz curve is based on earned income, not on after-tax income. Diff: 3 Type: ES Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills 108 Copyright © 2024 Pearson Canada Inc.

Figure 15.10

65) Refer to Figure 15.10 to answer the following questions. a. Did the distribution of income become more equal in 2020 than it was in 2019, or did it become less equal? Explain. b. If area A = 1,900, area B = 450, and area C = 2,650, calculate the Gini coefficient for 2019 and the Gini coefficient for 2020. Answer: a. The distribution of income became less equal in 2020. The Lorenz Curve for 2020 is farther from the diagonal line of equality than is the Lorenz Curve for 2019. b. The Gini coefficient = (the area inside the Lorenz Curve)/(the area beneath the diagonal line of equality). Thus, for 2019, the Gini coefficient = (A)/(A + B + C) = 1,900 /5,000 = 0.38. For 2020, the Gini coefficient = (A + B)/(A + B + C) = 2,350 /5,000 = 0.47. Diff: 2 Type: SA Topic: Income Distribution Learning Outcome: 15.4 Discuss the distribution of income in Canada and understand the extent of income mobility AACSB: Analytic Skills

Part 2 Test Bank For

Macroeconomics Fourth Canadian Edition Glenn Hubbard Anthony Patrick O’Brien Apostolos Serletis Jason Childs

Contents Chapter 1: Economics: Foundations and Models Chapter 2: Trade-offs, Comparative Advantage, and the Market System Chapter 3: Where Prices Come From: The Interaction of Supply and Demand Chapter 4: GDP: Measuring Total Production and Income Chapter 5: Unemployment and Inflation Chapter 6: Economic Growth, the Financial System, and Business Cycles Chapter 7: Long-Run Economic Growth: Sources and Policies Chapter 8: Aggregate Expenditure and Output in the Short Run Chapter 9: Aggregate Demand and Aggregate Supply Analysis Chapter 10: Money, Banks, and the Bank of Canada Chapter 11: Monetary Policy Chapter 12: Fiscal Policy Chapter 13: Inflation, Unemployment, and Bank of Canada Policy Chapter 14: Macroeconomics in an Open Economy

Macroeconomics, 4Ce (Hubbard) Chapter 1 Economics: Foundations and Models 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, and optimal decisions are made at the margin 1) Changes in global weather patterns can lead to A) more Canadians drinking coffee. B) Canadians having to pay more for coffee. C) wage increases for coffee shop employees. D) the destruction of the Canadian coffee harvest. E) Canadians demanding more coffee. Answer: B Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Chapter Opener: You versus Caffeine? 2) The study of economics arises due to A) money. B) scarcity. C) greed. D) unlimited resources. E) unemployment. Answer: B Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 3) Scarcity refers to the situation in which A) unlimited wants exceed limited resources. B) unlimited resources exceed limited wants. C) a country's population is larger than its resource base. D) a nation's poverty level increases faster than its population. E) our needs and wants are finite. Answer: A Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

Table 1.1 Hours Open 1 2 3 4 5 6

Total Revenue (dollars) $50 75 95 110 120 125

Table 1.3 Hours Open 1 2 3 4 5 6

Total Revenue (dollars) $275 375 450 500 530 550

Table 1.4 Hours Open 1 2 3 4 5 6

Total Revenue (dollars) $75 125 160 185 200 210

1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produce? 1) The three fundamental questions that any economy must address are A) What will be the prices of goods and services; how will these goods and services be produced; and who will receive them? B) What goods and services to produce; how will these goods and services be produced; and who receives them? C) Who gets jobs; what wages do workers earn; and who owns what property? D) How much will be saved; what will be produced; and how can these goods and services be fairly distributed? E) How can the economy's output be equally shared; who are the decision makers; and what is the optimum output? Answer: B Diff: 1 Type: MC Topic: The Economic Problems Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 2) The idea that because of scarcity, producing more of one good or service means producing less of another good or service refers to the economic concept of A) optimization. B) efficiency. C) trade-off. D) equity. E) consumption. Answer: C Diff: 1 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

1.3

Understand what economic models are and aren't, and why they are a good idea

1.4

Distinguish between microeconomics and macroeconomics

1.5

Define important economic terms (It's not all Greek)

1.6

Review the use of graphs and formulas

Figure 1.1

Figure 1.2

Figure 1.3

Figure 1.4

Table 1.5 Year 2007 2008 2009 2010 2011

DVD Recorders (millions) 12.5 14.0 17.2 20.0 21.7

20) Refer to Table 1.5. The table above shows the sales of DVD recorders in North America. Present the information using a bar graph. Answer:

Diff: 1 Type: ES Topic: Graphs Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 2 Trade-offs, Comparative Advantage, and the Market System 2.1

Use a production possibilities frontier to analyze opportunity costs and trade-offs

Figure 2.1

kilograms of fish

B) 1.2 kilograms of fish C)

kilograms of fish

16) Refer to Figure 2.2. What is the opportunity cost of one kilogram of fish? A)

kilogram of grain

kilograms of grain

Figure 2.3

Figure 2.4

Figure 2.6

Table 2.2 Possible Output Combinations A B C D E F G H

Apples (thousands of pounds) 70 60 50 40 30 20 10 0

Pears (thousands of pounds) 0 20 36 48 56 60 63 65

Answer: a.

Figure 2.9

Figure 2.10

136) a. Draw a production possibilities frontier for a country that produces two goods, wine and cheese. Assume that resources are not equally suited to both tasks. b. Define opportunity costs. c. Use your production possibilities frontier graph to demonstrate the principle of opportunity costs. Answer: a. The PPF is concave (bowed away from the origin) to reflect the fact that resources are not equally suited to both tasks.

b. Opportunity cost is defined as the highest valued alternative that must be forgone by taking an action. c. In the PPF graph in part (a), suppose the country is currently producing at point A and wishes to move to point B so that it can produce more wine. The only way it can obtain more wine is to give up some amount of cheese. Diff: 2 Type: SA Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

Table 2.4 Possible Output Combinations A B C D E F G H

Cashews (thousands of kilograms) 35 30 25 20 15 10 5 0

Almonds (thousands of kilograms) 0 20 35 47 57 64 68 70

Answer: a.

2.2

Understand comparative advantage and explain how it is the basis for trade

Serena 8 16

Haley 9 12

Figure 2.13

China South Korea

One Digital Camera 100 hours 60 hours

Wheat (per pound) 4 hours 3 hours

Table 2.7 China South Korea

Digital Camera 100 hours 90 hours

Wheat (bushels) 5 hours 3 hours

Answer: a.

Lawns Mowed Gardens Cultivated

George 10

Jack 6

Figure 2.14

40 hours 16 hours

Lumber (per cubic metre) 8 hours 4 hours

Table 2.13

Estonia Finland

Cell Phone 20 hours 18 hours

Lumber (cubic metres) 5 hours 4 hours

Table 2.14 Estonia Finland

Cell Phone 20 hours 18 hours

Lumber (cubic metres ) 5 hours 4 hours

Lumber Output (cubic metres)

Lumber (cubic metres)

Estonia Finland

g. Table 2.17: Consumption With Trade

Estonia Finland

Cell Phone 90 90

Lumber (cubic metres) 400 500

2.3

Explain the basic idea of how a market system works

Figure 2.17

Figure 2.18

Figure 2.19

Figure 2.20

Figure 2.21

Figure 2.22

Macroeconomics, 4Ce (Hubbard) Chapter 3 Where Prices Come From: The Interaction of Supply and Demand 3.1

Discuss the variables that influence demand

Figure 3.2

Price (dollars per bushel) 60 50 40 30 20

Quantity (thousands of bushels) 40 80 120 160 200

108) Refer to Table 3.3. Use the demand schedule for cherries to draw a graph of the demand curve. Be sure to label the demand curve and each axis, and show each point on the demand curve. Answer:

3.2

Discuss the variables that influence supply

Figure 3.3

Figure 3.4

Quantity (thousands of bushels) 50 100 150 200 250

59) Refer to Table 3.4. Use the supply schedule for cherries to draw a graph of the supply curve. Be sure to label the supply curve and each axis, and show each point on the supply curve. Answer:

3.3

Use a graph to illustrate market equilibrium

Figure 3.5

Figure 3.6

Table 3.5

Price per Bushel $3 6 9 12 15 18 21 24

Quantity Demanded (bushels) 30,000 26,000 22,000 18,000 15,000 12,000 8,000 4,000

Quantity Supplied (bushels) 0 4,000 9,000 12,000 15,000 22,000 28,000 36,000

Figure 3.9

Figure 3.10

Table 3.6

Price per Bushel $2 4 6 8 10 12 14 16

Quantity Demanded (bushels) 40,000 36,000 30,000 24,000 20,000 18,000 12,000 6,000

Quantity Supplied (bushels) 0 4,000 8,000 16,000 20,000 28,000 36,000 40,000

3.4

Use demand and supply graphs to predict changes in prices and quantities

Figure 3.13

11) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for bicycle helmets. Which panel best describes what happens in this market if there is a substantial increase in the price of bicycles? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 12) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for women's clothing. Which panel best describes what happens in this market when the wages of seamstresses rise? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (c) Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 83 Copyright © 2024 Pearson Canada Inc.

13) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for almonds. Which panel best describes what happens in this market when there is an increase in the productivity of almond harvesters? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 14) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for Fruitopia, a soft drink. Which panel describes what happens in the market for Fruitopia when the price of Snapple, a substitute product, decreases? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 15) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for potatoes and that steak and potatoes are complements. What panel describes what happens in this market when the price of steak rises? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

16) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for rice. What happens in this market if buyers expect the price of rice to fall? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 17) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for used clothing, an inferior good. Which panel describes what happens in this market as a result of a decrease in income? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (b) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 18) Positive technological change in the production of smart phones caused the price to fall. Holding everything else constant, how would this affect the market for smart phone apps (a complement to smartphones)? A) The supply of apps would increase and the equilibrium price of apps would decrease. B) The demand for apps would increase and the equilibrium price of apps would increase. C) The demand for apps would decrease because consumers could afford to buy fewer smart phones and apps. D) The demand for apps would increase and the equilibrium price of apps would decrease. E) The demand for apps would decrease and the equilibrium price of apps would decrease. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

19) Assume that both the demand curve and the supply curve for smart phones shift to the right but the demand curve shifts more than the supply curve. As a result A) both the equilibrium price and quantity of smart phones will increase. B) the equilibrium price of smart phones will increase; the equilibrium quantity may increase or decrease. C) the equilibrium price of smart phones may increase or decrease; the equilibrium quantity will increase. D) the equilibrium price of smart phones will decrease; the equilibrium quantity may increase or decrease. E) both the equilibrium price and quantity of smart phones will decrease. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 20) "The price of compact LED lights fell because of improvements in production technology. As a result, the demand for incandescent light bulbs decreased. This caused the price of incandescent light bulbs to fall; as the price of incandescent light bulbs fell the demand for incandescent light bulbs decreased even further." Evaluate this statement. A) The statement is false. A decrease in the price of compact LED lights would decrease the demand for incandescent light bulbs, but a decrease in the price of incandescent light bulbs would not cause the demand for incandescent light bulbs to decrease. B) The statement is false because the demand for incandescent light bulbs would increase as the price of compact LED lights fell. C) The statement is false because compact LED lights producers would not reduce their prices as a result of improvements in technology; doing so would reduce their profits. D) The statement is false because it confuses the law of demand with the law of supply. E) The statement is true. A decrease in the price of compact LED lights would decrease the demand for incandescent light bulbs, and a decrease in the price of incandescent light bulbs would cause the demand for incandescent light bulbs to decrease. Answer: A Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

Figure 3.14

21) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If the price of oranges, a substitute for apples, decreases and the wages of apple workers increase, how will the equilibrium point change? A) The equilibrium point will move from A to E. B) The equilibrium point will move from A to B. C) The equilibrium point will move from A to C. D) The equilibrium point will move from A to B to C. E) There will be no change in the equilibrium point. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 22) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If worms eat half the apple crop, how will the market equilibrium point change? A) The equilibrium point will move from A to B. B) The equilibrium point will move from A to C. C) There will be no change in the equilibrium point. D) The equilibrium point will move from A to E. E) The equilibrium point will move from A to B to C. Answer: A Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

23) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D2 and S2 (point E). Which of the following changes would cause the equilibrium to change to point A? A) a positive change in the technology used to produce apples and decrease in the price of oranges, a substitute for apples B) an increase in the wages of apple workers and a decrease in the price of oranges, a substitute for apples C) an increase in the number of apple producers and a decrease in the number of apple trees as a result of disease D) a decrease in the wages of apple workers and an increase in the price of oranges, a substitute for apples E) an increase in the number of apple producers and an increase in the number of apple trees Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 24) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If there is an increase in the wages of apple workers and an increase in the price of oranges, a substitute for apples, the equilibrium could move to which point? A) The equilibrium point will move from A to B. B) The equilibrium point will move from A to C. C) The equilibrium point will move from A to E. D) There will be no change in the equilibrium point. E) Cannot be determined. Answer: E Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 25) Which of the following statements is true? A) An increase in demand causes a change in equilibrium price; the change in price does not cause a further change in demand or supply. B) A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in demand. C) If both demand and supply increase, there must be an increase in equilibrium price; equilibrium quantity may either increase or decrease. D) If demand decreases and supply increases, one cannot determine if equilibrium price will increase or decrease without knowing which change is greater. E) An increase in supply causes equilibrium price to fall; the decrease in price then results in an increase in demand. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 88 Copyright © 2024 Pearson Canada Inc.

26) A decrease in the equilibrium price for a product will result A) when the quantity demanded for the product exceeds the quantity supplied. B) when there is a decrease in supply and a decrease in demand for the product. C) when there is an increase in supply and a decrease in demand for the product. D) when there is a decrease in demand and a decrease in the number of firms producing the product. E) when there is a decrease in demand and an increase in the price of inputs for producing the product. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 27) Hurricane Juan hit Halifax in 2003. The storm caused over $300 million in damage. In the effort to repair the damage, the prices of basic building materials and contractors increased dramatically. Many residents complained of profiteering and price gouging by contractors and home improvement stores. Which of the following offers the best explanation of the price increases people were seeing? A) The hurricane reduced the number of suppliers of building materials. B) The hurricane created an artificial shortage of building materials. C) The hurricane caused an increase in the demand for building materials. D) Firms shipped plywood and other materials to locations not affected by the storm. E) The hurricane increased the number of suppliers of building materials. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 28) Which of the following would cause a decrease in the equilibrium price and an increase in the equilibrium quantity of salmon? A) a decrease in demand greater than the increase in supply B) an increase in supply greater than the increase in demand C) a decrease in supply less than the increase in demand D) an increase in demand greater than the decrease in supply E) an increase in supply equal to the increase in demand Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

29) Select the phrase that correctly completes the following statement. "A decrease in the number of manufacturers caused a decrease in the supply of smartphones. As a result A) the price of smartphones increased and the demand for sailboats decreased." B) the equilibrium quantity of smartphones increased." C) the price of smartphones increased and the quantity of smartphones demanded decreased." D) the price of smartphones increased. The higher price caused the supply of smartphones to increase." E) the equilibrium price of smartphones decreased." Answer: C Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 30) What would happen in the market for laser eye surgery if provincial health plans started to cover a portion of the price of voluntary procedures? A) Demand will increase, but this will not shift the supply curve. B) Supply will increase, but this will not shift the demand curve. C) Demand and supply will both increase. D) Demand will increase and supply will decrease. E) Demand will decrease and supply will decrease. Answer: A Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 31) If provinces decide to cover part of the price of voluntary laser eye surgery and more doctors decide to enter the field of laser eye surgery, what will happen in the market for laser eye surgery as a result of these two factors? A) Demand will increase, but these two factors will not shift the supply curve. B) Supply will increase, but these two factors will not shift the demand curve. C) Demand and supply will both increase. D) Demand and supply will both decrease. E) Cannot be determined. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

32) Photovoltaic cells (solar panels) have been in use since the 1970s. Recently, new technology has been developed which some think will allow regular windows to be replaced with solar panels. If this technology works as these people expect what will happen in the market for solar energy? A) The new technology will cause the supply of solar energy to shift to the right and the price of solar energy to fall. B) The new technology caused an increase in the supply of solar energy and an increase in the price of solar energy. C) The new technology caused a decrease in the demand for solar energy. D) The new technology caused an increase in the quantity of solar energy supplied. E) Cannot be determined. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember: A Change in a Good's Price Does Not Cause the Demand or Supply Curve to Shift 33) "Because apples and oranges are substitutes, an increase in the price of oranges will cause the demand for apples to increase. This initial shift in demand for apples results in a higher price for apples; this higher price will cause the demand curve for apples to shift to the right." Which of the following correctly comments on this statement? A) The statement will be true if consumer tastes for apples and oranges do not change. B) The statement is false because a change in the price of apples would not change the demand for apples. C) The statement is false because oranges are inferior goods; apples are normal goods. D) The statement is false because one cannot assume that apples and oranges are substitutes for all consumers. E) The statement is false because oranges are normal goods; apples are inferior goods. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember: A Change in a Good's Price Does Not Cause the Demand or Supply Curve to Shift

34) The demand for lobster is higher at Christmas than in February. If the equilibrium price of lobster is lower at Christmas than in February, then A) the supply of lobster is lower in February than at Christmas. B) consumers' tastes for lobster are greater in February than at Christmas. C) there is a surplus of lobster at Christmas and a shortage of lobster in February. D) there are more substitutes for lobster at Christmas than there are in February. E) lobsters are inferior goods at Christmas, and normal goods in February. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Special Feature: Solved Problem: High Demand and Low Prices in the Lobster Market 35) All else equal, an increase in the number of firms producing energy drinks will A) shift the supply curve for energy drinks to the right. B) shift the supply curve for energy drinks to the left. C) shift the demand curve for energy drinks to the right. D) shift the demand curve for energy drinks to the left. E) leave the supply and demand curves unchanged. Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Chapter Opener: How Smart Is Your Water? 36) All else equal, a successful marketing campaign for energy drinks would cause the equilibrium price of energy drinks to ________ and the equilibrium quantity of energy drinks to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) stay the same; stay the same Answer: A Diff: 1 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 37) If the demand for a product increases and the supply of the same product increases, the equilibrium price will increase. Answer: FALSE Diff: 3 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

38) As the number of firms in a market decreases, the supply curve will shift to the left and the equilibrium price will rise. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 39) If the number of firms producing mouthwash increases and consumer preference for mouthwash increases, the equilibrium price of mouthwash will definitely increase. Answer: FALSE Diff: 2 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 40) If the demand curve for a product shifts to the left and the supply curve for the product shifts to the left, the equilibrium quantity will decrease. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 41) Discuss the correct and incorrect economic analysis in the following statements. "Unifor (the union that represents Canadian auto workers, among other industries) has successfully negotiated a 9 percent increase in wages for its workers. This increase in the wage rate causes an increase in demand for automobiles, since many consumers now have greater incomes, and also causes a decrease in supply of automobiles because the cost of production has increased. These effects cancel each other out resulting in no change in the equilibrium price and quantity in the automobile market." Answer: The wage rate is a determinant of the supply of automobiles, but not a determinant of the demand for automobiles (Unifor's auto workers make up a very small portion of the population). The increase in the wage rate will shift the automobile supply curve to the left along a given demand curve. This will result in a higher equilibrium price and a lower equilibrium quantity in the market for automobiles. Diff: 2 Type: ES Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

42) Explain how it would be possible for the equilibrium price and equilibrium quantity to both increase in the market for motorcycles if consumer preference for motorcycles increases and the number of motorcycle manufacturers decreases. Answer: An increase in consumer preference will shift the demand curve to the right, which increases the equilibrium price and the equilibrium quantity. A decrease in the number of manufacturers will shift the supply curve to the left, which will increase the equilibrium price and decrease the equilibrium quantity. In both cases, the equilibrium price increases. For the equilibrium quantity to increase, the rightward shift in demand resulting from the increase in consumer preference must be more than the leftward shift in supply which results from the decrease in manufacturers. Diff: 2 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 43) In each of the following situations, list what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is a normal good. a. The population increases and the price of inputs increase. b. The price of a complement increases and technology advances. c. The number of firms in the market increases and income increases. d. Price is expected to increase in the future. e. Consumer preference increases and the price of a substitute in production decreases. Answer: a. Price increases; Quantity may increase or decrease. b. Price decreases; Quantity may increase or decrease. c. Quantity increases; Price may increase or decrease. d. Price increases; Quantity may increase or decrease. e. Quantity increases; Price may increase or decrease. Diff: 3 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 44) Let D = demand, S = supply, P = equilibrium price, Q = equilibrium quantity. What happens in the market for solar panels if the government offers tax breaks to encourage manufacturers to produce more solar panels? A) D increases, S no change, P and Q increase B) S increases, D no change, P decreases, Q increases C) D and S increase, P and Q decrease D) D no change, S increases, P decreases, Q decreases E) D no change, S decreases, P decreases, Q decreases Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

45) Hurricane Arthur interrupted shipments of crude oil to refineries in eastern Canada. In the market for gasoline, A) the supply curve shifted to the left, resulting in an increase in the equilibrium price. B) the supply curve shifted to the right, resulting in an increase in the equilibrium price. C) the demand curve shifted to the left, resulting in a decrease in the equilibrium price. D) the demand curve shifted to the right, resulting in an increase in the equilibrium price. E) there was a decrease in the price for crude oil. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 46) Electric car enthusiasts want to buy more electric cars at a lower price. All of the following events would have this effect except A) technological advancement in the production of electric car batteries. B) an increase in the number of manufacturers of electric cars. C) a decrease in the price of lithium, which is used in the electric car batteries. D) an increase in the price of gasoline. E) an increase in the cost of transporting electric cars to markets. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 47) Which of the following would cause both the equilibrium price and equilibrium quantity of ramen to increase? A) an increase in consumer income, and ramen is a normal good B) a strike that sharply reduces ramen output C) a decrease in consumer income, and ramen is an inferior good D) ramen is found to contain unhealthy preservatives E) an increase in the price of chopsticks, a complement for ramen Answer: C Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

48) Which of the following would cause the equilibrium price of ketchup to increase and the equilibrium quantity of ketchup to decrease? A) a decrease in the price of tomatoes B) an increase in the price of tomatoes C) an increase in the price of mustard, a substitute for ketchup D) an increase in the price of French fries, a complement for ketchup E) an increase in ketchup manufacturers Answer: B Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 49) Assume that the hourly price for the services of personal trainers has risen and sales of these services have also risen. One can conclude that A) the law of demand has been violated. B) the number of personal trainers has increased. C) the demand for personal trainers has increased. D) personal trainers are deliberately charging high prices. E) there is an increase in the number of personal trainers. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 50) Prices of commercial airline tickets have fallen in recent months. Over this same period, the price of jet fuel has risen and consumer incomes have fallen. Which of the following best explains the falling prices of airline tickets? A) The demand curve for airline tickets and the supply curve of airline tickets have shifted to the left. B) The demand curve for airline tickets and the supply curve of airline tickets have shifted to the right. C) The demand curve for airline tickets has shifted to the left more than the supply curve has shifted to the left. D) The supply curve for airline tickets has shifted to the left more than the demand curve has shifted to the left. E) The supply curve of airline tickets and the demand curve for airline tickets have remained unchanged. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

51) In recent years the cost of producing wines in Canada has increased, largely due to rising rent for vineyards. At the same time, an increasing number of Canadians say they prefer wine to beer. Which of the following best explains the effect of these events on the wine market? A) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price. B) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity. C) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in both the equilibrium price and the equilibrium quantity. D) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity. E) Both the supply and demand curves have shifted to the left. As a result, there has been a decrease in the equilibrium price and the equilibrium quantity. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 52) Studies have shown that drinking one glass of red wine per day may help prevent heart disease. Assume this is true. Suppose that a fungal disease destroys a large portion of the grape harvest of B.C. vineyards. In the market for red wine, these two developments would A) increase demand and increase supply, resulting in an increase in the equilibrium quantity and a decrease in the equilibrium price of red wine. B) increase demand and decrease supply, resulting in a decrease in both the equilibrium quantity and the equilibrium price of red wine. C) increase demand and decrease supply, resulting in an increase in the equilibrium price and an uncertain effect on the equilibrium quantity of red wine. D) increase demand and decrease supply, resulting in an increase in both the equilibrium price and the equilibrium quantity of red wine. E) decrease demand and decrease supply, resulting in a decrease in the equilibrium price and the equilibrium quantity of red wine. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

53) A decrease in the demand for eggs due to changes in consumer tastes, accompanied by a decrease in the supply of eggs as a result of an outbreak of Avian flu, will result in A) a decrease in the equilibrium quantity of eggs and no change in the equilibrium price. B) a decrease in the equilibrium price of eggs and no change in the equilibrium quantity. C) a decrease in the equilibrium price of egg; the equilibrium quantity may increase or decrease. D) a decrease in the equilibrium quantity of eggs; the equilibrium price may increase or decrease. E) a decrease in the equilibrium price of eggs and an increase in the equilibrium quantity. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Figure 3.15

Figure 3.16

3.5

Use quantitative demand and supply analysis

Supply P = 10 + 1/3 QS

QD = 50 - P

QS = 3P - 30

Macroeconomics, 4Ce (Hubbard) Chapter 4 GDP: Measuring Total Production and Income 4.1

Explain how total production is measured

1) In 2018, the Canadian economy slowed down. This slowdown was caused mostly by A) a fall in the price of natural resources B) a slowdown in the U.S. economy. C) a reduction in advertising. D) declining quality of service. E) a rise in consumption spending. Answer: A Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Chapter Opener: The Health of the Canadian Economy 2) In 2018, some Canadian businesses outside the natural resource sector saw a slowdown in orders, these businesses were experiencing the effects of A) deflation. B) the underground economy. C) the business cycle. D) depreciation. E) global warming. Answer: C Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Chapter Opener: The Health of the Canadian Economy 3) During a business cycle expansion, total production ________ and total employment ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) remains constant; decreases Answer: A Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

4) Macroeconomics, as opposed to microeconomics, includes the study of what determines the level of A) employment in a specific industry. B) employment in the economy. C) output of a specific firm. D) output of a specific industry. E) prices of key natural resources. Answer: B Diff: 1 Type: MC Topic: Macroeconomics vs. Microeconomics Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 5) Macroeconomics, as opposed to microeconomics, includes the study of what determines the A) average price levels of goods and services in the economy. B) price charged for laptop computers by Dell. C) wages paid to employees by Dell. D) quantity of Dell employees. E) prices of substitutes for computers. Answer: A Diff: 1 Type: MC Topic: Macroeconomics vs. Microeconomics Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 6) Macroeconomics seeks to understand A) economic growth, business cycles, and inflation. B) industry sales, marketing strategies and corporate growth. C) product demand, product cost, and profit maximization. D) public choices, private choices, and consumer maximization. E) the structure of international supply chains. Answer: A Diff: 1 Type: MC Topic: Macroeconomics vs. Microeconomics Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 7) Which of the following headlines would be more closely related to what macroeconomists study than what microeconomists study? A) Apple Prices Rise due to an early frost in Ontario B) The Canadian Auto Workers sign a contract raising wages and benefits C) Real GDP grows by 2.3% in the second quarter D) Airlines raise ticket prices in response to rising fuel costs E) Toyota closes its Cambridge production facility Answer: C Diff: 1 Type: MC Topic: Macroeconomics vs. Microeconomics Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 2 Copyright © 2024 Pearson Canada Inc.

8) In calculating gross domestic product, Statistics Canada uses the sum of the market value of final goods and services produced. This means that Statistics Canada A) simply counts the total number of goods produced in the marketplace and then adds them up. B) values goods at their market prices, multiplies them by the quantity produced, and then adds them up. C) simply counts the total number of goods and services produced in the marketplace and then adds them up. D) values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up. E) values goods based on surveys of Canadian people, in which they're asked to value different products, multiplies the resulting values by the quantities produced and then adds them up. Answer: D Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 9) Suppose, in 2022, you purchased a house built in 2014. Which of the following would be included in the gross domestic product for 2022? A) the value of the house in 2022 B) the value of the house in 2014 C) the value of the house in 2022 minus depreciation D) the value of the services of the real estate agent E) the value of the down payment you made on the mortgage Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 10) In calculating gross domestic product, Statistics Canada uses the sum of the market value of final goods and services produced. This means that Statistics Canada A) simply counts the total number of goods produced in the market place and then adds them up. B) values goods at their market prices, multiplies them by the quantity produced, and then adds them up. C) simply counts the total number of goods and services produced in the marketplace and then adds them up. D) values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up. E) values goods based on surveys of Canadian people, in which they're asked to value different products, multiplies the resulting values by the quantities produced and then adds them up. Answer: D Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

11) Gross domestic product is calculated by summing up A) the total quantity of goods and services in the economy. B) the total quantity of goods and services produced in the economy during a period of time. C) the total market value of goods and services in the economy. D) the total market value of final goods and services produced in the economy during a period of time. E) the total value of all goods and services produced by a countries people during a period of time. Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 12) Which of the following goods is directly counted in GDP? A) the lettuce that Subway purchases for its sandwiches B) the bread that Subway purchases for its sandwiches C) a 12-inch Subway sandwich purchased by a student D) the plastic bags that Subway purchases to wrap its sandwiches E) the rent paid by the Subway franchise owner for their restaurant Answer: C Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 13) Which of the following transactions represents the purchase of a final good? A) Tim Hortons purchases coffee beans. B) WestJet buys a new European-made jetliner. C) Blackberry buys computer processors from Intel. D) Your father buys a new John Deere riding lawn mower. E) Pearson buys several tonnes of paper to print text books. Answer: D Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 14) Which of the following is not directly counted in GDP? A) investment expenditures B) government purchases C) intermediate goods D) consumer goods E) net exports Answer: C Diff: 1 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

15) Value added equals the market price of the firm's product minus A) wages and salaries. B) the price of intermediate goods. C) the price of all factors of production. D) depreciation on plant and equipment. E) taxes paid to government. Answer: B Diff: 1 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 16) Which of the following would be directly counted in GDP in 2022? A) kitchen cabinets purchased from Home Depot in 2022 to be installed in a house built in 2010 B) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a brand new countrystyle home C) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a farm house built in 1950 D) kitchen cabinets purchased from Home Depot in 2019 to be installed in a house built in 2022 E) none of the above Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Table 4.1 Product Sweatshirts Dental examinations Coffee drinks Coffee beans

Quantity 50 40 1,000 2,000

Price $35.00 75.00 4.00 0.50

17) Refer to Table 4.1. Suppose that a simple economy produces only four goods and services: sweatshirts, dental examinations, coffee drinks, and coffee beans. Assume all of the coffee beans are used in the production of the coffee drinks. Using the information in the above table, nominal GDP for this simple economy equals A) $114.50. B) 3,090 units. C) $7,250. D) $8,750. E) $9,750. Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 5 Copyright © 2024 Pearson Canada Inc.

Table 4.2 Product Shoes DVDs Tomatoes Ketchup

Quantity 40 100 2,000 300

Price $60.00 18.00 1.00 4.00

18) Refer to Table 4.2. Suppose that a simple economy produces only four goods and services: shoes, DVDs, tomatoes, and ketchup. Assume one half of the tomatoes are used in making the ketchup and the other half of the tomatoes are purchased by households. Using the information in the above table, nominal GDP for this simple economy equals A) $7,400. B) $6,400. C) $5,800. D) 2,440 units. E) $83.00. Answer: B Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 19) In the circular flow model, the value of total income for an economy ________ the value of total production. A) equals B) is greater than C) is less than D) may be greater than or less than E) is unrelated to Answer: A Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 20) In the circular flow model, the value of total production for an economy ________ the value of total expenditures on final goods and services. A) equals B) is greater than C) is less than D) may be greater than or less than E) is unrelated to Answer: A Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 6 Copyright © 2024 Pearson Canada Inc.

21) Which of the following is not an example of a transfer payment? A) employment insurance payments B) the government's contribution to a teacher's pension plan C) social program payments to retirees D) social program payments to disabled persons E) government payments to parents with small children Answer: B Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 22) The purchase of a new automobile is included in A) consumption expenditures on services. B) consumption expenditures on nondurable goods. C) consumption expenditures on durable goods. D) investment expenditures. E) household savings. Answer: C Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 23) Which of the following would not be included in final consumption when calculating GDP using the expenditure approach? A) furniture B) automobile C) a house D) refrigerator E) clothing Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 24) The factors of production include A) wages. B) capital. C) investment. D) transfers. E) money. Answer: B Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 7 Copyright © 2024 Pearson Canada Inc.

25) Which of the following is not a category used in the Income Approach to calculating GDP? A) Net exports B) Compensation of employees C) Taxes minus subsidies D) Gross operating surplus E) Gross mixed income Answer: A Diff: 1 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Table 4.1.1 Category Inventory Gross mixed income Final Consumption Compensation of Employees Gross Operating Surplus Gross Fixed Capital Formation Taxes less Subsidies

Millions of $ 6 200 1,500 900 400 450 200

26) Refer to Table 4.1.1. Based on the information provided, what is GDP in this economy using the income approach? A) $1,700 million B) $1,750 million C) $3,006 million D) $3,656 million E) $4,256 million Answer: A Diff: 3 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 27) Which of the following would not be included in compensation of employees when calculating GDP using the income approach? A) the wage the owner of a small business pays themselves B) Canada Pension Plan (CPP) premiums paid by an employer C) wages and salaries paid to workers D) the cost of a health insurance plan that a corporation buys for its employees E) the cost of payroll taxes Answer: A Diff: 2 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 8 Copyright © 2024 Pearson Canada Inc.

28) Investment, as defined by economists, would include the purchase of a A) corporate bond. B) government bond. C) share of stock in SunCor. D) computer by an accounting firm. E) work of art you expect to increase in value. Answer: D Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 29) An example of business fixed investment spending is A) a purchase of a home by a household. B) a purchase of a computer by an accounting firm. C) a purchase of a bond by General Electric Corporation. D) $200 million of unsold cars at a car dealership. E) a purchase of shares in Bombardier. Answer: B Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 30) To calculate GDP by the expenditure method, one must add A) wages, rents, interest, and profits. B) final consumption spending, gross fixed capital formation, investment in inventories, and net exports. C) final consumption spending, net fixed capital formation, government spending and exports. D) labour, natural resources, entrepreneurship, and capital. E) final consumption spending, wages, income taxes, and fixed capital formation. Answer: B Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 31) Investment, as defined by economists, would not include which of the following? Ford A) buys a new robotic machine (from a plant in Ontario) to assemble cars. B) adds 1,000 new cars to inventories. C) builds another assembly plant in Oakville, Ontario. D) buys Canadian government bonds. E) buys new computers for its human resources department. Answer: D Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember What Economists Mean by Investment 9 Copyright © 2024 Pearson Canada Inc.

32) The purchase of a new house is included in A) consumption expenditures. B) investment expenditures. C) government purchases. D) exports. E) imports. Answer: B Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 33) The purchase by a household in China of a CD produced in Canada is included in Canadian A) consumption expenditures. B) investment expenditures. C) government purchases. D) net exports. E) It is not included in Canadian accounts. Answer: D Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 34) The purchase by a foreign government of an airplane produced in Canada is included in Canadian A) consumption expenditures. B) investment expenditures. C) government purchases. D) net exports. E) consumer spending. Answer: D Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

35) In 2022, Kendall Ford, an automobile dealership, spent $20,000 on a new car lift for its repair shop, $2,000 on a new copy machine for its sales division, and $600,000 on Ford Motor company stock. Unsold cars and trucks were valued at $400,000 on January 1, 2022, and unsold cars and trucks were valued at $900,000 on December 31, 2022. What is Kendall Ford's total investment spending in 2022? A) $22,000 B) $322,000 C) $522,000 D) $620,000 E) $1,022,000 Answer: C Diff: 3 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember What Economists Mean by Investment 36) The statistical discrepancy captures A) small errors in the original data. B) the probability of the income approach being incorrect. C) mismeasurement due to poor definitions. D) uncertainty over household spending. E) the size of the underground economy. Answer: A Diff: 3 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 37) In 2019, which component of GDP had a negative value? A) consumption B) investment C) government spending D) net exports E) imports Answer: D Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

38) What is the largest component of spending in Canada? A) final consumption spending B) gross fixed capital formation C) government purchases D) spending on inventories E) inventory investment Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 39) In Canada, household spending on consumption as a percentage of GDP is A) lower than most other countries. B) higher than most other countries. C) the highest among OECD countries. D) the lowest among OECD countries. E) slightly below average among OECD countries. Answer: E Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much? 40) In 2021, American household spending accounted for ________ of GDP. A) 70 percent B) 56 percent C) 30 percent D) 46 percent E) 25 percent Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much?

41) In 2021, Canadian household spending accounted for ________ of GDP. A) 66 percent B) 54 percent C) 30 percent D) 46 percent E) 25 percent Answer: B Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much? 42) American data on consumption includes which of the following that wouldn't be included in Canadian consumption? A) purchases of new houses B) business travel C) purchases of sports equipment D) expenditures on health care E) purchases of new homes Answer: D Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much? 43) When consumers are less confident about their jobs or incomes, they are more likely to A) reduce purchases of durable goods than nondurable goods. B) reduce purchases of nondurable goods and increase purchases of durable goods. C) increase investment spending and decrease consumption spending. D) increase consumption spending and decrease investment spending. E) reduce savings for the future. Answer: A Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much?

Table 4.3 Final Consumption Gross Fixed Capital Formation Inventory Investment Exports Imports Wages

$800 200 300 100 200 800

44) Refer to Table 4.3. Consider the data above (in billions of dollars) for an economy: Gross domestic product (in billions of dollars) for this economy equals A) $2,200. B) $1,600. C) $1,400. D) $1,200. E) $800. Answer: D Diff: 2 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Table 4.4 Consumption expenditures Investment expenditures Government purchases Government transfer payments Exports Imports

$800 300 300 400 300 100

45) Refer to Table 4.4. Consider the data above (in billions of dollars) for an economy: Based on the expenditure approach in macroeconomic models, gross domestic product (in billions of dollars) for this economy equals A) $2,200. B) $2,100. C) $1,600. D) $1,400. E) $800. Answer: C Diff: 2 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

46) Which of the following is not true about the composition of Canadian GDP in 2021? A) Consumer spending is the smallest component. B) Purchases made by government are larger than investment spending. C) Exports are greater than imports. D) Consumption spending is the largest component. E) Net exports is the smallest component. Answer: A Diff: 2 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 47) The sum of the value added of every firm involved in producing all final goods and services ________ gross domestic product. A) equals B) is greater than C) is less than D) is sometimes greater than and other times less than E) is unrelated to Answer: A Diff: 1 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Table 4.5 Stage of Production 1 2 3

Seller Steel mill Auto manufacturer Auto dealer

Buyer Auto manufacturer Auto dealer Consumer

Consider the table above showing three stages of production of an automobile. 48) Refer to Table 4.5. The value added by the automobile dealer equals A) $7,000. B) $10,000. C) $15,000. D) $18,000. E) $25,000. Answer: A Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

Price $10,000 18,000 25,000

49) Refer to Table 4.5. The value of each automobile in gross domestic product equals A) $7,000. B) $10,000. C) $15,000. D) $18,000. E) $25,000. Answer: E Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Scenario 4.1 CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for $300 and uses its labour and intermediate goods to make the canoe. It sells the finished canoe to a retail canoe store for $800. The retail canoe store then sells the canoe to a consumer for $1,200. 50) Refer to Scenario 4.1. The value added of CANOES-R-US for each canoe equals A) $1,200. B) $800. C) $500. D) $400. E) $300. Answer: C Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 51) Refer to Scenario 4.1. The value of each canoe in gross domestic product equals A) $1,200. B) $800. C) $500. D) $400. E) $300. Answer: A Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 52) In the circular flow diagram, the value of all the income in the economy is greater than the value of goods and services produced in the economy. Answer: FALSE Diff: 1 Type: TF Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 16 Copyright © 2024 Pearson Canada Inc.

53) Residential investment includes spending by firms on office buildings. Answer: FALSE Diff: 1 Type: TF Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 54) High-income countries such as Canada spend a greater amount on services as compared to goods. Answer: TRUE Diff: 1 Type: TF Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 55) Why do we not count the value of intermediate goods and services in gross domestic product? Answer: We would double count if we counted directly the value of intermediate goods and services, because their value shows up in the value of the final goods and services in which they are a part. Diff: 2 Type: ES Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 56) People complain that inflation increases the cost of goods and services and therefore reduces their purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain carefully. Answer: If inflation and income grow at the same rate, real income will be constant as inflation increases both total expenditures and total income by the same amount. All of the money that a business receives on the sale of its product must be paid out as income to the owners of the factors of production. If the prices of final goods and services increase (inflation), then there is more money for the businesses to pay out as income. Therefore, on average, the buying power of income will remain constant. The complaint is not valid. Diff: 3 Type: ES Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

Table 4.6 Product iPods T-shirts Bottled water Oranges

Quantity 20 100 2,000 600

Price $125.00 20.00 1.00 0.50

57) Refer to Table 4.6. Suppose that a simple economy produces only four goods and services: iPods, tshirts, bottled water, and oranges. Calculate nominal GDP for this simple economy. Answer: Nominal GDP equals (20 × $125) + (100 × $20) + (2,000 × $1) + (600 × $0.50) = $6,800. Diff: 2 Type: ES Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP Table 4.7 Product Sweaters CDs Sugar Soft drinks

Quantity 50 150 600 800

Price $50.00 10.00 1.00 0.75

58) Refer to Table 4.7. Suppose that a simple economy produces only four goods and services: sweaters, CDs, sugar, and soft drinks. Assume one half of the sugar is used in making the soft drinks and the other half of the sugar is purchased by households. Calculate nominal GDP for this simple economy. Answer: Nominal GDP equals (50 × $50) + (150 × $10) + ((600 × .5) × $1)) + (800 × 0.75) = $4,900. Diff: 3 Type: ES Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 59) If the value added of a firm is positive, will the firm necessarily have positive profits? Answer: No. Value added equals the price of the firm's product minus the cost of intermediate goods. The intermediate goods are converted to the firm's profits by the application of such resources as labour, capital, and entrepreneurship. Profit is the difference between the total sales revenue and the opportunity cost of all the resources used to make the product. Diff: 3 Type: ES Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

60) How can a firm have a negative valued added, as supposedly some state-owned businesses did in the former Soviet Union? What has to be true for value added to be negative? Answer: A negative value added means that the cost of the intermediate goods exceeds the price of the final product produced using the intermediate goods. For value added to be negative, a firm would use its primary factors of production, such as labour and capital equipment, to produce a product from the intermediate goods that is less valuable than the intermediate goods themselves. Diff: 3 Type: ES Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

Table 4.7.1 Inventory Investment Small Business Capital Consumption Government Capital Spending Government Capital Consumption Government Consumption Business Capital Spending

$ 20

Net Exports

- $ 100

$ 65

Household Consumption

$ 800

$ 30

Non-Profit Capital Spending

$ 12

$ 35

Net Operating Surplus

$ 115

$ 200

Non-Profit Consumption

$ 15

$ 400

Net Mixed Income

$ 100

Taxes Less Subsidies

$ 130

Wages and Salaries Corporate Capital Consumption Employers' Social Contributions

$700

$ 150

$ 100

61) Refer to Table 4.7.1. Calculate the following: A) Final consumption expenditure B) Gross Fixed Capital Formation C) Inventory Investment D) Net Exports E) Compensation of Employees F) Gross Operating Surplus G) Gross Mixed Income H) Taxes Less Subsidies I) Statistical Discrepancy for the Income Approach J) Statistical Discrepancy for the Expenditure Approach K) GDP

Answer: A) = Household Consumption + Non-profit Consumption + Government Consumption = 800 + 15 + 200 = 1015 B) = Business Fixed Capital Formation + Non-profit Fixed Capital Formation + Government Fixed Capital Formation = 400 + 12 + 30 = 442 C) = Inventories = 20 D) = NX = -100 E) = Wages and Salaries + Employers' Social Contributions = 700 + 100 = 800 F) = Net Operating Surplus + Government Capital Consumption + Corporate Capital Consumption = 115 + 35 + 150 = 300 G) = Net Mixed Income + Small Business Capital Consumption = 100 + 65 = 165 H) = Taxes less Subsidies = 130 I) = (Final Consumption + Gross Fixed Capital Formation + Inventory Investment + Net Exports - Compensation of Employees - Gross Operating Surplus - Gross Mixed Income - Taxes Less Subsidies) / 2 = (1377 - 1395)/2 = -9 J) = (Compensation of Employees + Gross Operating Surplus + Gross Mixed Income + Taxes Less Subsidies - Final Consumption - Gross Fixed Capital Formation Inventory Investment - Net Exports)/2 = (1395 - 1377)/2 = 9 K) GDP = Compensation of Employees + Gross Operating Surplus + Gross Mixed Income + Taxes Less Subsidies + Statistical Discrepancy from (J) = 1395 - 9 = 1386 or GDP = Final Consumption + Gross Fixed Capital Formation + Inventory Investment + Net Exports + Statistical Discrepancy from (I) = 1377 + 9 = 1386 Diff: 3 Type: ES Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 62) Gross domestic product in the economy is measured by the A) total number of goods and services produced in the economy. B) dollar value of all final goods and services produced in the economy. C) total number of goods produced in the economy. D) total number of services produced in the economy. E) dollar value of all goods (but not services) produced in the economy. Answer: B Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

63) One American study found that college students who graduate during a recession have to search longer for a job and end up accepting jobs that, on average, pay ________ than jobs accepted by students who graduate during expansions. A) 50 percent less B) 10 percent less C) roughly the same D) 7 percent more E) 10 percent more Answer: B Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Chapter Opener: The Health of the Canadian Economy 64) In comparing China to the United Kingdom, China's relatively ________ growth rate in GDP would make you more likely to take a job in China, and China's relatively ________ level of GDP would make you less likely to take a job in China. A) high; low B) high; high C) low; low D) low; high E) stable; volatile Answer: A Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What's the Best Country for You to Work In? 65) A final good is one that A) is used in the production of another good. B) is a natural resource used to produce a good. C) is purchased as an input in the production process. D) is purchased by its final user. E) is the output of any production process. Answer: D Diff: 1 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

66) How are intermediate goods treated in the calculation of GDP? A) Their value is not counted separately, but included as part of the value of the final good for which they are an input. B) Their value is counted separately, and their value is also included as part of the value of the final good for which they are an input. C) Their value is counted separately, but is not included as part of the value of the final good for which they are an input. D) They are included only if they are imported. E) Their value is deducted from the value of final goods and services. Answer: A Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 67) An example of an intermediate good would be A) the bread that goes into a sub sandwich that is sold by Mr. Sub. B) the soda pop sold by Mr. Sub. C) a sub sandwich sold by Mr. Sub. D) the potato chips sold by Mr. Sub. E) a Mr. Sub sandwich sold to a construction worker on their lunch break. Answer: A Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 68) An example of an intermediate good would be A) a new car. B) a used car. C) the rims on a new car. D) new rims to replace old rims on a used car. E) the wages earned by a mechanic repairing your bent rims. Answer: C Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

69) An example of a final good would be A) the sugar sold to Tim Hortons. B) the whipped cream sold to Tim Hortons. C) an extra-large double-double sold by Tim Hortons to a student. D) the coffee beans sold to Tim Hortons. E) the paper cups sold to Tim Hortons. Answer: C Diff: 1 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 70) Which of the following are included in gross domestic product for an economy in a given year? A) the value of intermediate goods produced in that year B) the value of used goods sold in that year C) the value of final goods produced in that year D) the value of stocks and bonds sold to finance the building of new factories E) All of the above would be included in gross domestic product for an economy in a given year. Answer: C Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 71) Rona sells new and used doors to contractors who build new homes. Rona also sells new and used doors to homeowners. Which of the following would be counted in GDP? A) the sale of a used door to a homeowner B) the sale of a new door to homeowner C) the sale of a used door to TapKon construction for installation into a new home D) the sale of a new door to TapKon construction for installation into a new home E) None of these sales are counted in GDP. Answer: B Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 72) Which of the following transactions would be included in the official calculation of GDP? A) A student buys a used textbook at the bookstore. B) Magna sells $2 million worth of seats to General Motors. C) You wash and wax your father's car as a favour to him. D) You buy a new iPod. E) You illegally download music off the Internet to put on your new iPhone. Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 24 Copyright © 2024 Pearson Canada Inc.

73) A car that is produced in 2019 is not sold until 2020. According to the definition of GDP, in which year's GDP should it be counted? A) 2019 B) 2020 C) Half of the sales price will count as part of 2019 GDP and half will count as part of 2020 GDP. D) The production cost will count as part of 2018 GDP while the sales price will count as part of 2019 GDP. E) It should not be counted in either year's GDP. Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 74) A transfer payment is a payment by the government to an individual A) for a service. B) for an investment good. C) for a consumption good. D) for which the government does not receive a good or service in return. E) for a debt owed. Answer: D Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 75) An example of a transfer payment is A) a teacher's paycheque. B) a paycheque for a member of the Royal Canadian Air Force. C) an Old Age Security payment. D) a purchase of a new bridge by PEI. E) federal income taxes collected in Saskatchewan. Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

76) In the circular flow diagram, ________ supply the factors of production and ________ goods and services. A) households; sell B) households; buy C) firms; sell D) firms; buy E) governments; sell Answer: B Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 77) ________ is/are the payment for the ________ factor of production. A) Wages; capital B) Interest; labour C) Profit; entrepreneurship D) Rent; capital E) Taxes; government Answer: C Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 78) Investment spending includes spending on A) stocks. B) food. C) changes in business inventories. D) transfer payments. E) bonds. Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 79) Which of the following are not considered part of government purchases? A) Employment Insurance payments B) teachers' salaries paid by a provincial government C) a tank purchased by the federal government D) a bridge purchased by the local government E) new uniforms for the RCMP Answer: A Diff: 2 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 26 Copyright © 2024 Pearson Canada Inc.

80) Final consumption expenditures do not include household purchases of A) dental care. B) social workers salaries. C) road construction. D) clothing purchases by households. E) medication. Answer: C Diff: 2 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 81) Which of the following is not included in gross operating surplus? A) the depreciation of your university's photocopier B) the profits net of depreciation of Bombardier C) the depreciation of a United Way sign D) the purchase of new equipment by the government E) the hourly wage of a Tim Hortons employee Answer: D Diff: 2 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 82) Government spending ________ is included in gross domestic product. A) at federal, provincial, and local levels of government B) at the federal level of government only C) at provincial and local levels of government only D) on defense goods only E) at the local level only Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 83) Assuming that Canada is the domestic economy, ________ are goods and services produced by ________ and purchased by ________. A) exports; foreign countries; Canada B) exports; Canada; Canada C) imports; foreign countries; foreign countries D) imports; foreign countries; Canada E) exports; foreign countries; foreign countries Answer: D Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 27 Copyright © 2024 Pearson Canada Inc.

84) The largest component of spending in GDP is A) household spending. B) investment spending. C) government spending. D) net export spending. E) wages. Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 85) In a small economy in 2020 gross fixed capital formation is $1,500, final consumption spending is $6,000, net investment is $1,000, inventory investment is $1,500, exports are $2,000 and imports are $1,000. What is GDP for this economy in 2020? A) $10,700 B) $10,300 C) $10,200 D) $10,000 E) $2,500 Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 86) In a small economy for 2020, final consumption spending $6,000, inventory investment is $1,200, gross fixed capital formation is $1,500, exports are $2,000, and imports are $1,000. What is gross domestic product in 2020? A) $9,700 B) $9,800 C) $10,800 D) $11,700 E) $15,700 Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

87) Consumption spending is $4.5 billion, investment is $3 billion, and government expenditures are $2 billion. If GDP is $14 billion, which of the following could be true regarding exports and imports in the economy? A) Exports are $4.5 billion and imports are $2 billion. B) Exports are $6 billion and imports are $8.5 billion. C) Exports are $9 billion and imports are $6 billion. D) Exports are $15 billion and imports are $10.5 billion. E) Exports are $17 billion and imports are $6 billion. Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Table 4.8 Product Coke iPhones Backpacks Hershey bars

Quantity 10,000 2,000 4,000 8,000

Price per Unit $2 150 25 1

88) Refer to Table 4.8. Consider the table of production and price statistics for a small economy. If the economy only produces the four goods listed below, what is nominal GDP? A) $428,000 B) $267,000 C) $24,000 D) $3,000 E) $1,424 Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 89) Which of the following would increase gross fixed capital formation in an economy? A) an increase in the shares of Loblaw's stock households own B) an increase in the number of workers Loblaw's hires C) an increase in the number of carts at your local grocery store D) an increase in the number of items your local grocery store carries E) an increase in the value of the Toronto Stock Exchange index Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember What Economists Mean by Investment 29 Copyright © 2024 Pearson Canada Inc.

90) Which of the following equations correctly measures GDP in an economy? A) GDP = C + I + G + X B) GDP = C + NI + G + NX C) GDP = C + I + G + NX D) GDP = C + G + I - taxes E) GDP = C + I + G + NX + wages Answer: C Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 91) If an economy's exports rise by $8 billion and its imports fall by $8 billion between 2019 and 2020, by how much will GDP change between the two years, all else equal? A) Net exports will increase GDP by $8 billion. B) The increase in exports is offset by the decrease in imports, so there is no change in net exports and no effect on GDP. C) Net exports will increase GDP by $16 billion. D) Net exports will decrease GDP by $8 billion. E) Net exports will decrease by $16 billion. Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

92) Which of the following would result in GDP for an economy equal to $10 trillion? A) C = $6 trillion I = $2 trillion G = $1.5 trillion NX = -$2 trillion B) C = $7 trillion I = $2 trillion G = $4 trillion NX = $3 trillion C) C = $5 trillion I = $5 trillion G = $2 trillion NX = -$2 trillion D) C = $4 trillion I = $3 trillion G = $2 trillion NX = -$1 trillion E) C = $5 trillion I = $3 trillion G = $2 trillion NX = -$1 trillion Answer: C Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 93) Which component of consumption spending is the greatest in the Canadian economy? A) household consumption B) government consumption C) non-profit consumption D) wages and salaries E) gross fixed capital formation Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

94) To calculate GDP using the value-added method, one would add up A) the market value of final goods and services produced during a particular period. B) only the value added by the underground economy. C) the value added by each firm involved in the production of final goods and services. D) the market value of intermediate goods and services produced during a particular period. E) the after tax profits of every firm in the economy. Answer: C Diff: 1 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 95) Which of the following would not be included in the expenditure category called investment expenditures? A) spending on new houses B) a purchase of shares of preferred stock C) a purchase of a copy machine by Purolator Courier's head office D) the cars held in inventory on a local Ford dealer's lot E) the purchase of a new airplane by Air Canada Answer: B Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember What Economists Mean by Investment 96) The circular flow diagram shows that A) the value of total income is equal to the total value of expenditures on final goods and services. B) firms pay households wages, and households receive transfer payments from firms. C) households spend all their income on goods and services. D) GDP will be less than the total value of expenditures on final goods and services in the economy. E) firms own all factors of production. Answer: A Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

97) Demographics and savings suggest that consumption's share of GDP is likely to ________ in the future. A) rise B) remain highly stable C) increase and then level off D) drop E) stay the same Answer: D Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much? 98) The nominal GDP of Canada in 2020 was approximately $2274 billion. This means that A) the value of output in 2020 was around $2274 billion. B) total income in 2020 was around $2274 billion. C) total spending in 2020 was around $2274 billion. D) all of the above are true. E) only B and C are true. Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytical Thinking 99) One reason why consumption accounts for more of GDP in the U.S. than it does in Canada is A) Americans are more materialistic. B) spending on health care is often counted as consumption in the U.S. and not in Canada. C) Americans are less concerned about the future than Canadians. D) there is less for consumers to buy in Canada. E) Canadian save much more than Americans. Answer: B Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much?

100) Export growth in Canada will help increase Canadian GDP because A) an increase in exports will increase net exports, assuming no change in imports. B) growth in exports indicates a decline in imports. C) exports are added to imports when calculating GDP, causing GDP to increase. D) exports are subtracted from imports when calculating GDP. E) exports are the largest element of GDP. Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 101) Caroline is an artist. She purchases canvas, paints, brushes, and accessories for $75. She sells one of her original paintings to an art gallery for $1,500, even though an art lover would pay $4,500 for that painting. How much value does Caroline add? A) $75 B) $1,425 C) $1,500 D) $4,425 E) $5,075 Answer: B Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 102) Caroline is an artist. She purchases canvas, paints, brushes, and accessories for $75. She sells one of her original paintings to an art gallery for $1,500. The gallery, in turn, sells the painting to an art lover for $4,500. How much value does the gallery add? A) $1,425 B) $1,500 C) $3,000 D) $4,500 E) $5,075 Answer: C Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

103) Emily is a writer. She buys pens and paper for $20 and writes a 500-page novel that she sells to a publishing company for $500,000. If the publisher prints 1 million copies that sell for $25 each, what is the contribution to GDP of Emily's novel? A) $25 million B) $20 million C) $500,000 D) $50,000 E) $20,000 Answer: A Diff: 3 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 104) If Gladys sells her 2015 Jeep Cherokee for $3,500 in 2020, the sale of her car contributes $3,500 to 2020 GDP. Answer: FALSE Diff: 1 Type: TF Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 105) The circular flow of income shows that GDP can be measured as the sum of wages, interest, rent, and profits received by households or total expenditures on goods and services by households, firms, government, and the rest of the world. Answer: TRUE Diff: 1 Type: TF Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 106) Government spending on subsidies is included in government consumption when calculating GDP because it results in the production of new goods and services. Answer: FALSE Diff: 1 Type: TF Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

Table 4.9 Product Steel iPods Cars Legal services

Quantity 1,000 5,000 500 100

Price per Unit $100 200 25,000 2,000

107) Refer to Table 4.9. Suppose that the above table represents the goods and services produced in a very simple economy in 2020. Assume that steel is used as an input in the production of autos. Using this information, calculate GDP for the year 2020. Answer: First, we must decide which goods to include in the calculation of GDP. GDP is defined as the money value of final goods and services produced. Since steel is included in the production of autos, it is an intermediate good, not a final good. So, steel should be excluded from the calculation. Final goods and services are goods and services consumed by the ultimate user of the good or service. All the other goods and services in the table are considered final goods. Next, the money value of these final goods and services must be calculated. The money value is found by multiplying the price of the good or service times the quantity produced of that good or service. The total money value is found by summing up the individual money values. Thus, GDP for 2015 = $200 × 5,000 + $ 25,000 × 500 + $2,000 × 100 = $1,000,000 + $12,500,000 + 200,000 = $13,700,000. Diff: 2 Type: SA Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 108) Describe briefly how the final value of an iPhone must be equal to the sum of incomes generated by the production of the iPhone. Answer: Consider the value of an iPhone that costs $200. Part of the $200 goes to Apple in the form of profit. Part of the $200 goes to the firms that sold Apple the parts that made up the iPhone. Part of the $200 goes to the workers that built the iPhone. A portion of the $200 goes to pay the sales clerk who sells the iPhone. Part of the $200 goes to the trucking company that shipped the iPhone. In fact, all of the value of the $200 ends up as income for someone in the economy. If we extend this idea to the entire economy and add up the value of all goods and services, then the total will equal the total amount of income in the economy. Diff: 3 Type: SA Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP

109) Why do we subtract import spending from total expenditures? Answer: Import spending is defined as spending on goods and services that are produced in foreign countries. When we total up consumption expenditures, investment spending, and government spending, this total includes spending on goods and services, regardless of where they are produced. That is, it includes some import spending. We must then subtract the value of import spending from total expenditures because we would be including spending on goods and services that were not the result of production of newly produced goods and services in Canada. We want total expenditures to reflect expenditures on final goods and services produced in the domestic economy. Diff: 2 Type: SA Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 110) When reporting GDP using the expenditure approach Statistics Canada divides its statistics into four major categories. List the categories of expenditures and define each one. Answer: The largest category is final consumption spending which includes all goods and services purchased to satisfy individual or community needs and wants. The second largest category is Gross fixed capital formation which covers purchases of fixed assets (capital). Investment in inventories was the third largest category in 2015; it includes the purchases of stock for retail businesses. The final category is net exports; the value of domestically produced goods and services sold to foreigners less the value of foreign produced goods and services purchased by Canadians. Diff: 2 Type: SA Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 111) Debbie makes porcelain plates in her home and sells them to the Opus gallery. She spent $400 last month on supplies and made 50 plates. She sold the plates to the gallery at $25 per plate. The gallery sells all the plates for $40 each. For all of the 50 plates, what is Debbie's total value added? For all the 50 plates, what is the gallery's total value added? Answer: To determine Debbie's value added, we must find the additional market value she gives to the plates. For each plate, this is the difference between the price she charges the gallery and the cost of her raw materials. Her cost per plate is $400/50 or $8. Her value added per plate is $25 - $8 or $17. Her total value added for all 50 plates is $17 × 50 or $850. The gallery's value added per plate is $40 - $25 = $15. The total value added by the gallery for all 50 plates is 50 × $15 = $750. Diff: 2 Type: SA Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

112) The table below describes the value added in the production of a gallon of gasoline by each stage of production. (The values are hypothetical.) Table 4.10 Stage of Production Oil drilling Refining Shipping Retail sales

Value of Sales 0.75 1.25 1.85 3.65

Value Added

a) What is the value added by each stage of production? b) What is the total value added? For simplicity, you can ignore the cost of the inputs for oil drilling. Answer: Stage of Production Value of Sales Value Added Oil drilling 0.75 $0.75 Refining 1.25 0.50 Shipping 1.85 0.60 Retail sales 3.65 1.80 $3.65 a) The value added is the difference between the price the firm sells a good for and the price it paid other firms for the intermediate good. The firm that does the oil drilling sells the gallon of oil to the refinery for $0.75. Since we are assuming no other input costs for simplicity, the value added by the drilling firm is $0.75. The refinery processes the oil and then sells it to the transport company for $1.25. The refinery's value added is $0.50. The transport company sells the oil to the retail company for $1.85. The transport company's value added is $1.85 - $1.25 = $0.60. Finally, the retail gas station sells the gallon of gas for $3.65. The value added by the retail station is $1.80. b) The total value added is found by summing the value added by each firm involved the production of the gallon of gas. The retail price is the same at this total of value added. Diff: 2 Type: SA Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

4.2

Discuss whether GDP is a good measure of well-being

1) The Philippines and Vietnam have roughly the same size population. Suppose the GDP of the Philippines is $1 trillion and the GDP of Vietnam is $10 trillion. You should conclude A) a typical person in Vietnam is 10 times as well off as the typical person in the Philippines. B) a typical person in Vietnam is more than 10 times as well off as the typical person in the Philippines. C) a typical person in Vietnam is less than 10 times as well off as the typical person in the Philippines. D) a typical person in the Philippines is 10 times as well off as a typical person in Vietnam. E) It is not possible to make a good comparison of the economic well-being of a typical individual in the 2 countries without additional information. Answer: E Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What's the Best Country for You to Work In? 2) Gross domestic product ________ the total production of final goods and services. A) understates B) overstates C) equals D) is unrelated to E) none of the above Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 3) Gross domestic product understates the total production of final goods and services because of the omission of A) exports. B) inflation. C) intermediate goods. D) household production. E) imports. Answer: D Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

4) Gross domestic product understates the total production of final goods and services because of the omission of A) the underground economy. B) intermediate goods. C) inflation. D) exports. E) imports. Answer: A Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 5) The size of the underground economy would tend to decrease if the government of a country A) decreased government regulations on businesses. B) made over-the-counter drugs illegal. C) increased income tax rates. D) increased business taxes. E) increased trade with other countries. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 6) The size of the underground economy would tend to increase if the government of a country A) decreased government regulations on businesses. B) increased income tax rates. C) legalized prostitution. D) legalized marijuana. E) decreased sales taxes. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

7) Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry and have eight children. Bob stops working for Mary in order to care for the children. What will be the effect on GDP? A) GDP will decrease; Bob's childcare is part of household production. B) GDP will increase; Bob's childcare is part of household production. C) GDP will increase; Bob's childcare is part of the underground economy. D) GDP will decrease; Bob's childcare is part of the underground economy. E) GDP may increase or may decrease depending on the amount of Bob's leisure time. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 8) Which of the following statements about the underground economy is true? A) The underground economy in developing countries amounts to less than 10% of measured GDP. B) Most transactions that occur in the underground economy are included in the calculation of GDP. C) Excluding underground economy production from measured GDP causes errors in GDP growth estimates in the long run. D) Income that is earned but not reported as income for tax purposes is included in the calculation of GDP. E) The Canadian underground economy is continually growing relative to measured GDP. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 9) The informal sector can be a significant drag on the economies of developing countries because the firms in the informal sector A) produce goods and services no one wants. B) sell their goods and services to citizens in other countries. C) do not pay taxes to the government. D) employ illegal immigrants from other countries. E) are better able to produce goods and services in high demand. Answer: C Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

10) Recent estimates put the size of the underground economy in Canada at about ________ of GDP. A) 1 percent B) 13 percent C) 10 percent D) 15 percent E) over 50 percent Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 11) Prior to legalization, the estimated value of the illegal market for recreational cannabis was ________ of GDP. A) 0.1 percent B) 0.2 percent C) 1 percent D) 1.5 percent E) over 10 percent Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: Will Legalization of Cannabis Boost GDP? 12) Legalizing cannabis A) decreases GDP and decreases the size of the underground economy. B) decreases GDP and increases the size of the underground economy. C) increases GDP and decreases the size of the underground economy. D) increases GDP and increases the size of the underground economy. E) has no effect on GDP or the size of the underground economy. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: Will Legalization of Cannabis Boost GDP?

13) Which of the following statements is true? A) A decrease in the crime rate increases GDP as people will spend more on security. B) Household production is counted in GDP as it amounts to real production. C) GDP accounting rules do not adjust for production that pollutes the environment. D) GDP growth distributes income equally to people in the economy. E) Purchases of stolen goods would be counted in GDP if they were observable. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 14) Which of the following is likely to increase measured GDP? A) A greater number of women decide to stay at home and provide day care for their children under age 5. B) Marijuana becomes legal to grow and sell. C) Tax rates increase and more people attempt to underreport their income for tax purposes. D) More people decide to do their own lawn maintenance and give up using a professional service. E) The government reduces the number of immigrants allowed into the country. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: Will Legalization of Cannabis Boost GDP? 15) The Canadian work week has declined from 60 hours in 1800s to 40 hours today. The impact of the decline in working hours A) increases Canadian GDP and increases the well-being of a typical working person in Canada. B) increases Canadian GDP and decreases the well-being of a typical working person in Canada. C) decreases Canadian GDP and increases the well-being of a typical working person in Canada. D) decreases Canadian GDP and decreases the well-being of a typical working person in Canada. E) has no effect on GDP and the well-being of a typical working person in Canada. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

16) Amazon is experimenting with a 30-hour work week (instead of 40 hours a week) for some full time employees and other companies may follow. If employees are equally productive each hour they are at work, the impact of such a decline in working hours would A) cause a decrease in GDP and an increase in the well-being of workers. B) cause an increase in GDP and an increase in the well-being of workers. C) cause a decrease in GDP and a decrease in the well-being of workers. D) cause an increase in GDP and a decrease in the well-being of workers. E) have no effect on GDP and the well-being of workers. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 17) A sharp increase in the divorce rate increases the number of lawyers hired to determine divorce settlements. This will A) increase GDP and increase well-being in the economy. B) increase GDP and decrease well-being in the economy. C) decrease GDP and increase well-being in the economy. D) decrease GDP and decrease well-being in the economy. E) have no effect on GDP or on the well-being in the economy. Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 18) Which of the following describes the relationship between the Better Life Index and GDP per person? A) As GDP per person increases, the Better Life Index decreases. B) As GDP per person increases, the Better Life Index increases. C) Increases in GDP per person appear to have no relationship with the Better Life Index. D) There is a perfect linear relationship between GDP per person and the Better Life Index. E) There is no relationship between GDP per person and the Better Life Index. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: GDP and Happiness

19) GDP is A) entirely unrelated to personal well-being. B) imperfectly related to personal well-being. C) the only method of measuring the success of a country. D) entirely pointless. E) the only valid approach to measuring improvements in well-being. Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: GDP and Happiness 20) Increases in real GDP would overstate the increase in the well-being of a country over time if, over that time period, the A) average hours worked per week increased. B) amount of pollution decreased. C) price level increased. D) crime rate decreased. E) size of the underground economy increased. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 21) Increases in real GDP would understate the well-being of a country over time if, over that time period, the A) crime rate increased. B) percentage of people addicted to illegal drugs increased. C) amount of pollution decreased. D) average hours worked per week decreased. E) size of the underground economy decreased. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

22) If GDP calculations included measurements of pollution and environmental damage, GDP values would most likely be A) greater than their values without these measurements. B) less than their values without these measurements. C) unchanged from their values without these measurements. D) meaningless, since GDP values without these measurements would no longer be of value. E) rising more quickly than they currently are. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 23) Presently, GDP is ________ to compensate for the costs of environmental damage. A) fully adjusted B) partially adjusted C) adjusted on a chain-weight basis D) not adjusted E) adjusted using base year values of environmental quality Answer: D Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 24) Developing countries with large informal sectors tend to have firms that invest less in capital equipment. Answer: TRUE Diff: 2 Type: TF Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 25) If income is unequally distributed in an economy, increases in GDP may not raise well-being in an economy. Answer: TRUE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 26) Real GDP per capita is calculated by dividing the value of real GDP for a country by the country's adult population. Answer: FALSE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 46 Copyright © 2024 Pearson Canada Inc.

27) The underground economy—the informal sector—can be a significant drag on the economies of developing countries. Why are firms in the informal sector often less efficient than firms in the formal sector? Answer: Entrepreneurs of the firms in the informal sector limit their investments in capital equipment because they are afraid that the firms will someday be shut down. The workers in the firms, consequently, have less capital equipment to work with. Diff: 2 Type: ES Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 28) Even though it is generally true that the more goods and services people have, the better off they are, GDP provides only a rough measure of well-being. Assuming language is not an issue, what other factors besides GDP might you consider when deciding where to live and work? Answer: Factors not included in GDP which you might consider include the value of leisure, levels of pollution, crime levels, and other social problems. All of these factors are not included in GDP measurements, yet may be very important in making a decision concerning your well-being. Diff: 2 Type: ES Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 29) Over the last 50 years, has the ratio of household production to gross domestic product in Canada increased or decreased? Consider the effect of the increased number of women working outside the home, and the effect of advances in technology in household production such as microwaves, coffee makers, power tools, etc. Answer: "Household production" refers to goods and services people produce for themselves. It is not clear whether the ratio of household production to gross domestic product has increased or decreased. More women working outside the home has decreased the ratio of household production to GDP, but the technological advances at home have allowed people to produce more household production in less time. Diff: 3 Type: ES Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Analytic Skills 30) GDP is not a perfect measure of well-being because A) the value of leisure is included in GDP. B) GDP is not adjusted for pollution. C) GDP is adjusted for changes in crime rates. D) GDP is adjusted for increases in drug addiction. E) GDP can be adjusted to account for inflation. Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

31) Which of the following accurately describes an effect of a flooding on GDP? A) GDP would decrease reflecting the costs of cleanup. B) GDP would increase reflecting the costs of cleanup. C) GDP would increase reflecting the decrease in production that occurred during the storm and the productive capacity lost in the flood. D) GDP would increase well-being. E) GDP would decrease due to the assets destroyed by flooding. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 32) Canadian GDP shrank in 2020 due to the COVID-19 pandemic. Why would the pandemic reduce GDP? A) The pandemic caused businesses to shut down across country, putting millions out of work. B) The pandemic destroyed many homes and the loss of savings reduces GDP. C) The efforts to fight the pandemic caused an increase in employment. D) People had to spend extra money on things they won't normally have bought. E) The pandemic reduced the demand for goods and services which reduced the GDP. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 33) The underground economy can be described as A) production of intermediate goods and services. B) economic production that includes mining. C) economic activity that is hidden from the government to avoid taxes or because the activity is illegal. D) production of infrastructure that spurs growth in the rest of the economy. E) production in the mining sector that takes place underground rather than in open pit mines. Answer: C Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

34) Which of the following is counted in GDP? A) the value of goods and services produced in the underground economy B) the cost of a speed boat purchased by drug smugglers C) the value of do-it-yourself work D) the value of leisure E) the value of learning that takes place when you read a book from the library Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 35) Marla is an architect who is designing a home for Chuck. Chuck is paying Marla $150 per hour to design his new home. When Chuck and Marla get married, Marla continues to work on designing the home, but she no longer charges Chuck for her work. As a result, GDP ________ because ________. A) falls; Marla's work takes place in the underground economy once she's married B) falls; Marla's work becomes less valuable once she's married C) falls; Marla's architectural design services are no longer bought by Chuck once they're married D) rises; Marla becomes more productive once she's married E) rises; Marla's work continues to add value for Chuck Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 36) "Household production" refers to A) the manufacturing of durable household products. B) the home building sector of the economy. C) home-based craft businesses. D) goods and services people produce for themselves. E) the formation of new households when people decide to live together. Answer: D Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

37) The "underground economy" is also referred to as A) the informal sector. B) the formal sector. C) the halfway economy. D) the net domestic product economy. E) the mining sector. Answer: A Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: GDP and Happiness 38) The OECD's Better Life Index A) gives a very similar ranking of countries as GDP per capita. B) shows that wealthy countries typically have a much lower quality of life than middle income countries. C) shows that there is no relationship between quality of life and GDP per capita. D) can be expected to completely replace GDP as a measure used by economists in the next few years. E) shows that GDP is a highly inaccurate measure of well-being. Answer: A Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: GDP and Happiness 39) Scott is a woodworker and charges $125 an hour for his time manufacturing custom-made wood products. For his wife's birthday, he designs and creates an intricate birdseye maple jewelry box that takes him 15 hours to complete. How is GDP affected by Scott's efforts? A) GDP rises by $1,875. B) GDP is not affected by Scott's production of the jewelry box. C) GDP rises by $125. D) GDP falls by $1,875. E) GDP rises by $1,875 less the cost of the materials Scott uses. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

40) The "underground economy" refers to A) the buying and selling of goods that is concealed from the government. B) the production of goods and services used by the government for covert spy operations. C) the sector of the economy that earns profits that are higher than average. D) the formal sector of the economy in developing countries. E) those businesses in the economy that are likely to go out of business in the coming year. Answer: A Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 41) Which of the following transactions would take place in the "underground economy"? A) Elizabeth tells her mother she's going to work but she really goes to watch a movie. B) Paul buys 30 litres of gasoline for $1.29 a liter, not realizing that a fraction of that price goes to the government as tax revenue. C) John makes chain-link belts and necklaces and sells them at a local flea market for cash to avoid paying taxes. D) Matt bought an iPad for $499 but decided to sell it on eBay instead of keeping it. E) Sam works as a consultant on the side and doesn't tell the university he works for. Answer: C Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 42) If a country passes a labour law limiting the number of hours of work per week, GDP would ________ and leisure would ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease E) stay the same; increase Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

43) If China decides to enact laws to clean up the environment, what would be the effect on its GDP? A) GDP would increase, reflecting the fact that the environment would be cleaner. B) GDP would decrease if the pollution controls reduced productivity by more than the cost of the controls. C) GDP would increase as the citizens of China become happier as the environment is cleaned up. D) GDP would increase since the environmental costs of pollution were not included in the calculation of GDP. E) GDP would decrease as Chinese people took more leisure time. Answer: B Diff: 3 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 44) Because workers in Canada work fewer hours per week, on average, than they did over 100 years ago, A) workers in Canada are worse off than they were over 100 years ago. B) workers in Canada earn less income than they did over 100 years ago. C) GDP is lower than it would be if Canadian workers worked the same hours that they did over 100 years ago. D) GDP is higher than it would be if Canadian workers worked the same hours that they did over 100 years ago. E) GDP is higher due to the technological progress made by people in their time off. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 45) GDP is not a complete measure of well-being. Answer: TRUE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 46) The size of the underground economy as a percent of GDP is larger in Canada as compared to poorer countries such as Zimbabwe. Answer: FALSE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

47) Based on the increase in GDP that comes with a war effort, we can conclude that wars make consumers better off. Answer: FALSE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 48) If an increase in crime causes households to spend money on police and security systems, GDP will rise. Answer: TRUE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 49) Give two reasons why GDP does not reflect total production in an economy. Answer: The measure of GDP leaves out production in two cases. First, it does not count household production as part of production. A person engages in household production if he or she produces for himself or herself. Do-it-yourself work is household production. Homemaking and child care done by a parent for their own children is household production. This is clearly productive work, but is excluded from the calculation of GDP. Second, GDP does not include the production of the underground economy. This includes illegal activity, work that is unreported to avoid taxes, and work that is unreported to avoid regulation. Again, these are productive activities, yet are not included in GDP. Diff: 2 Type: SA Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 50) What is the underground economy and how could it hurt an economy? How does it hurt developing economies? Answer: The underground economy is that part of the economy involved in buying and selling goods and services that are concealed from government to avoid taxes or regulations or because the goods and services are illegal. This sector of the economy can serve as a drag on the economy. Firms that participate in the underground economy face the possibility of the government finding out about their operations and shutting them down because they are acting illegally. They tend to be smaller and invest less in capital. Since workers in this sector have less capital to work with, they are less productive and produce fewer goods and services. Firms also incur costs to avoid discovery by the government, such as paying bribes and hiring lookouts. These are resources that could be used in other productive activities. Because of these reasons, this sector of the economy is not as productive as it might be if it were legal. Fewer goods and services are produced. This is not an insignificant problem, as the underground sector can be large in developing countries as high tax rates drive many firms to the underground sector to avoid taxes. Diff: 2 Type: SA Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

51) China's current rate of GDP growth is quite rapid. Its current growth rate is probably three times that of Canada. However, pollution levels are much higher in China. Would you consider China to be better off than Canada given this information? Why or why not? Answer: China is not better off because of higher rates of growth of GDP. GDP is not a perfect measure of well-being. GDP is not adjusted for pollution or other negative effects of production. Certainly the rapid growth of GDP raises the standard of living for many people in China. However, this comes at the cost of dirty air and water. According to the World Health Organization, seven of the ten most polluted cities in the world are in China. This pollution can result in negative health effects. Improved living standards positively affect well-being, but increased pollution has a negative effect on well-being. In addition, GDP per capita may be a better measure of standard of living rather than growth in GDP. Diff: 2 Type: SA Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

4.3

Discuss the difference between real GDP and nominal GDP

1) Nominal GDP is GDP in a given year A) adjusted for inflation. B) adjusted for anticipated inflation. C) valued in the prices of that year. D) valued in the prices of the base year. E) adjusted for interest rates. Answer: C Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 2) Real GDP is GDP in a given year A) adjusted only for anticipated inflation. B) adjusted only for unanticipated inflation. C) valued in the prices of that year. D) valued in the prices of the base year. E) valued in U.S. dollars. Answer: D Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

Table 4.11 Year 2015 2022

Guns Produced Price of Guns 80 $5 90 6

Butter Produced 40 60

Price of Butter $4 10

Consider the above data for Tyrovia, a country that produces only two products: guns and butter. 3) Refer to Table 4.11. Real GDP for Tyrovia for 2022 using 2015 as the base year equals A) $1,140. B) $880. C) $690. D) $560. E) $320. Answer: C Diff: 2 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 4) Refer to Table 4.11. Nominal GDP for Tyrovia in 2022 equals A) $1,140. B) $880. C) $690. D) $560. E) $320. Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

Table 4.12 Year 2019 2020 2021 2022

Nominal GDP $7,400 7,813 8,301 8,760

Real GDP $7,537 7,813 8,165 8,516

5) Refer to Table 4.12. Consider the data shown above on nominal GDP and real GDP (values are in billions of dollars). The base year used in calculating real GDP is A) 2015. B) 2019. C) 2020. D) 2021. E) 2022. Answer: C Diff: 2 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking Special Feature: Solved Problem: Calculating Real GDP Table 4.13 Year 2021 2022

Oranges Produced 1,800 2,000

Price of Oranges $0.90 1.00

Shirts Produced 110 110

Price of Shirts $30.00 35.00

Consider the data shown above for Vicuna, a country that produces only two products: oranges and shirts. 6) Refer to Table 4.13. Real GDP for Vicuna for 2021 using 2022 as the base year equals A) $4,620. B) $5,100. C) $5,650. D) $5,850. E) $6,250. Answer: C Diff: 2 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

7) Refer to Table 4.13. Nominal GDP for Vicuna for 2021 equals A) $4,920. B) $5,100. C) $5,300. D) $5,850. E) $6,250. Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 8) If the quantity of goods and services produced in the economy decreases, A) it may be possible for real GDP to increase. B) real GDP would certainly increase. C) it may be possible for nominal GDP to increase. D) nominal GDP would certainly increase. E) nominal GDP would certainly decrease. Answer: C Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 9) What would explain a rise in nominal GDP but a drop in real GDP during the same period? A) a rise in prices and a fall in production B) a fall in prices and a rise in production C) a rise in prices and a rise in production D) a fall in prices and a fall in production E) constant prices and a fall in production Answer: A Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

10) Suppose that nominal GDP in 2022 was less than real GDP in 2022. Given this information, we know for certain that A) the price level in 2022 was greater than the price level in the base year. B) the price level in 2022 was less than the price level in the base year. C) real GDP in 2022 was less than real GDP in the base year. D) real GDP in 2022 was greater than real GDP in the base year. E) real GDP in 2022 was equal to real GDP in the base year. Answer: B Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 11) Which of the following could cause nominal GDP to decrease, but real GDP to increase? A) The price level rises, and the quantity of final goods and services produced rises. B) The price level falls, and the quantity of final goods and services produced rises. C) The price level rises, and the quantity of final goods and services produced falls. D) The price level falls, and the quantity of final goods and services produced falls. E) The price level stays the same, and the quantity of final goods and services produced rises. Answer: B Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 12) Which of the following could cause nominal GDP to increase, but real GDP to decrease? A) The price level rises, and the quantity of final goods and services produced rises. B) The price level rises, and the quantity of final goods and services produced falls. C) The price level falls, and the quantity of final goods and services produced rises. D) The price level falls, and the quantity of final goods and services produced falls. E) The price level stays the same, and the quantity of final goods and services produced falls. Answer: B Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 13) If real GDP in 2022 (using 2012 prices) is lower than nominal GDP of 2021, then A) prices in 2022 are lower than prices in 2021. B) nominal GDP in 2022 equals nominal GDP in 2021. C) prices in 2022 are higher than prices in 2021. D) real GDP in 2022 is larger than real GDP in 2021. E) the economy is going through a recession. Answer: A Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 58 Copyright © 2024 Pearson Canada Inc.

14) To examine how the total production of an economy has changed over time, it would be better to examine A) real GDP. B) nominal GDP. C) GDP at current prices. D) the GDP deflator. E) the Consumer Price Index. Answer: A Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 15) If prices in the economy rise, then A) the purchasing power of a dollar rises. B) the purchasing power of a dollar declines. C) the purchasing power of a dollar stays constant. D) the quantity of goods produced rises. E) the quantity of goods produced declines. Answer: B Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 16) Real GDP will increase A) only if the price level rises. B) only if the price level falls. C) only if the quantity of final goods and services produced rises. D) when nominal GDP falls. E) if either the price level rises or the quantity of final goods and services produced rises. Answer: C Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 17) If nominal GDP is $5 trillion and real GDP is $4 trillion, the GDP deflator is A) 0.8. B) 12.5. C) 80. D) 125. E) 800. Answer: D Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 59 Copyright © 2024 Pearson Canada Inc.

18) The GDP deflator is the A) difference between real GDP and nominal GDP multiplied by 100. B) difference between nominal GDP and real GDP multiplied by 100. C) ratio of real GDP to nominal GDP multiplied by 100. D) ratio of nominal GDP to real GDP multiplied by 100. E) difference between real GDP minus potential GDP multiplied by 100. Answer: D Diff: 1 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 19) Nominal GDP will increase A) only if the price level rises. B) only if the price level falls. C) only if the quantity of final goods and services produced rises. D) if either the price level or the quantity of goods and services produced rises. E) only if real GDP rises. Answer: D Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 20) The GDP deflator is a measure of the A) total production of the economy adjusted for inflation. B) total production of the economy unadjusted for inflation. C) average level of prices of final goods and services in the economy. D) average level of prices of intermediate goods and services in the economy. E) depth of a recession. Answer: C Diff: 1 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 21) The GDP deflator does not capture the prices of A) imports. B) exports. C) services. D) final goods. E) goods purchased by government. Answer: A Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

22) If nominal GDP exceeds real GDP for a specific year, then the GDP deflator must be A) equal to 100. B) greater than 100. C) less than 100. D) less than 0. E) equal to its value in the base year. Answer: B Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 23) If real GDP is larger than nominal GDP, A) prices must be lower than in the base year. B) prices must be higher than in the base year. C) the economy must be growing. D) the economy must be shrinking. E) prices and output must be constant. Answer: A Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 24) The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on average, the cost of goods and services is A) 5% higher in year 2 than in year 1. B) 105% higher in year 2 than in year 1. C) 5% higher in year 1 than in year 2. D) 105% higher in year 1 than in year 2. E) 95% higher in year 2 than in year 1. Answer: A Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

Table 4.14 Year 2021 2022

Nominal GDP 1 762 1 818

Real GDP 1 628 1 658

25) Refer to Table 4.14. Consider the data shown above on nominal GDP and real GDP (values are in billions of dollars). The GDP deflator for 2021 equals A) 92.2. B) 102.6. C) 108.2. D) 109.1. E) 115.2 Answer: C Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Table 4.15 Year 2020 2021 2022

Nominal GDP $13,399 14,078 14,441

Real GDP $12,976 13,254 13,312

26) Refer to Table 4.15. Consider the data shown above on nominal GDP and real GDP (values are in billions of dollars). The GDP deflator for 2021 equals A) 94.1. B) 105.1. C) 106.2. D) 108.5. E) 127.2. Answer: C Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 27) If prices rise on average in the Canadian economy, the purchasing power of a dollar declines. Answer: TRUE Diff: 1 Type: TF Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

28) Using "chain-weighted" prices to calculate real GDP remedies the distortions caused by changes in relative prices over time. Answer: TRUE Diff: 1 Type: TF Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 29) If the GDP deflator is equal to 100, then for that year nominal GDP is equal to real GDP. Answer: TRUE Diff: 1 Type: TF Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 30) It is possible for nominal GDP to fall while real GDP rises. Answer: TRUE Diff: 1 Type: TF Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 31) In the term "real GDP," what does "GDP" stand for and what does it measure? What does "real" indicate? Answer: GDP stands for gross domestic product and measures the value of the total production of final goods and services. "Real" indicates that the goods and services produced are valued using the prices of the base year, not the current year, and therefore are adjusted for inflation. Diff: 2 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 32) Is nominal GDP measured in terms of quantity or in terms of dollars? If dollars, the value of the dollar from what period? Is real GDP measured in terms of quantity or in terms of dollars? If dollars, the value of the dollar from what period? Answer: Both nominal GDP and real GDP are measured in terms of dollars. Nominal GDP is measured using the value of the dollar for that specific year, and real GDP is measured using the value of the dollar for the base year. Diff: 2 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

33) Japan experienced periods of deflation—a declining price level—during the 1990s. During a deflationary period, which would be higher: nominal GDP or real GDP? Why? Assume that the base year of choice is prior to the deflationary period. Answer: Real GDP would be higher, as long as the base year was before the period of deflation. Nominal GDP would be measured using the lower prices that resulted from the deflation. Real GDP would use the higher prices before the deflation, assuming the base year was before the deflation. Diff: 3 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 34) Since real GDP is adjusted for inflation and nominal GDP is not, nominal GDP must always be higher than real GDP. Do you agree or disagree? Why? Answer: Disagree. It depends on whether the year being examined is before or after the base year. If after the base year, then nominal GDP will always exceed real GDP if inflation has occurred. If before the base year, then nominal GDP will always be less than real GDP if inflation has occurred. If the year being examined is before the base year and inflation has occurred, then the base year prices will exceed the prices of that year. Diff: 3 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Table 4.16 Product Hats French fries Digital cameras

2021 Quantity 200 2,000 40

Price $20 1 200

2022 Quantity 250 2,300 50

Price $21 2 140

35) Refer to Table 4.16. Consider the data shown above for a simple economy. Calculate nominal GDP and real GDP for 2022, using 2021 as the base year. Show your work. Answer: Nominal GDP for 2022 equals (250 × $21) + (2,300 × $2) + (50 × $140) = $16,850. Real GDP for 2022 equals (250 × $20) + (2,300 × $1) + (50 × $200) = $17,300. Diff: 3 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

Table 4.17 Product MP3s Tacos Coats

2020 Quantity 40 2,000 300

Price $250.00 2.00 50.00

2021 Quantity 45 2,200 310

Price $200.00 2.25 52.00

2022 Quantity 50 2,300 350

Price $150.00 2.40 55.00

36) Refer to Table 4.17. Consider the data above for a simple economy: Using 2020 as the base year, calculate nominal GDP, real GDP, and the GDP deflator for 2022. Show your work. Answer: Nominal GDP for 2022 equals (50 × $150) + (2,300 × $2.40) + (350 × $55) = $32,270. Real GDP for 2022 equals (50 × $250) + (2,300 × $2.00) + (350 × $50) = $34,600. The GDP deflator equals

× 100 = 93.3

Diff: 3 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 37) If the GDP deflator is less than 100, which will be higher: nominal GDP or real GDP? Why? Answer: Real GDP will be higher. The GDP deflator is the ratio of nominal GDP to real GDP, so if the value is less than 100, nominal GDP must be smaller than real GDP. Diff: 2 Type: ES Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 38) The measure of production that values production using current prices is called A) value-added GDP. B) nominal GDP. C) real GDP. D) underground GDP. E) expenditure approach GDP. Answer: B Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

39) The ________ is a measure of the price level and is calculated by dividing ________ by ________ and multiplying by 100. A) CPI; real GDP; nominal GDP B) GDP deflator; real GDP; nominal GDP C) GDP deflator; nominal GDP; real GDP D) PPI; nominal GDP; real GDP E) PPI; real GDP; nominal GDP Answer: C Diff: 1 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 40) The measure of production that values output using base-year prices is called A) real GDP. B) nominal GDP. C) value-added GDP. D) underground GDP. E) chain-weighted GDP. Answer: A Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 41) The drawback to calculating real GDP using base-year prices is that A) real GDP in one year is not comparable to real GDP in another year. B) relative prices change over time, which is not reflected in base-year prices, and this distorts GDP. C) relative prices change over time and these changes are reflected in base-year prices. D) quality changes are reflected in base-year prices. E) base year prices do not capture changes in production from year to year. Answer: B Diff: 2 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 42) Nominal GDP is another term for A) inflation-adjusted GDP. B) real GDP. C) constant-dollar GDP. D) current-dollar GDP. E) chain-weighted GDP. Answer: D Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 66 Copyright © 2024 Pearson Canada Inc.

Table 4.18 Nominal GDP Real GDP

2021 $10,000 9,500

2022 $12,000 10,500

43) Refer to Table 4.18. Given the information above, what can we say has happened in the economy from 2021 to 2022? A) The price level has fallen. B) The price level has risen. C) The price level has remained constant. D) Prices have risen but output has remained constant. E) Prices have fallen and output has fallen. Answer: B Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 44) In periods when prices are falling, on average, A) real GDP will grow slower than nominal GDP. B) real GDP will grow faster than nominal GDP. C) real GDP will grow as fast as nominal GDP. D) real GDP will certainly be lower than nominal GDP. E) real GDP cannot be calculated. Answer: B Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 45) If prices are rising on average, then A) real GDP will always be equal to nominal GDP. B) real GDP will be greater than nominal GDP in the years after the base year. C) real GDP will be less than nominal GDP in the years before the base year. D) real GDP will be greater than nominal GDP in the years before the base year. E) real GDP will certainly be lower than nominal GDP. Answer: D Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

46) If real GDP increases, we know for sure that A) output has risen. B) prices have risen. C) prices have risen but output has remained constant. D) prices have remained constant. E) output has fallen. Answer: A Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking Table 4.19 Product Movie Burgers Bikes

2019 Quantity 20 100 3

Price $6.00 2.00 1,000.00

2022 Quantity 30 90 6

Price $7.00 2.50 1,100.00

A very simple economy produces three goods: movies, burgers, and bikes. The quantities produced and their corresponding prices for 2019 and 2022 are shown in the table above. 47) Refer to Table 4.19. What is nominal GDP in 2022? A) $3,320 B) $3,690 C) $6,360 D) $7,035 E) $8,340 Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 48) Refer to Table 4.19. What is nominal GDP in 2019? A) $3,320 B) $3,690 C) $6,360 D) $7,035 E) $8,340 Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 68 Copyright © 2024 Pearson Canada Inc.

49) Refer to Table 4.19. What is real GDP in 2022, using 2019 as the base year? A) $3,320 B) $3,690 C) $6,360 D) $7,035 E) $8,340 Answer: C Diff: 3 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP Table 4.20 Product Cameras Legal services Books

2019 Quantity 100 50 200

Price $10 15 40

2022 Quantity 120 45 210

Price $12 20 45

A very simple economy produces three goods: cameras, legal services, and books. The quantities produced and their corresponding prices for 2019 and 2022 are shown in the table above. 50) Refer to Table 4.20. What is real GDP in 2022, using 2019 as the base year? A) $28,885 B) $11,790 C) $11,200 D) $10,275 E) $8,750 Answer: D Diff: 3 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking Special Feature: Solved Problem: Calculating Real GDP 51) Refer to Table 4.20. What is real GDP in 2022, using 2022 as the base year? A) $28,885 B) $11,790 C) $11,200 D) $10,275 E) $8,750 Answer: B Diff: 3 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 69 Copyright © 2024 Pearson Canada Inc.

52) Refer to Table 4.20. What is nominal GDP in 2022 when 2019 is the base year? A) $28,885 B) $11,790 C) $11,200 D) $10,275 E) $8,750 Answer: B Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 53) Refer to Table 4.20. What is the GDP deflator in 2022 if 2022 is the base year? A) 120 B) 118 C) 100 D) 87 E) 78 Answer: C Diff: 2 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 54) Refer to Table 4.20. What is the GDP deflator in 2022 if 2019 is the base year? A) 187 B) 100 C) 87 D) 8.7 E) 0.87 Answer: C Diff: 3 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

55) Refer to Table 4.20. If the GDP deflator rises from 185 to 190, what is the rate of inflation between the two years? A) 270% B) 50% C) 5% D) 2.7% E) 1.5% Answer: D Diff: 2 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 56) Refer to Table 4.20. If the GDP deflator is 142, by how much have prices changed since the base year? A) Prices have increased by 42%. B) Prices have increased by 142%. C) Prices have decreased by 4.2%. D) Prices have increased by 58%. E) Prices have increased by 70.5%. Answer: A Diff: 2 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 57) An inflation rate of 5% between 2021 and 2022 would be implied by a change in the GDP deflator from ________ in 2021 to ________ in 2022. A) 105; 115 B) 200; 205 C) 400; 420 D) 375; 390 E) 170; 175 Answer: C Diff: 3 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

58) To make the calculation of real GDP more accurate, Statistics Canada began publishing real GDP data in A) base-year prices. B) current prices. C) chain-weighted prices. D) market prices. E) American dollar prices. Answer: C Diff: 1 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 59) When Statistics Canada calculates real GDP using the average of prices in the current year and the year preceding it, and this average changes from year to year, this is called calculating GDP using A) chain-weighted prices. B) fixed-weight prices. C) current-year prices. D) fixed base-year prices. E) international standard prices. Answer: A Diff: 1 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 60) Which of the following is a true statement about real and nominal GDP? A) If nominal GDP increases from one year to the next, we know that production of goods and services has risen. B) Nominal GDP is a better measure than real GDP in comparing changes in the production of goods and services year after year. C) Increases in average prices do not affect the calculation of nominal GDP. D) If real GDP increases from one year to the next, we know that production of goods and services has risen. E) If real GDP increases from one year to the next, nominal GDP will have risen as well. Answer: D Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

61) If nominal GDP rises, we can say that A) production has risen and prices remain constant. B) prices have risen and production remains constant. C) production has risen, or prices have risen, or both have risen. D) production has fallen and prices have risen. E) prices have fallen and production has remained constant. Answer: C Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 62) The GDP deflator is equal to A) real GDP divided by nominal GDP. B) nominal GDP divided by real GDP, multiplied by 100. C) nominal GDP divided by real GDP. D) real GDP divided by nominal GDP, multiplied by 100. E) nominal GDP to potential GDP, multiplied by 100. Answer: B Diff: 1 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 63) Under what circumstances would the GDP deflator be less than 100 after the base year? A) The GDP deflator will be less than 100 if there has been inflation relative to the base year. B) The GDP deflator will be less than 100 if there has been inflation of less than 2% per year relative to the base year. C) The GDP deflator will be less than 100 if there has been deflation relative to the base year. D) The GDP deflator will be less than 100 if there has been a recession since the base year. E) There are no circumstances under which the GDP deflator could be less than 100. Answer: C Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

64) Under what circumstances would the GDP deflator be more than 100 after the base year? A) The GDP deflator will be more than 100 if there has been deflation relative to the base year. B) The GDP deflator will be more than 100 if there has been inflation of less than 2% per year relative to the base year. C) The GDP deflator will be more than 100 if there has been inflation relative to the base year. D) The GDP deflator will be more than 100 if there has been an expansion since the base year. E) There are no circumstances under which the GDP deflator could be more than 100. Answer: C Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking Table 4.21 Nominal GDP Real GDP

2021 $10,000 9,500

2022 $12,000 10,500

65) Refer to Table 4.21. Given the information above, calculate the GDP deflator in 2022. A) 114 B) 105 C) 100 D) 95 E) 87 Answer: A Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 66) Refer to Table 4.21. Given the information above, calculate the GDP deflator in 2021. A) 87 B) 95 C) 100 D) 105 E) 114 Answer: D Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

Table 4.22 Nominal GDP Real GDP

2021 $10,000 9,500

2022 $12,000 10,500

67) Refer to Table 4.22. Given the information above, calculate the rate of increase in the price level from 2021 to 2022. A) 8.6% B) 7.9% C) 6.3% D) -7.9% E) -8.6% Answer: A Diff: 3 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 68) Nominal GDP measures the value of all final goods and services at base-year prices. Answer: FALSE Diff: 1 Type: TF Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 69) The GDP deflator is a measure of the price level, which is calculated as nominal GDP divided by real GDP and multiplied by 100. Answer: TRUE Diff: 1 Type: TF Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 70) If nominal GDP is less than real GDP, then the GDP deflator will be greater than 100. Answer: FALSE Diff: 2 Type: TF Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 71) Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next? Answer: Nominal GDP can change because of either quantity changes or price changes. When there is inflation, nominal GDP overstates the increase in total production. Diff: 2 Type: SA Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 75 Copyright © 2024 Pearson Canada Inc.

Table 4.23 Product Pizza Haircuts Backpacks

2019 Quantity 100 50 200

Price $10 15 40

2022 Quantity 120 45 210

Price $12 20 45

72) Refer to Table 4.23. Suppose that a very simple economy produces three goods: pizzas, haircuts, and backpacks. Suppose the quantities produced and their corresponding prices for 2019 and 2022 are shown in the table above. Use the information to compute real GDP in the year 2019 and 2022. Assume that 2019 is the base year. Is output higher in 2019 or 2022? Why? Answer: Recall that real GDP is found by valuing GDP in a particular year using base year prices. Since 2019 is the base year, real GDP for 2019 is found by multiplying 2019 prices by 2019 quantities and then adding the values up. The individual values for 2019 are calculated in the following table: Product Pizzas Haircuts Backpacks

Quantity 100 50 200

Price $10 15 40

Value $1,000 750 8,000

Therefore, Real GDP for 2019 = Quantity of pizza in 2019 × price of pizza in 2019 = $1,000 Quantity of haircuts in 2019 × price of haircuts in 2019 = $750 Quantity of backpacks in 2019 × price of backpacks in 2019 = $8,000 Total $9,750. The individual values for 2022 output and prices in 2019 are calculated in the following table: Product Pizzas Haircuts Backpacks

Quantity 120 45 210

Price $10 15 40

Value $1,200 675 8,400

Therefore, Real GDP for 20225 = Quantity of pizza in 2022 × price of pizza in 2019 = $1,200 Quantity of haircuts in 2022 × price of haircuts in 2019 = $675 Quantity of backpacks in 2022 × price of backpacks in 2019 = $8,400 Total $10,275. Since real GDP is a measure of output, and real GDP is higher in 2022 as compared to 2019, output has increased. Diff: 3 Type: SA Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

Table 4.24 Product Pizzas Haircuts Backpacks

2019 Quantity 100 50 200

Price $10 15 40

2022 Quantity 120 45 210

Price $12 20 45

73) Refer to Table 4.24. Suppose that a very simple economy produces three goods: pizzas, haircuts, and backpacks. Suppose the quantities produced and their corresponding prices for 2019 and 2022 are shown in the table above. Use the information to compute real GDP in the year 2019 and 2022. Calculate real GDP in 2022 assuming the base year is 2019. Do the same calculation assuming the base year is 2022. Are the calculations different? Why?

Answer: Recall that real GDP is found by valuing GDP in a particular year using base year prices. When 2019 is the base year, real GDP for 2022 is found by multiplying 2019 prices by 2022 quantities and then adding the values up. The individual values for 2022 (2019 is the base year) are calculated in the following table: Product Pizzas Haircuts Backpacks

Quantity 120 45 210

Price $10 15 40

Value $1,200 675 8,400

Therefore, Real GDP for 2022 (2019 base year) = Quantity of pizza in 2022 × price of pizza in 2019 = $1,200 Quantity of haircuts in 2022 × price of haircuts in 2019 = $675 Quantity of backpacks in 2022 × price of backpacks in 2019 = $8,400 Total $10,275. The individual values for 2022 (2022 base year) are calculated in the following table: Product Pizzas Haircuts Backpacks

Quantity 120 45 210

Price $12 20 45

Value $1,440 900 9,450

Therefore, Real GDP for 2022 (2022 base year) = Quantity of pizza in 2022 × price of pizza in 2022 = $1,440 Quantity of haircuts in 2022 × price of haircuts in 2022 = $900 Quantity of backpacks in 2022 × price of backpacks in 2022 = $9,450 Total $11,790. When 2022 is used as the base year, the calculation of real GDP is larger as compared to the calculation of real GDP for 2022 assuming 2019 is the base year. The values differ because the prices are different in 2019 and 2022, so the value of real GDP does depend on the chosen base year. However, since we use the same base year prices for every year when we calculate a GDP series, we can still compare real GDP across the different years. Diff: 3 Type: SA Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

Table 4.25 Nominal GDP Real GDP

2021 10,000 9,500

2022 $15,000 10,500

74) Refer to Table 4.25. Given the information above, calculate the rate of increase in the price level from 2021 to 2022. Use the percent change in the GDP deflator. Answer: To calculate the rate of change of prices, the GDP deflator for 2021 and 2022 must be determined. The GDP deflator for 2021 =

× 100 = 105.3

The GDP deflator for 2022 =

× 100 = 142.9

= 35.7% Diff: 3 Type: SA Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Table 4.26 Nominal GDP Real GDP

2021 $10,000 10,000

2022 $15,000 14,000

75) Refer to Table 4.26. Given the information above, calculate the GDP deflator for both 2021 and 2022. What does the value of the deflator in the year 2021 tell you about that year with respect to the base year? What happened to prices in 2021 as compared to 2022? Answer: To calculate the GDP deflator for 2021 and 2022 we use the following formula given in the text: The GDP deflator =

× 100

The GDP deflator for 2021 =

× 100 = 100

The GDP deflator for 2022 =

× 100 = 107.1

Since the value of the deflator is 100 in 2021, 2021 must be the base year. Since the value of the deflator in 2022 is greater than the value of the deflator in 2021, prices must have risen. Diff: 2 Type: SA Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 76) Use the formula for the GDP deflator to explain how it is affected by an increase in prices in the economy. If the value of the deflator equals 100, what does that tell you about that year with respect to the base year? Answer: The formula for the GDP deflator is given by: The GDP deflator =

× 100

From this formula we can see that if prices are rising in the economy but production remains constant, nominal GDP will go up but real GDP will remain the same, so the deflator should rise. If prices rise more rapidly than production in the economy, then nominal GDP will rise relative to real GDP and the value of the GDP deflator will rise. It is in this way the deflator can help economists track changes in prices in the economy over time. If the value of the deflator is 100 in a particular year, that year must be the base year or nominal GDP and real GDP are exactly the same. Diff: 2 Type: SA Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

4.4

Become familiar with other measures of total production and total income

1) Gross national income, GNI, of Canada is the market value of A) all the final goods and services produced within Canada. B) the value of the goods and services consumed within Canada. C) payments Canadians receive for the use of their factors of production. D) the value of goods and services consumed by Canadians, even if they live outside Canada. E) the services produced in Canada and sold abroad. Answer: C Diff: 1 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 2) The output of Mexican citizens who work in Ontario would be included in the A) gross domestic product of Mexico. B) gross national income of Mexico. C) gross national product of Canada. D) net national income of Canada. E) disposable income of Canada. Answer: B Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 3) The output of Canadian citizens who work in the United States would be included in the A) gross domestic product of the United States. B) gross national income of the United States. C) gross domestic product of Canada. D) gross national income of the United States and the gross national product of Canada. E) gross domestic product of both countries. Answer: A Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

4) If a Canadian firm opens a production facility in India, the total value of the production will be included in the A) gross domestic product of Canada. B) net national income of Canada. C) gross domestic product of India. D) national income of India. E) household disposable income of India. Answer: C Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 5) Which of the following is included in both Canadian GDP and Canadian GNI? A) the value of all cars produced by General Motors Canada in Canada B) the value of all cars produced by Ford in Mexico C) the value of all cars produced by Toyota in Canada D) the value of all cars produced by Nissan in Japan and Canada E) the value of car parts produced by Magna in Mexico Answer: A Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 6) A country in which a significant fraction of domestic production takes place in foreign-owned factories and facilities is most likely a country where A) GNI is much larger than GDP. B) GDP is much larger than GNI. C) GDP is equal to GNI. D) GDP is much larger than NNI. E) GDP is equal to NNI. Answer: B Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

7) The value of what a Canadian-owned Tim Hortons produces in South Korea is included in the Canadian ________ and the South Korean ________. A) GDP; GDP B) GNI; GDP C) GDP; GNI D) GNI; GNI E) GNI; NNI Answer: B Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 8) Net National Income equals Gross National Income minus A) imports. B) depreciation. C) inventories. D) changes in inventories. E) exports. Answer: B Diff: 1 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 9) Net national income equals gross domestic product A) plus sales taxes. B) plus government transfer payments. C) minus the consumption of fixed capital. D) minus government transfer payments. E) minus transfers to other countries. Answer: C Diff: 1 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 10) Depreciation is A) the value of worn-out equipment, machinery, and buildings. B) the value of the decrease in business inventory stocks. C) the value of the addition to the capital stock. D) the decline in the value of the stock market, net of dividends. E) the decline in the value of the Canadian dollar due to inflation. Answer: A Diff: 1 Type: MC Topic: Depreciation Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 83 Copyright © 2024 Pearson Canada Inc.

11) Suppose that in 2022, the net national income in Madeupistan was $20 billion, depreciation was $1.5 billion, personal taxes were $2 billion, and transfer payments were $1 billion. Gross domestic product in 2022 is A) $18.5 billion. B) $21.5 billion. C) $22 billion. D) $24.5 billion. E) $30 billion. Answer: B Diff: 2 Type: MC Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills 12) The best measure of the income households actually have available to spend is A) household income. B) disposable household income. C) national income. D) net national income. E) gross national income. Answer: B Diff: 1 Type: MC Topic: Disposable Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 13) Disposable household income equals household income A) minus personal tax payments. B) plus government transfer payments. C) minus personal tax payments plus government transfer payments. D) minus government transfer payments plus personal tax payments. E) plus interest payments. Answer: A Diff: 1 Type: MC Topic: Disposable Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

Table 4.27 Net national income Retained earnings not paid as dividends Transfer payments Interest on government bonds Personal taxes

$1,000 50 40 20 30

The components of national income for an economy are represented in Table 4.27 above. All values are in billions of dollars. 14) Refer to Table 4.27. What is the level of household income for this economy? A) $1,140 billion B) $1,010 billion C) $990 billion D) $860 billion E) $590 billion Answer: B Diff: 3 Type: MC Topic: Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills 15) Refer to Table 4.27. What is the level of disposable household income for this economy? A) $1,080 billion B) $1,010 billion C) $980 billion D) $860 billion E) $590 billion Answer: C Diff: 3 Type: MC Topic: Disposable Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills 16) The total value of production from Ford's manufacturing plant in Cologne, Germany would be included in Germany's gross national income. Answer: FALSE Diff: 1 Type: TF Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 17) Transfer payments are subtracted from net national income to get to Household income. Answer: FALSE Diff: 1 Type: TF Topic: Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 85 Copyright © 2024 Pearson Canada Inc.

18) For developed countries like Canada, GDP will always exceed GNI. Answer: FALSE Diff: 1 Type: TF Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 19) What are the differences between net national income, household income, and disposable household income? Answer: Net national income is the total income received by a country's residents. Household income, which is income actually received by households, is national income minus corporations' retained earnings, plus government transfer payments and the interest on government bonds paid to households. Disposable personal income, which represents the income available for households to spend, is personal income less personal tax payments, such as the federal personal income tax. Diff: 2 Type: ES Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking Table 4.28 Net national income Retained earnings Depreciation Interest on government bonds Transfer payments Personal taxes

Billions of Dollars $11,200 560 700 300 2,200 1,400

20) Refer to Table 4.28. The table above represents hypothetical data from the National Income Accounts for 2022. Use the data to calculate household income and disposable income. Answer: Household income = Net national income - Retained earnings + Transfer payments + Interest on government bonds. Substituting the table values: Household income = $11,200 - 560 + 2,200 + 300 = $13,140 billion. Disposable household income = Personal household - Personal taxes = $13,140 - 1,400 = $11,740 billion. Diff: 2 Type: ES Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills

21) Net national income is equal to A) personal income minus personal taxes. B) GDP minus depreciation. C) disposable personal income, plus depreciation, plus personal taxes. D) GNI plus depreciation. E) GDP plus taxes. Answer: B Diff: 1 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 22) Canada's gross national income is defined as A) the value of final goods and services produced within Canada. B) the value of final goods and services produced outside of Canada. C) the value of payments received by Canadians for their factors of production even if the production takes place outside of Canada. D) the value of final goods and services produced within Canada, by Canadian residents. E) the value of intermediate goods and services produced within Canada. Answer: C Diff: 1 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 23) If a Canadian engineer works on contract for a Mexican firm, the value of the wages that engineer receives will be included in A) Canadian GNI. B) Mexico's GNI. C) Canadian GDP. D) Mexico's NNI. E) It will not affect either Canadian GNI or Canadian GDP. Answer: A Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

24) If a Japanese firm produces cars in Canada, that production should count towards A) Canadian GNP. B) Japanese GDP. C) Canadian GDP. D) Canadian GNI. E) both Canadian GNP and Japanese GDP. Answer: C Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 25) Which of the following would increase GNI in Canada? A) an increase in the production of oil by Canadian-owned Talisman Energy from wells in Mexico B) an increase in the production of Japanese-owned Toyota cars in Mexico C) an increase in the production of Japanese-owned Toyota cars in Canada D) an increase in the production of Mexican-owned Grupo Minsa corn in Canada E) an increase in the production of Korean-owned Hyundai cars in South Korea Answer: A Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 26) When lumber from Brazilian forests is used by a U.S.-owned company to produce furniture in Canada, the value of the furniture produced will be counted as a final good in A) U.S. GDP. B) Canada's GDP. C) Brazil's GDP. D) Brazil's GNP. E) Brazil's GNI. Answer: B Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

27) When BHP (an Australian mining company) buys a Canadian company running mines in Canada and takes ownership of the Canadian mining company's capital, A) Australian GDP rises. B) Canadian GNI rises. C) GNI in Australia rises. D) Canadian GDP rises. E) Canadian NNI rises. Answer: C Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 28) Net national income is defined as A) gross national income plus transfer payments. B) gross national income, less retained earnings, plus transfer payments. C) gross domestic income, less retained earnings, plus transfer payments. D) gross domestic income less the consumption of fixed capital. E) gross domestic income plus taxes. Answer: D Diff: 1 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 29) Household income is defined as A) net national income, less retained earnings, plus transfer payments, plus interest on government bonds. B) net national income, plus retained earnings, less transfer payments, less interest on government bonds. C) net national income less depreciation. D) net national income less personal taxes. E) gross national product less taxes paid. Answer: A Diff: 1 Type: MC Topic: Personal Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

30) Disposable household income is defined as A) personal income, less personal taxes, plus indirect sales taxes. B) personal income, less transfer payments, plus personal taxes. C) personal income less personal taxes. D) personal income less depreciation. E) personal income plus depreciation. Answer: C Diff: 1 Type: MC Topic: Disposable Personal Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 31) Net national income is derived from gross domestic product by A) subtracting retained earnings from gross domestic product. B) adding personal taxes and depreciation to gross domestic product. C) subtracting depreciation from gross domestic product. D) adding personal income and transfer payments to gross domestic product. E) adding taxes and depreciation to gross domestic product. Answer: C Diff: 2 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 32) An increase in net national income could be caused by which of the following? A) an increase in depreciation B) an increase in personal taxes C) a decrease in personal income D) an increase in gross domestic product E) an increase in housing costs Answer: D Diff: 2 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 33) Which of the following would increase disposable personal income? A) a decrease in transfer payments received B) a decrease in taxes paid C) a decrease in personal income D) a decrease in interest payments E) All of the above would increase disposable income. Answer: B Diff: 2 Type: MC Topic: Disposable Personal Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

34) Gross domestic product is generally ________ net national income. A) greater than B) less than C) equal to D) unrelated to Answer: A Diff: 2 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytical Thinking Table 4.29

GDP Depreciation Retained earnings Personal income tax Transfer payments

Billions of Dollars $1,800 300 400 100 100

35) Refer to Table 4.29. Based on the table above, what is the net national income for this economy? A) $800 billion B) $1,100 billion C) $1,500 billion D) $1,700 billion E) $1,900 billion Answer: C Diff: 3 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills

Table 4.30

GNI Transfer Payments Retained earnings Depreciation

Billions of Dollars $5,250 50 700 1,250

36) Refer to Table 4.30. Based on the table above, what is the net national income for this economy? A) $4,700 billion B) $4,000 billion C) $3,150 billion D) $2,450 billion E) $1,850 billion Answer: B Diff: 2 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills Table 4.31

GNI Depreciation Retained earnings Personal tax payments Transfer payments

Billions of Dollars $3,250 300 1,000 500 80

37) Refer to Table 4.31. Based on the table above, what is household income for this economy? A) $1,950 billion B) $2,250 billion C) $2,450 billion D) $5,130 billion E) $6,220 billion Answer: A Diff: 2 Type: MC Topic: Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills

38) When U.S. GDP grows more quickly compared to Canada, A) Canadian firms will export more, leading to faster Canadian GDP growth. B) Canadians will import some of the newly made American goods, causing Canadian GDP to shrink. C) government spending in Canada will likely increase. D) Canadian firms will invest less, causing domestic investment to fall and Canadian GDP to rise. E) Canadian prices will rise more quickly causing household disposable income to fall in Canada. Answer: A Diff: 2 Type: MC Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 39) When U.S. GDP grows more slowly compared to Canada, A) Canadian firms will export less, leading to slower Canadian GDP growth. B) Canadians will export some of the newly made Canadian goods, causing U.S. GDP to shrink. C) government spending in Canada will likely decrease. D) Canadian firms will invest more, causing domestic investment to rise and Canadian GDP to fall. E) Canadian prices will rise more quickly causing household disposable income to fall in Canada. Answer: A Diff: 2 Type: MC Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 40) The values of real GDP and real GNI are almost the same for Canada. Answer: TRUE Diff: 1 Type: TF Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 41) The values of real GDP and real GNI are almost the same in countries where a significant fraction of domestic production takes place in foreign-owned firms. Answer: FALSE Diff: 2 Type: TF Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 42) Disposable household income is equal to household income minus personal tax payments. Answer: TRUE Diff: 1 Type: TF Topic: Disposable Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

43) Explain the difference between gross domestic product and gross national income. Give an example of each. Answer: Gross domestic product is the value of final goods and services produced within Canada. In contrast, gross national income is the value of payments received by residents of Canada for the use of their factors of production, regardless if the production takes place in Canada. GNI would include the production from a Canadian-run gold mine located in Africa not attributed to African workers. GDP would include production from a Japanese-owned Toyota plant located in Ontario. Diff: 1 Type: SA Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking Table 4.33

Net national income Retained earnings Depreciation Interest on government bonds Transfer payments Personal taxes

Billions of Dollars $1,489 400 300 20 100 150

44) Refer to Table 4.33. The table above represents hypothetical data from the National Income Accounts for 2022. Use the data to calculate household income and household disposable income. Answer: Household income = Net national income - Retained earnings + Transfer payments + Interest on government bonds. Substituting the table values: Household income = $1489 - 400 + 100 + 20 = $1,209 billion. Household disposable income

= Household income - Personal taxes = $1,209 - 150 = $1,059 billion.

Diff: 2 Type: SA Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills

Table 4.34

National income Retained earnings Depreciation Interest on government bonds Transfer payments Personal taxes

Billions of Dollars $11,200 560 700 300 2,200 1,400

45) Refer to Table 4.34. The table above represents hypothetical data from the National Income Accounts for 2022. Use the data to calculate personal income and disposable income. Answer: Household income = National income - Retained earnings + Transfer payments + Interest on government bonds. Substituting the table values: Household income = $11,200 - 560 + 2,200 + 300 = $13,140 billion. Disposable household income

= Household income - Personal taxes = $13,140 - 1,400 = $11,740 billion.

Diff: 2 Type: SA Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 5 Unemployment and Inflation 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed 1) Unemployment in Canadian economy increased during the COVID-19 pandemic from ________ in 2019 to ________ in 2021. A) 6.5 percent; 13.2 percent B) 6.7 percent; 9.5 percent C) 5.7 percent; 7.5 percent D) 5.7 percent; 9.5 percent E) 7.5 percent; 9.5 percent Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytical Thinking Special Feature: Chapter Opener: Canadian Labor Market during COVID-19 pandemic 2) The economy has gone into a recession. You have majored in computer science and, because of the recession, have difficulty in finding a job. Should you go back to school and get a second major? A) Yes, the recession will ensure that I will never find a job as a programmer. B) Yes, the recession will lower income in my field permanently. C) No, the recession will most likely be short-lived and I can get a job after it is over. D) No, the recession will have no impact on my ability to get a job or my future income. E) Yes, the recession will likely reduce the demand for computer science majors permanently. Answer: C Diff: 2 Type: MC Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should You Change Your Career Plans If You Graduate During a Recession?

3) The unemployment rate is an important economic statistic that can tell us about the health of the economy. If the unemployment rate turns out to be high or higher than anticipated, we would expect A) it is more likely that an incumbent Prime Minister will be re-elected. B) that stock prices are more likely to fall. C) that jobs are less difficult to find. D) that investors will be more optimistic about the economy. E) consumer spending is likely to rise. Answer: B Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 4) Statistics Canada would categorize a person as ________ if they were temporarily away from their job because they were ill. A) employed B) unemployed C) a discouraged worker D) out of the labour force E) disabled Answer: A Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 5) Statistics Canada would categorize a retiree who is not working as A) employed. B) unemployed. C) a discouraged worker. D) out of the labour force. E) eligible to work. Answer: D Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

6) The labour force equals the number of people A) employed. B) unemployed. C) employed plus unemployed. D) in the working-age population. E) in the entire country. Answer: C Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 7) Suppose that homemakers are included as employed in the labour force statistics, rather than being counted as out of the labour force. This would A) increase the measured unemployment rate. B) increase the measured labour force participation rate. C) decrease the number of persons in the labour force. D) decrease the number of persons in the working-age population. E) increase the number of people not in the labour force. Answer: B Diff: 3 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking Table 5.1 Total population Working-age population Employment Unemployment

20,000 15,000 1,000 100

Consider the data above for a simple economy. 8) Refer to Table 5.1. The unemployment rate for this simple economy equals A) (100/1,000) × 100 percent. B) (100/1,100) × 100 percent. C) (100/15,000) × 100 percent. D) (100/20,000) × 100 percent. E) (1000/15,000) × 100 percent. Answer: B Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 3 Copyright © 2024 Pearson Canada Inc.

9) Refer to Table 5.1. The labour force participation rate for this simple economy equals A) (1,000/1,100) × 100 percent. B) (1,000/15,000) × 100 percent. C) (1,100/15,000) × 100 percent. D) (1,100/20,000) × 100 percent. E) (15,000/20,000) × 100 percent. Answer: C Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 10) Suppose the working-age population of a fictional economy falls into the following categories: 90 are retired or homemakers; 60 have full-time employment; 20 have part-time employment; 20 do not have employment, but are actively looking for employment; and 10 would like employment but do not have employment and are not actively looking for employment. The official unemployment rate as calculated by Statistics Canada would equal A) (20/60) × 100%. B) (20/80) × 100%. C) (30/80) × 100%. D) (20/100) × 100%. E) (60/90) × 100%. Answer: D Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 11) Suppose the labour force stays constant, and the working-age population stays constant, but a greater number of persons who were unemployed become employed. The labour force participation rate will A) increase. B) decrease. C) remain constant. D) increase and then decrease. E) decrease and then increase. Answer: C Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

12) The unemployment rate equals the number of unemployed divided by the ________, all times 100. A) number of employed B) labour force C) working-age population D) total population E) number of discouraged workers Answer: B Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 13) Suppose the government launches a successful advertising campaign that convinces workers with high school degrees to quit their jobs and become full time students. This would cause A) the unemployment rate to decrease. B) the labour force participation rate to decrease. C) the number of discouraged workers to increase. D) no change in the unemployment rate. E) the employment population ratio to increase. Answer: B Diff: 3 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 14) Someone who is available for work but has not actively looked for work in the previous four weeks would be classified as A) employed. B) unemployed. C) not in the labour force. D) not in the working-age population. E) not legally entitled to work. Answer: C Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

15) The labour force participation rate equals the A) (number of employed divided by the labour force) × 100. B) (labour force divided by the number of people not in the labour force) × 100. C) (labour force divided by working-age population) × 100. D) (labour force divided by the total population) × 100. E) (working age population divided by employment) × 100. Answer: C Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 16) Which of the following labour market statistics best indicates the amount of labour that is available to the economy from a given working-age population? A) unemployment rate B) discouraged-worker ratio C) labour force participation rate D) the ratio of minimum wage to inflation E) the employment population ratio Answer: C Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 17) Which of the following cause the unemployment rate as measured by Statistics Canada to understate the true extent of joblessness? A) inflation B) discouraged workers C) people employed in the underground economy D) unemployed persons falsely report themselves to be actively looking for a job E) a shrinking working age population Answer: B Diff: 2 Type: MC Topic: Problems with Measuring the Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

18) Which of the following cause the unemployment rate as measured by Statistics Canada to overstate the true extent of joblessness? A) inflation B) discouraged workers C) counting people as employed who are working part time, although they would prefer to be working full time D) unemployed persons falsely report themselves to be actively looking for a job E) people choosing not to participate in the labour force Answer: D Diff: 2 Type: MC Topic: Problems with Measuring the Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 19) Which of the following explains the changes in the Canadian adult male labour force participation rate since 1976? A) More men are joining the military as compared to the past. B) More men are retiring later in life as compared to the past. C) Fewer men consider themselves discouraged workers as compared to the past. D) Younger men are remaining in school longer as compared to the past. E) There are fewer working age males than in the past. Answer: D Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 20) Due to the global COVID-19 pandemic, labor force participation rate from 2019 to 2020 A) increased for both men and women. B) decreased for both men and women. C) stayed the same. D) increased for men while decreased for women. E) increased for women while decreased for men. Answer: B Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

21) The recession that followed the global financial crisis of 2007-2009 caused ________ in Canada. A) less unemployment B) a rise in the labour force participation rate C) an increase in the duration a typical unemployed person was out of work D) less government spending E) a drop in the working age population Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 22) Since 1976, the labour force participation rate for adult men has ________ and for adult women has ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; remained constant E) remained constant; increased Answer: C Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 23) Using a broader measure of the unemployment rate where discouraged workers and part-time workers who wished to work full time were counted as unemployed, you would expect this unemployment rate to ________ compared to the Statistics Canada measured unemployment rate. A) increase B) more than double C) decrease D) barely change E) fall by half Answer: A Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

24) In the modern Canadian economy, the typical unemployed person stays unemployed for A) a relatively long time, over a year. B) a relatively short time, less than 13 weeks. C) a long time during expansions and short time during recessions. D) an amount of time that is hard to quantify. E) a permanent time. Answer: B Diff: 1 Type: MC Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 25) An issue with the Labour Force Survey (LFS) which overstates the extent of joblessness is A) individuals who are working but concealing it for legal reasons are counted as unemployed. B) they verify claims that people have actively looked for work. C) they tend to count unemployed people more often because they are not working. D) there is no distinction between employees who work part-time but would like to have a full-time job and those who are content with their full- or part-time job. E) people who choose not to work are counted as unemployed. Answer: A Diff: 1 Type: MC Topic: Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 26) The most important group not identified by the unemployment rate is A) seniors. B) discouraged workers. C) part-time workers seeking full-time work. D) those under the minimum working age. E) students. Answer: B Diff: 1 Type: MC Topic: Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

27) Which of the following statements is true about the Canadian economy? A) Each year, many new jobs are created, but few existing jobs are destroyed, and the unemployed find jobs quickly. B) Each year, few new jobs are created, but few existing jobs are destroyed, keeping unemployment low. C) Each year, many new jobs are created and many existing jobs are destroyed. D) Each year few jobs are created, and therefore it takes the unemployed a long time to find a new job. E) Each year many more jobs are destroyed than are created. Answer: C Diff: 1 Type: MC Topic: Job Creation and Job Destruction Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 28) Counting part-time workers who are looking for full-time work as employed overstates the degree of joblessness in the economy. Answer: FALSE Diff: 2 Type: TF Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 29) In Canada, the typical person who has lost his or her job finds another one in a few months except during severe recessions. Answer: TRUE Diff: 1 Type: TF Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 30) The labour force participation rates of women have rapidly increased since 1976. Answer: TRUE Diff: 2 Type: TF Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

31) Fill in the missing values in the table of data collected in the fictitious Labour Force Survey below. Show your work. Working-age population Employment Unemployment Unemployment rate Labour force Labour force participation rate

5.4% 135,113 67.0%

Answer: Working-age population Employment Unemployment Unemployment rate Labour force Labour force participation rate

201,661 127,817 7,296 5.4% 135,113 67.0%

Unemployment rate =

× 100.

Unemployed = (Labour force × Unemployment rate)/100 (135,113 × 5.4)/100 = 7,296 Labour force = Employed + Unemployed Employed = Labour Force - Unemployed Employed = 135,113 - 7,296 = 127,817 Labour force participation rate =

× 100.

Labour force = (Working-age population × Labour force participation rate) × 100 Working-age population = (Labour force/Labour force participation rate) × 100 Working-age population = (135,113/67) × 100 = 201,661 Diff: 3 Type: ES Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

32) Fill in the missing values in the table of data collected in the fictitious Labour Force Survey below. Show your work. Working-age population Employment Unemployment Unemployment rate Labour force Labour force participation rate Answer: Working-age population Employment Unemployment Unemployment rate Labour force Labour force participation rate

235,900

9.4% 65.5%

235,900 139,991 14,524 9.4% 154,515 65.5%

Labour force participation rate =

× 100.

Labour force = (Working-age population × Labour force participation rate)/100 Labour force = (235,900 × 65.5)/100 = 154,515 Unemployment rate =

× 100.

Unemployed = (Labour force × Unemployment rate)/100 (154,515 × 9.4)/100 = 14,524 Labour force = Employed + Unemployed Employed = Labour force - Unemployed Employed = 154,515 - 14,524 = 139,991 Diff: 3 Type: ES Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 33) Statistics Canada counts as employed people who work part-time, but would prefer to work full-time. Suppose the people who had part-time jobs, but wanted full-time jobs, were counted as unemployed. Explain how the unemployment rate and the labour force participation rate would change. Answer: The unemployment rate would increase and the labour force participation rate would stay the same. The number of unemployed would rise, but the labour force would stay the same. The part-time workers who wanted to be full-time workers would simply go from being employed to unemployed. With no change in the labour force, the labour force participation rate would not change. Diff: 3 Type: ES Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 12 Copyright © 2024 Pearson Canada Inc.

34) Statistics Canada does not count discouraged workers as unemployed. Suppose discouraged workers were counted as unemployed. Explain how the unemployment rate and the labour force participation rate would change. Answer: Both the unemployment rate and the labour force participation rate would increase. The number of unemployed would rise, as would the labour force. The unemployment rate would rise because adding the same number to the numerator and the denominator of a fraction that is less than one increases the value of the fraction. The labour force participation rate would rise because the labour force increases with no change in the working-age population. Diff: 3 Type: ES Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 35) The labour force is the sum of A) employed workers and discouraged workers. B) employed workers and unemployed workers. C) employed workers and individuals not looking for work. D) employed workers and the working age population. E) unemployed workers and the working age population. Answer: B Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 36) Upon your graduation from university, you find that the economy is in recession and the unemployment rate is relatively high. Nonetheless, you continue along your career path looking for a new job because A) the cost of additional education is always higher during recession. B) high unemployment rates do not usually last for very long. C) looking for work is your only option. D) the wages of university graduates do not fall during recession. E) recessions typically last longer than it takes to complete a second university degree. Answer: B Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should You Change Your Career Plans If You Graduate During a Recession?

37) The unemployment rate is A) the percentage of the labour force that is employed. B) the percentage of the working-age population that is unemployed. C) the percentage of the labour force that is unemployed. D) the percentage of the working-age population that is employed. E) the percentage of the population that is unemployed. Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 38) A full-time student who is not working is categorized as A) unemployed. B) employed. C) not in the labour force. D) a discouraged worker. E) frictionally unemployed. Answer: C Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 39) Discouraged workers are classified by Statistics Canada as A) part of the labour force. B) not in the labour force. C) unemployed. D) employed. E) part-time employees. Answer: B Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

40) Discouraged workers are A) workers who have a part time job but want a full time job. B) workers who find their current jobs unfulfilling and are considering a job change. C) workers who have consistently been looking for work for more than 4 weeks. D) workers who have stopped looking for work because they believe there are no jobs for them. E) workers who are disappointed in the labour force because they are over qualified for their current jobs. Answer: D Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 41) The labour force participation rate is defined as A) the percentage of the working-age population that is employed. B) the percentage of the working-age population that is unemployed. C) the percentage of the labour force that is employed. D) the percentage of the labour force that is unemployed. E) the percentage of the working-age population in the labour force. Answer: E Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 42) Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work again. Because Mike started looking for a new job, A) the unemployment rate increased. B) the labour force participation rate decreased. C) the unemployment rate decreased. D) the working-age population increased. E) the employment population ratio has decreased. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

43) During the month of May, 300,000 workers moved from being classified as "unemployed" to being classified as "employed." As a result, A) the unemployment rate rose. B) the labour force participation rate fell. C) the unemployment rate fell. D) the labour force participation rate rose. E) the employment population ratio fell. Answer: C Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 44) Which of the following would reduce the labour force participation rate, all else equal? A) an increase in the number of people in the labour force B) an increase in the unemployment rate C) a decrease in the unemployment rate D) an increase in the working-age population E) an increase in minimum working age Answer: D Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 45) Jack lost his job six months ago and he's been actively looking for a new job ever since. Statistics Canada would classify Jack as A) unemployed. B) out of the labour force. C) a discouraged worker. D) an involuntary part-time worker. E) all of the above Answer: A Diff: 2 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

46) Which of the following causes the unemployment rate to understate the true extent of joblessness? A) Many full-time workers really want to be part-time workers. B) Persons who collect unemployment benefits report themselves to be searching for a job. C) Discouraged workers are not counted as unemployed. D) A drug dealer reports herself as unemployed. E) Some people do not want to have a paid job. Answer: C Diff: 2 Type: MC Topic: Problems with Measuring the Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 47) An increase in the size of the underground economy would A) have no effect on the official unemployment rate. B) cause the official unemployment rate to fall as more people find jobs outside the formal economy. C) cause the labour force participation rate to rise. D) cause the labour force participation rate to fall. E) raise the employment population ratio as reported by Statistics Canada. Answer: D Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 48) The federal government legalized marijuana in 2017. Before this change Statistics Canada would have considered people who made their living growing and selling marijuana for recreational use to be A) not in the labour force. B) unemployment. C) employed part time. D) employed full time. E) not legally entitled to work in Canada. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

49) After the legalization of recreational marijuana, the labour force participation rate would A) rise. B) fall. C) rise then fall. D) fall then rise. E) remain unchanged. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 50) If the number employed is 17.5 million, the working-age population is 28.5 million, and the number unemployed is 1.4 million, then the unemployment rate is A) 7.4%. B) 8%. C) 5%. D) 4.7%. E) 61%. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 51) If the number employed is 190 million, the number unemployed is 10 million, and the working-age population is 250 million, then the labour force participation rate is A) 4%. B) 5.2%. C) 60%. D) 76%. E) 80%. Answer: E Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

52) Except for recessions, the duration of unemployment for the typical person lasts A) less than 4 weeks. B) less than 13 weeks. C) 14 to 25 weeks. D) more than 25 weeks. E) over five years. Answer: B Diff: 1 Type: MC Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 53) Except for expansions, the least amount of time, the unemployment for the typical person lasts A) less than 4 weeks. B) less than 13 weeks. C) 14 to 25 weeks. D) more than 25 weeks. E) over five years. Answer: C Diff: 1 Type: MC Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 54) If the number of unemployed workers is 2 million and the number in the labour force is 28 million, what is the unemployment rate? A) 0.7% B) 4% C) 7% D) 9% E) 40% Answer: C Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

55) If the number of unemployed workers is 20 million, the number of employed workers is 30 million, and the working-age population is 80 million, what is the labour force participation rate? A) 12.5% B) 18% C) 37.5% D) 40% E) 62.5% Answer: E Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 56) If the number of unemployed workers is 1.9 million, the number in the working-age population is 50 million, and the unemployment rate is 4%, what is the labour force participation rate? A) 4.75% B) 7.8% C) 63% D) 95% E) 96.2% Answer: D Diff: 3 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 57) If the number of unemployed workers is 1.9 million, the number in the working-age population is 50 million, and the unemployment rate is 4%, how many workers are in the labour force? A) 1 million B) 20 million C) 47.5 million D) 48.1 million E) 50 million Answer: C Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

58) Which of the following describes actual trends in the Canadian labour force participation rate? A) The labour force participation rate of adult men has risen since 1976. B) The labour force participation rate of adult women has fallen since 1976. C) The labour force participation rate of adult men not in school, but too young to retire has risen since 1976. D) The labour force participation rate of adult women has risen since 1976. E) The labour force participation rate of all adults has fallen since 1976. Answer: D Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 59) How would including members of the military in employment, labour force, and working-age population statistics affect the unemployment rate and the labour force participation rate? A) Including members of the military would increase the unemployment rate and reduce the labour force participation rate. B) Including members of the military would reduce the unemployment rate and increase the labour force participation rate. C) Including the military would increase both the unemployment rate and the labour force participation rate. D) Including the military would reduce both the unemployment rate and the labour force participation rate. E) Including the military would not change either the unemployment rate or the labour force participation rate. Answer: B Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 60) In recent years, the most common length of time for a person to be unemployed was A) less than 4 weeks. B) 5 to 13 weeks. C) 14 to 25 weeks. D) 26 weeks to 42 weeks. E) 42 weeks or more. Answer: A Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

61) Jack was unemployed two weeks ago but just started a new job. As a result of this increase in the number of employed workers, which of the following occurred? A) The labour force participation rate increased. B) The unemployment rate increased. C) The labour force participation rate decreased. D) The unemployment rate decreased. E) The employment population ratio decreased. Answer: D Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 62) Jack just received a promotion at work and now works 50 hours per week instead of 35. As a result, A) the unemployment rate increased. B) the unemployment rate decreased. C) the labour force participation rate increased. D) both the unemployment rate and the labour force participation rate changed. E) neither the unemployment rate nor the labour force participation rate changed. Answer: E Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 63) For the last few decades, the labour force participation rates of men have ________, and the labour force participation rates of women have ________. A) risen; risen B) fallen; fallen C) risen; fallen D) fallen; risen E) remained constant; risen Answer: D Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

64) The labour force survey asks adults about their employment status and is used to compile the monthly unemployment rate. Answer: TRUE Diff: 1 Type: TF Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 65) The labour force survey is compiled from firms who answer questions about the number of persons who are employed and on the company payroll. Answer: FALSE Diff: 1 Type: TF Topic: Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 66) In the labour force survey, all people are categorized as either employed or unemployed. Answer: FALSE Diff: 1 Type: TF Topic: Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 67) The labour force participation rates of men have gradually increased since 1975. Answer: FALSE Diff: 1 Type: TF Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 68) How could a growing labour force lead to an increase in the unemployment rate? Answer: The labour force is calculated as the sum of employed workers and unemployed workers in the economy. If the labour force is growing and, simultaneously, the unemployment rate is increasing, the number of people in the labour force classified as unemployed workers must be increasing. Diff: 2 Type: SA Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

69) How would the unemployment rate and the labour force participation rate change if discouraged workers were counted as unemployed rather than as out of the labour force? Illustrate this using the formulae for both measurements. Answer: The unemployment rate is calculated as: × 100

Including discouraged workers would increase the number of people counted as being in the labour force and would increase the number of people counted as unemployed. In terms of our calculation, the numerator would rise, and the denominator would rise. However, the numerator would rise by a greater percentage than the denominator, as the denominator is the sum of employment plus unemployment. If the top number rises more quickly than the bottom number, then the whole number rises. This would increase the unemployment rate. The labour force participation rate is calculated as: × 100

Including discouraged workers would increase the number of people in the labour force, but not change the number of people in the working-age population. This would increase the labour force participation rate because the numerator increases. Increasing the numerator of a fraction increases the fraction. Diff: 3 Type: SA Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 70) Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age population is 250,000, and 50,000 people are out of the labour force. Calculate the unemployment rate. Answer: The unemployment rate is calculated as: × 100

The labour force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000, which equals 200,000 people. Substituting this information into our equation, we get: × 100 which equals 10%. Diff: 2 Type: SA Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 24 Copyright © 2024 Pearson Canada Inc.

71) Suppose 180,000 people are employed, 20,000 people are unemployed, and 50,000 people are out of the labour force. Calculate the labour force participation rate. Answer: The labour force participation rate is calculated as: × 100

The labour force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000, which equals 200,000 people. The working-age population is the sum of those in the labour force and those out of the labour force. This is 200,000 plus 50,000, which equals 250,000. Substituting this information into our equation, we get: × 100 which equals 80%. Diff: 2 Type: SA Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

72) Fill in the missing values in the table of data collected in the Labour Force Survey. The working-age population, employment, unemployment, and labor force are measured in thousands. Show your work. Working-age population Employed Unemployed Unemployment rate Labor force Labor force participation rate

5.4% 135,113 67.0%

Answer: Working-age population Employed Unemployed Unemployment rate Labor force Labor force participation rate

201,661 127,817 7,296 5.4% 135,113 67.0%

Unemployment rate =

× 100.

Unemployed = (Labor force × Unemployment rate)/100 (135,113 × 5.4)/100 = 7,296 Labor force = Employed + Unemployed Employed = Labor Force - Unemployed Employed = 135,113 - 7,296 = 127,817 Labor force participation rate =

× 100.

Labor force = (Working-age population × Labor force participation rate) × 100 Working-age population = (Labor force/Labor force participation rate) × 100 Working-age population = (135,113/67) × 100 =201,661 Diff: 3 Type: SA Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytical Thinking

73) Fill in the missing values in the table of data collected in the Labour Force Survey. The working-age population, employment, unemployment, and labor force are measured in thousands. Show your work. Working-age population Employed Unemployed Unemployment rate Labor force Labor force participation rate Answer: Working-age population Employed Unemployed Unemployment rate Labor force Labor force participation rate

235,900

9.4% 65.5%

235,900 139,991 14,524 9.4% 154,515 65.5%

Labor force participation rate =

× 100.

Labor force = (Working-age population × Labor force participation rate)/100 Labor force = (235,900 × 65.5)/100 = 154,515 Unemployment rate =

× 100.

Unemployed = (Labor force × Unemployment rate)/100 (154,515 × 9.4)/100 = 14,524 Labor force = Employed + Unemployed Employed = Labor force - Unemployed Employed = 154,515 - 14,524 = 139,991 Diff: 2 Type: SA Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytical Thinking

5.2

Identify the four types of unemployment

1) Frictional unemployment is the result of A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. B) the search process of matching workers with jobs. C) the ups and downs in inflation. D) a slowdown in the economy. E) the changing of the seasons. Answer: B Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 2) The advice to "keep searching, there are plenty of jobs around here for which you are qualified," would be most appropriate for which of the following types of unemployment? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) seasonal unemployment E) geographical unemployment Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 3) A student who just graduated from college but has not found a job would most likely be A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. E) underemployed. Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

4) Cyclical unemployment is the result of A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. B) the search process of matching workers with jobs. C) the ups and downs in inflation. D) a slowdown in the economy. E) regional differences in the economy. Answer: D Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 5) Structural unemployment is the result of A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. B) the search process of matching workers with jobs. C) the ups and downs in inflation. D) a slowdown in the economy. E) the entry of new workers into the labour force. Answer: A Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 6) In 2020, when governments across Canada enacted public health measures duo to COVID-19 Pandemic, which closed thousands of businesses and put hundreds of thousands out of work; most of the resulting unemployment is best categorized as: A) structural unemployment. B) frictional unemployment. C) seasonal unemployment. D) cyclical unemployment. E) permanent unemployment. Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking Special Feature: Apply the Concept: How Should We Categorize the Unemployment of Workers Due to the COVID-19 Pandemic?

7) According to the text, economists consider full employment to occur when A) everyone who wants a job has a job. B) frictional unemployment equals zero. C) the sum of frictional unemployment and structural unemployment equals zero. D) the unemployment rate consists of only frictional and structural unemployment. E) structural unemployment is less than 2 percent. Answer: D Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 8) If cyclical unemployment is eliminated in the economy, then A) the economy is considered to be at full employment. B) the unemployment rate is below the natural rate of unemployment. C) the unemployment rate is above the natural rate of unemployment. D) the economy is at less than full employment. E) the unemployment rate will be zero. Answer: A Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 9) Full employment is not considered to be zero unemployment, because A) some cyclical unemployment always exists. B) some people do not want a job. C) there are not enough jobs for everyone who wants one. D) people do not find jobs instantaneously. E) not everyone is entitled to work in Canada. Answer: D Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 10) The natural rate of unemployment is the amount of unemployment A) equal to frictional and cyclical unemployment. B) equal to frictional plus structural unemployment. C) that exists when the economy goes into recession. D) that exists when the economy is in an expansion. E) equal to seasonal and cyclical unemployment. Answer: B Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

11) During the Great Depression, cyclical unemployment increased as the recession continued. This increase in cyclical unemployment A) increased the natural rate of unemployment. B) decreased the natural rate of unemployment. C) had no effect on the natural rate of unemployment. D) increased the structural rate of unemployment. E) decreased the structural rate of unemployment. Answer: C Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 12) Throughout 2016, Alberta's oil and gas sector laid-off thousands of workers due to low oil prices. If oil prices do not recover, these unemployed workers would be classed as A) structurally unemployed. B) seasonally unemployed. C) frictionally unemployed. D) cyclically unemployed. E) naturally unemployed. Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 13) In 2009, Chrysler announced to temporarily close its assembly plant in Brampton, Ontario, due to low sales because of recession in the economy. The laid-off Chrysler employees were A) cyclically unemployed. B) structurally unemployed. C) seasonally unemployed. D) frictionally unemployed. E) underemployed. Answer: A Diff: 3 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

14) A lumberjack loses his job because timber cutting restrictions were imposed by the Environment Canada to protect the spotted owl habitat. This lumberjack would be A) frictionally unemployed. B) cyclically unemployed. C) structurally unemployed. D) seasonally unemployed. E) legally unemployed. Answer: C Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 15) If you have trouble finding a job because of a slowdown in the overall economy, we would say that you are A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. E) naturally unemployed. Answer: C Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 16) The advice to "retrain" would be most appropriate for which of the following types of unemployment? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) core unemployment E) seasonal unemployment Answer: B Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

17) If the federal government implements programs so that the unemployed are more quickly matched with jobs, then A) the natural rate of unemployment will increase. B) the natural rate of unemployment will decrease. C) the natural rate of unemployment will not change. D) the natural rate of unemployment could either increase or decrease. E) the natural rate of unemployment will rise then fall. Answer: B Diff: 3 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 18) Eliminating frictional unemployment would be good for the economy. Answer: FALSE Diff: 2 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 19) Unemployment caused by a business cycle recession is called cyclical unemployment. Answer: TRUE Diff: 1 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 20) The natural rate of unemployment consists of frictional unemployment plus structural unemployment. Answer: TRUE Diff: 1 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

21) To understand why someone cannot get a job, it helps to know the four types of unemployment. List the four types of unemployment and explain what causes each type. What advice for finding a job would be appropriate for someone in each type of unemployment? Answer: Frictional unemployment is the unemployment that arises from the process of matching workers with jobs. These workers are qualified; they just need to search for a job. The advice for finding a job would be to keep searching, because there are jobs available for which they are qualified. Structural unemployment is unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. The advice for finding a job would be to retrain so that they can match up with the requirements of current jobs. Cyclical unemployment is unemployment caused by a business cycle recession. The advice for finding a job would be to hang in there and continue searching, but realize that there are less jobs available than the number of applicants. The cyclically unemployed person could perhaps get a temporary job until the economy picks up, or perhaps consider continuing his or her education while the business cycle slowdown lasts. Seasonal unemployment is unemployment due to time or season of the year. The seasonally unemployed person could consider searching of employment in an industry with a different season, or perhaps retraining for jobs that do not depend so much on seasonal factors. Diff: 3 Type: ES Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Analytic Skills 22) Many of the reasons why someone cannot get a job are similar to the reasons why someone cannot get a date. Using the ideas of frictionally unemployed, structurally unemployed, and cyclically unemployed, describe and explain how a student at your university might be frictionally "undated," structurally "undated," seasonally "undated", and cyclically "undated." Answer: The frictionally "undated" student does not have a date because of the search process of matching up people. It is an information search problem. There are lots of other students who would go out with the student, but it takes time to find them. The structurally "undated" student does not match up with the characteristics of the other students looking for dates. Perhaps the structurally "undated" student is considerably older, from another region or country, or just has different preferences. The cyclically "undated" student does not have a date because there are not many dates to be had—there is a recession in dates. This might be due to an increase in the popularity of a new video game which makes people less interested in dating. The seasonally undated student does not have a date because no one is going on dates at this time of year. This could be during final exams when most students do not date because they're studying. Diff: 3 Type: ES Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Analytic Skills

23) A central concept in macroeconomics is the idea of the natural rate of unemployment. Why does it make sense to define full employment to occur when the unemployment rate equals the natural rate of unemployment, instead of when the unemployment rate equals zero? Elaborate and explain carefully. Answer: With a growing, dynamic economy where businesses expand and contract, technological change regularly occurs, and people enter and leave the labour market on a continual basis, zero percent unemployment is not possible nor desirable. Frictional unemployment and structural unemployment are normal parts of a healthy, growing economy. With frictional unemployment, people and firms have to search for one another and that takes time. With structural unemployment, technology changes and international competition cause people to have to retrain to match up with the evolving job requirements. Economists, consequently, consider full employment to occur when the only unemployment is frictional unemployment and structural unemployment. Diff: 3 Type: ES Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Analytic Skills 24) The short-term unemployment arising from the process of matching workers with jobs is called A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: A Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 25) Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: B Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

26) Workers laid off as a result of a recession suffer A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) natural unemployment. Answer: C Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 27) People who lost their jobs as hand-drawn animators because of the popularity of computer-generated 3D animation are examples of persons who are suffering A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: B Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 28) Which of the following is an example of a worker experiencing cyclical unemployment? A) a worker who changes jobs to move closer her family B) an assembly-line worker who loses his job because of automation C) a Canadian Pacific Railway employee who got laid off because of the recession of 2008-2009 D) a lifeguard who was hired during the summer season is laid off after summer is over E) a worker who quits his job because he does not get along with his boss Answer: C Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

29) Jack just told his boss that he thinks his boss is an idiot. It is likely that Jack will be experiencing ________ unemployment in the near future. A) permanent B) cyclical C) frictional D) structural E) seasonal Answer: C Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 30) Sarah is a full-time student who is not looking for work. What kind of unemployment is Sarah experiencing? A) cyclical B) structural C) frictional D) seasonal E) none Answer: E Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 31) Emma is a road construction worker. During the winter months, Emma finds it more difficult to get work. The unemployment Emma experiences in the winter is A) structural. B) cyclical. C) seasonal. D) functional. E) voluntary. Answer: C Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

32) Which of the following is an example of a worker experiencing frictional unemployment? A) a worker who quits his job at the post office to find more interesting work B) a computer programmer who loses her job because it is outsourced to India C) an employee who is laid off because the economy is suffering a recession D) an Air Canada pilot who loses her job because of lack of demand for air travel E) a road worker laid off in the winter Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 33) An example of a seasonally unemployed worker would be A) a software engineer who is laid off because of declining demand for the software he writes. B) a day care provider who quits his job to go back to school. C) a General Motors employee who loses her job because the company is downsizing its work force. D) a ski lift operator who loses his job when the snow melts in the spring. E) a mother who quits her job to stay home with her children. Answer: D Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 34) What are the three main kinds of unemployment? A) frictional, seasonal, and cyclical B) temporary, permanent, and volunteer C) cyclical, structural, and temporary D) structural, frictional, and cyclical E) involuntary part-time, structural, and seasonal Answer: D Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 35) When the labour market is at full employment, A) there is only cyclical unemployment in the economy. B) there is only structural unemployment in the economy. C) the unemployment rate is 0%. D) there is no cyclical unemployment in the economy. E) frictional unemployment is less than 2%. Answer: D Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

36) When an economy is at its natural rate of unemployment, which of the following will be true? A) The unemployment rate will be 0%. B) The labour force participation rate will be 100%. C) The unemployment rate will be greater than 0%. D) The employment population ratio will be 80%. E) Only structural unemployment as a result of technological change will exist in the economy. Answer: C Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 37) The natural rate of unemployment is made up of A) frictional, cyclical, and structural unemployment. B) frictional and cyclical unemployment. C) cyclical and structural unemployment. D) frictional and structural unemployment. E) seasonal and structural unemployment. Answer: D Diff: 1 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 38) An increase in cyclical unemployment will result in A) an increase in the natural rate of unemployment. B) an increase in the unemployment rate. C) an increase in structural unemployment. D) a decrease in frictional unemployment. E) an increase in the employment population ratio. Answer: B Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 39) We say that the economy is at full employment if the unemployment rate is equal to A) zero. B) the natural rate of unemployment. C) the amount of cyclical unemployment. D) the sum of frictional and cyclical unemployment. E) the sum of structural and cyclical unemployment. Answer: B Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

40) The natural rate of unemployment consists of frictional unemployment plus cyclical unemployment. Answer: FALSE Diff: 1 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 41) Eliminating all structural unemployment would be good for the economy. Answer: FALSE Diff: 2 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 42) The full-employment rate of unemployment is zero. Answer: FALSE Diff: 2 Type: TF Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 43) Describe the three types of unemployment. Answer: Frictional unemployment is short-term unemployment that arises from the process of matching workers with jobs. Structural unemployment arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs. Cyclical unemployment is caused by a business cycle recession. Diff: 2 Type: SA Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 44) Explain what economists mean by full employment and why this rate of unemployment is not zero. Answer: Full employment occurs in the macro economy when cyclical unemployment is zero. The fullemployment rate of unemployment is then made up of the frictional rate of unemployment and the structural rate of unemployment. Because it will always take time to find a job, frictional unemployment will never be zero. Also, because demand and technology are constantly changing in an economy, structural unemployment will never be zero. That is, some workers will always lose their jobs as the demands for the products they make fall or disappear entirely. Diff: 2 Type: SA Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

45) What is the natural rate of unemployment, and what types of unemployment constitute the natural rate of unemployment? Answer: The natural rate of unemployment is the rate of unemployment that exists in the economy when cyclical unemployment is zero. This underlying level of unemployment in the economy consists of frictional and structural unemployment. The natural rate of unemployment is also known as the fullemployment rate of unemployment. Diff: 1 Type: SA Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

5.3

Explain what factors determine the unemployment rate

1) An increase in Employment Insurance payments would, in effect, ________ the amount of time spent searching for a job, which would increase ________ unemployment. A) increase; cyclical B) increase; frictional C) decrease; cyclical D) decrease; frictional E) increase; structural Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 2) Which of the following would increase the unemployment rate? A) a law making it illegal to work more than 35 hours per week B) a cut in employment compensation C) an increase in employment insurance payments D) a decrease in the minimum wage E) a period of high economic growth Answer: C Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

3) Which of the following would decrease the unemployment rate? A) an increase in the minimum wage B) an increase in the efficiency wage C) an increase in labour union membership D) government aid to retrain unemployed workers E) an increase in the generosity of Employment Insurance payments Answer: D Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 4) Which of the following policies would reduce structural unemployment? A) an increase in the minimum wage B) a job retraining program C) expanding employment insurance to cover more workers D) building an online job database that helps workers find jobs E) a government spending program designed to shorten recessions Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 5) Which of the following policies would reduce frictional unemployment? A) a decrease in the minimum wage B) a job retraining program C) implementing an unemployment insurance policy D) building an online job database that helps workers find jobs E) an increase in the generosity of Employment Insurance payments Answer: D Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 6) The Employment Insurance program has which of the following effects? A) It decreases the amount of personal income of the unemployed. B) It contributes to the severity of a recession or economic downturn. C) It increases the amount of time spent searching for a job. D) It lowers the overall unemployment rate. E) It reduces structural unemployment. Answer: C Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

7) In Canada the Employment Insurance (EI) will tend to ________ the opportunity cost of continuing to search for a job, and generally will ________ the unemployment rate. A) lower; lower B) lower; increase C) increase; lower D) increase; increase E) increase; not impact Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 8) The increased generosity of unemployment insurance programs in Canada as compared to the United States should A) decrease the duration of unemployment in Canada as compared to the United States. B) increase the duration of unemployment in Canada as compared to the United States. C) have no impact on the duration of unemployment in Canada. D) raise the duration of unemployment in the United States. E) raise Canada's structural unemployment relative to the United States. Answer: B Diff: 3 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills 9) If the minimum wage is set above the market wage, A) the quantity of labour supplied will be below the quantity of labour demanded. B) unemployment will rise. C) highly-skilled workers will have a harder time finding jobs. D) frictional unemployment will increase. E) All of the above are correct. Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills

10) Minimum wage laws cause unemployment because the legal minimum wage is set A) below the market wage, causing labour demand to be greater than labour supply. B) below the market wage, causing labour demand to be less than labour supply. C) above the market wage, causing labour demand to be greater than labour supply. D) above the market wage, causing labour demand to be less than labour supply. E) too low compared the market wage, causing labour demand to collapse. Answer: D Diff: 3 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 11) If the government of Alberta announces that it would raise the minimum wage in the province from $11.20 an hour to $15 an hour, which of the following is most likely to occur as a result of the new minimum wage? A) an increase in unemployment B) a decrease in prices C) a decrease in unemployment D) a decrease in automation E) an increase in the employment population ratio Answer: A Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 12) Suppose more Canadian retail firms decided to pay efficiency wages. As a result, we would expect A) the labour force participation rate to fall. B) the average wage rate to rise. C) the average wage to fall. D) long run unemployment trends to reverse. E) the employment population ratio to rise. Answer: B Diff: 2 Type: MC Topic: Labour Unions Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills

13) If firms pay "efficiency wages," they pay wages that A) motivate workers to increase their productivity. B) are lower than average to ensure maximum profit. C) will eventually lower the unemployment rate. D) are mandated by the government. E) are negotiated by labour unions. Answer: A Diff: 2 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 14) Efficiency wages cause unemployment because A) firms pay wages that are below the market wage, causing the quantity of labour demanded to be greater than the quantity of labour supplied. B) firms pay wages that are below the market wage, causing the quantity of labour demanded to be less than the quantity of labour supplied. C) firms pay wages that are above the market wage, causing the quantity of labour demanded to be greater than the quantity of labour supplied. D) firms pay wages that are above the market wage, causing the quantity of labour demanded to be less than the quantity of labour supplied. E) firms pay wages that are above the market wage, causing the quantity of labour demanded to increase in all industries. Answer: D Diff: 3 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 15) The unemployment rate in Canada is typically higher for teenagers relative to other workers in part because of the impacts of minimum wage laws. Answer: TRUE Diff: 2 Type: TF Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 16) Most economists believe that labour unions significantly increase the overall unemployment rate in Canada. Answer: FALSE Diff: 2 Type: TF Topic: Labour Unions Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

17) Efficiency wage is another name for the minimum wage. Answer: FALSE Diff: 1 Type: TF Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 18) Discuss the likely impact of each of the following on the unemployment rate. a. The length of time workers are eligible to receive Employment Insurance payments is cut in half. b. The government passes a law making labour unions illegal. c. The minimum wage is raised by 50 percent. d. The government funds an Internet site where companies can post job openings at no charge. Answer: a. The unemployment rate will likely decrease, since decreasing the time people are eligible to receive Employment Insurance benefits will increase the opportunity cost of searching for a job. b. This will likely have little effect on the unemployment rate as unions cover relatively little of the Canadian labour force. c. The unemployment rate will likely increase since an increase in minimum wage will raise the wage above the market wage for some workers. d. The unemployment rate will likely decrease, since making information on job openings more available lowers the search involved in frictional unemployment. Diff: 2 Type: ES Topic: The Unemployment Rate Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 19) What are some reasons why many economists still think Employment Insurance (EI) is a good idea for Canada, despite the fact it prolongs job search and increases the unemployment rate? Answer: If not for the EI program, unemployed workers would suffer very large declines in their income, which would lead them to greatly reduce spending, which would make any recession worse. EI helps the unemployed maintain their incomes and spending, which also reduces the personal hardship of being unemployed. Finally, EI helps both workers and firms make "good matches." Allowing unemployed people spend more time searching for an appropriate job that means more people find jobs that are appropriate to their skills and tastes. The better the match between employer and employee, the more productive the economy will be. Diff: 3 Type: ES Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

20) The Employment Insurance program A) increases the amount of time the unemployed spend searching for a job. B) decreases the level of frictional unemployment. C) pays the unemployed a benefit equal to twice the average wage. D) eliminates structural unemployment. E) increases cyclical unemployment. Answer: A Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 21) By offering training to workers whose firms laid them off because of competition from foreign firms, the federal government is attempting to reduce A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: B Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 22) Establishing a federal employment agency that speeds up the process of matching unemployed workers with unfilled jobs is an attempt to lower A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: A Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

23) Which of the following explains why Canada tends to have unemployment rates that are higher than the United States? A) Technological change occurs at a faster rate in Canada, so structural unemployment is higher in Canada. B) Canada offers more generous unemployment benefits than the United States. C) Firms in Canada offer employees higher wages and higher benefits than do firms in the United States. D) The minimum wage in Canada is lower than it is in the United States. E) Seasons play a bigger role in the Canadian economy than in the American economy. Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 24) Despite increasing the unemployment rate, the Employment Insurance program can improve the economy by A) keeping unmotivated people out of the labour force. B) allowing workers the time needed to find a job that is a good match for their skills. C) increasing the need for government. D) creating an incentive for workers to put a lot of effort into their jobs. E) creating an incentive for firms to hire more workers. Answer: B Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 25) Except during recessions, workers in Canada are eligible for unemployment benefits for about twice as long a period of time as workers in the United States. As a result, A) the average duration of unemployment is longer in the United States than in Canada. B) the unemployment rate in Canada is usually higher than in the United States. C) the opportunity cost of job search in Canada is lower than in the United States. D) frictional unemployment is higher, on average, in the United States than in Canada. E) cyclical unemployment is higher, on average in Canada than in the United States. Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Multicultural and Diversity

26) Which of the following has a tendency to raise the unemployment rate? A) implementing a minimum wage in an economy B) reducing unemployment insurance in an economy C) offering wages at the market-clearing rate D) reducing labour unions' membership in an economy E) introducing programs that retrain workers displaced by technological change Answer: A Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 27) An efficiency wage A) is higher than the market wage and tends to increase productivity. B) is lower than the market wage and tends to increase productivity. C) is higher than the market wage and tends to decrease productivity. D) is lower than the market wage and tends to decrease productivity. E) is lower than the market wage and tends to increase unemployment. Answer: A Diff: 1 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 28) Why might firms pay wages that are above the equilibrium wage in a market? A) to increase the productivity of their workers B) to reduce the unemployment rate C) to encourage workers to form labour unions D) to reduce profit E) to avoid federal corporate income taxes Answer: A Diff: 2 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 29) The equilibrium wage in a local labour market is $12 per hour. If a minimum wage of $15 per hour is imposed, which of the following will occur? A) There will be an increase in unemployment. B) There will be an increase in the quantity of labour demanded by firms. C) There will be a decrease in the quantity of labour supplied by households. D) There will be a decrease in automation. E) All of the above will occur. Answer: A Diff: 3 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 49 Copyright © 2024 Pearson Canada Inc.

30) The equilibrium wage in a local labour market is $15 per hour. If the minimum wage is $13 per hour, which of the following will occur? A) Minimum wage will not affect the market, and the equilibrium wage of $15 per hour will prevail. B) There will be a decrease in the quantity of labour demanded by firms. C) There will be an increase in the quantity of labour supplied by households. D) There will be an increase in automation. E) All of the above will occur. Answer: A Diff: 3 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking Figure 5.1

31) Refer to Figure 5.1. Based on the graph of the labour market above, if a minimum wage of $16 per hour is imposed, which of the following will result? A) The quantity of labour demanded by firms will rise. B) The quantity of labour demanded by firms will fall. C) The unemployment rate will fall. D) The quantity of labour supplied by households will fall. E) None of the above will occur. Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills

32) Refer to Figure 5.1. Based on the graph of the labour market above, if a minimum wage is set at $10 per hour, which of the following will occur? A) The unemployment rate will rise. B) The unemployment rate will fall. C) The level of unemployment will fall, but the percentage of the labour force unemployed will not change. D) The level of unemployment will rise, but the percentage of the labour force unemployed will not change. E) None of the above will occur. Answer: E Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills 33) Labour unions cause unemployment because the union contract wage is set A) below the market wage, causing a shortage of labour. B) below the market wage, causing a surplus of labour. C) above the market wage, causing a surplus of labour. D) above the market wage, causing a shortage of labour. E) equal to the market clearing wage. Answer: C Diff: 2 Type: MC Topic: Labour Unions Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 34) Observing that Costco pays its employees much more than Walmart does leads economists to think A) Costco is paying an efficiency wage in an effort to maximize profit. B) Costco employees have a powerful union. C) Costco's owners are not interested in maximizing profits. D) Walmart is consistently breaking Canada's labour laws. E) Costco's ownership must be more motivated by fairness than Walmart. Answer: A Diff: 1 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 35) The unemployment rate has historically been higher in Canada than in the United States. Answer: TRUE Diff: 1 Type: TF Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

36) The unemployment rate is higher with a minimum wage law than it would be without a minimum wage law. Answer: TRUE Diff: 1 Type: TF Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 37) Paying efficiency wages are a way for a company to cut costs and become more efficient, and are therefore lower than market wages. Answer: FALSE Diff: 1 Type: TF Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 38) What effect does the Employment Insurance program have on the unemployment rate? Answer: The Employment Insurance program likely raises the unemployment rate. The employment insurance payments lower the opportunity cost (the salary that the unemployed are giving up by not working) of continuing to search for a job, which leads the unemployed to spend more time searching for a job. Diff: 2 Type: SA Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 39) Why would a firm pay efficiency wages? Answer: An efficiency wage is a wage that is higher than the market wage. Firms pay efficiency wages to raise productivity. Studies show that workers are motivated to work harder if they are paid higher wages. Put differently, a firm does not monitor workers as closely in order to get them to be more productive. The higher wage motivates them to be productive. Diff: 2 Type: SA Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

40) Some of the people advocating large increases in the minimum wage, use the theory of efficiency wages to counter the claim that large increases in the minimum wage increase unemployment. a. What are efficiency wages? b. What is likely to happen if the minimum wage were set equal to the efficiency wage? Explain. Answer: a. Efficiency wages are wages above the market wage voluntarily paid by an employer to increase the productivity of the firm's workers. b. If all firms pay the same efficiency wage, say due to a minimum wage, the higher wages would have a much smaller impact on productivity than if only a few firms pay an efficiency wage. Part of the reason why efficiency wages increase productivity is they increase the cost of getting fired for not working very hard. Efficiency wages also tend to make workers feel better about their employers and thus more likely to work hard. These effects disappear if all firms are paying the same efficiency wage. Diff: 3 Type: ES Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

5.4

Define price level and inflation rate, and understand how they are computed

1) The average price of goods and services in the economy is also known as A) the price level. B) the inflation rate. C) a market basket. D) the cost of living. E) average expenditure. Answer: A Diff: 1 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 2) If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would A) increase. B) remain the same. C) decrease. D) equal 20%. E) cannot be determined. Answer: A Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

3) Which of the following is true about the consumer price index? A) It accounts for people switching to goods whose prices have fallen. B) It assumes that consumers purchase the same amount of each product in the market basket each month. C) It updates yearly to allow for new products to be added to the market basket. D) It filters out the part of price increases that occurs because of quality improvements in products. E) It updates yearly to account for changes in the places where people shop. Answer: B Diff: 3 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 4) Which of the following price indices comes closest to measuring the cost of living of the typical household? A) GDP deflator B) producer price index C) consumer price index D) household price index E) house price index Answer: C Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 5) Which of the following would be the best measure of the cost of living? A) real GDP B) real GDP per person C) GDP deflator D) consumer price index E) purchasing managers' index Answer: D Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

6) The consumer price index is the A) cost of a market basket of goods and services typically consumed in the base year. B) cost of a market basket of goods and services typically consumed in the current period. C) average of the prices of the goods and services purchased by a typical urban family. D) average of the prices of new final goods and services produced in the economy over a period of time. E) average price of consumer data purchased from Facebook. Answer: C Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking Table 5.2 Product Milk Bread

Quantity 50 100

Base Year (2015) Price $1.20 1.00

2022 Price $1.50 1.10

7) Refer to Table 5.2. Assume the market basket for the consumer price index has two products — bread and milk — with the above values in 2015 and 2022 for price and quantity. The Consumer Price Index for 2022 equals A) 118. B) 116. C) 86. D) 85. E) 76. Answer: B Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

Table 5.3 Product Cokes Hamburgers CDs

Quantity 100 200 10

Base Year (2015) Price $0.50 2.00 20.00

2022 Price $0.75 2.50 21.00

8) Refer to Table 5.3. Assume the market basket for the consumer price index has three products — Cokes, hamburgers, and CDs — with the above values in 2015 and 2022 for price and quantity. The Consumer Price Index for 2022 equals A) 75. B) 93. C) 108. D) 121. E) 132. Answer: D Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Table 5.4 Product Meat Potatoes

Base Year (2015) Quantity 100 200

Price $10 2

2022 Quantity 120 180

Price $12 3

9) Refer to Table 5.4. Assume the market basket for the consumer price index has two products — meat and potatoes — with the above values in 2015 and 2022 for price and quantity. The Consumer Price Index for 2022 equals A) 125. B) 129. C) 135. D) 141. E) 153. Answer: B Diff: 3 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

10) The percent increase in the CPI from one year to the next is a measure of the A) GDP deflator. B) unemployment rate. C) real interest rate. D) inflation rate. E) GDP growth rate. Answer: D Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 11) Assume the average annual CPI values for 2021 and 2022 were 207.3 and 215.3, respectively. What was the percent increase in the CPI between these two years? A) 0.96 B) 1.04 C) 3.86 D) 8.0 E) 9.16 Answer: C Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 12) A consumer price index of 160 in 2020 with a base year of 2012 would mean that the cost of the market basket A) equaled $160 in 2022. B) equaled $160 in 2012. C) rose 160% from the cost of the market basket in the base year. D) rose 60% from the cost of the market basket in the base year. E) is 160 times more than its cost in 2012. Answer: D Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

Table 5.5 Year 2020 2021

CPI 207 215

13) Refer to Table 5.5. Consider the above values of the consumer price index for 2020 and 2021. The inflation rate for 2021 was equal to A) 215 percent. B) 21.5 percent. C) 8.0 percent. D) 3.9 percent. E) 2.5 percent. Answer: D Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate Table 5.6 Year 2019 2020 2021

CPI 157 161 163

14) Refer to Table 5.6. Consider the above values of the consumer price index for 2019, 2020, and 2021. The inflation rate for 2020 was equal to A) 1.2 percent. B) 2.0 percent. C) 2.5 percent. D) 4.0 percent. E) 5.2 percent. Answer: C Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

15) Refer to Table 5.6. Consider the above values of the consumer price index for 2019, 2020, and 2021. The inflation rate for 2021 was equal to A) 1.2 percent. B) 2.0 percent. C) 2.5 percent. D) 4.0 percent. E) 5.2 percent. Answer: A Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 16) Your grandfather tells you that he earned $5,000/year in his first job in 1971. You earn $45,000/year in your first job in 2022. You know that average prices have risen steadily since 1971. You earn A) 9 times as much as your grandfather in terms of real income. B) more than 9 times as much as your grandfather in terms of real income. C) less than 9 times as much as your grandfather in terms of real income. D) less than 9 times as much as your grandfather in terms of nominal income. E) more than 9 times as much as your grandfather in terms of nominal income. Answer: C Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 17) If we want to use a measure of inflation that foreshadows price changes before they affect prices at the retail level, we would base our measure of inflation on A) the producer price index. B) the consumer price index. C) the GDP deflator. D) the household price index. E) the Baltic dry index. Answer: A Diff: 2 Type: MC Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

18) The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket. A) change; overestimates B) change; underestimates C) do not change; overestimates D) do not change; underestimates E) do not change; does not change Answer: A Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 19) The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to ________ the cost of the market basket. A) also; understate B) also; overstate C) not; understate D) not; overstate E) also; not change Answer: D Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 20) The "new product bias" in the consumer price index refers to the idea that A) consumers switch to new goods when the prices of old goods increase, and the CPI overestimates the cost to consumers. B) consumers switch to old goods when the prices of new goods increase, and the CPI underestimates the cost to consumers. C) consumers prefer new goods, even if they are worse in quality than old goods, and this causes the CPI to underestimate the cost to consumers. D) new products' prices often decrease after their initial introduction, and the CPI is adjusted infrequently and overestimates the cost to consumers. E) new products are often over represented in the basket as consumers move quickly to adopt new technology and then buy fewer units as time passes. Answer: D Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

21) The iPhone 7 was launched without a headphone jack. This "innovation" will mean A) the CPI will understate inflation as cheap headphones must be replaced with more expensive wireless ones. B) the CPI will overstate inflation because lack of a headphone jack is an example of a quality improvement. C) the CPI will understate inflation due to the new product bias. D) the CPI will overstate inflation due to the outlet bias as people buy new phones at iStores. E) the CPI will understate inflation due to the outlet bias. Answer: A Diff: 3 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 22) The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is A) positively sloped. B) negatively sloped. C) vertical. D) horizontal. E) backward bending. Answer: C Diff: 3 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 23) Most economists believe that the biases in the consumer price index cause the CPI to overstate the true inflation rate by about A) one-half to one percentage point. B) one to two percentage points. C) one quarter percentage point. D) one and one-half percentage points. E) more than two percentage points. Answer: A Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

24) Which of the following would be a consequence of substitution bias in the CPI? A) Social Security payments would not adequately compensate retired workers for inflation. B) Businesses would overcompensate employees for inflation when giving the cost of living rises. C) The inflation rate based on the CPI would underestimate the true level of inflation. D) Judges would award child support payments that would not adequately keep up with the true cost of inflation. E) Economists make errors in estimating inflation when using substitutes for the CPI such as GDP deflator. Answer: B Diff: 3 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 25) Statistics Canada surveys 16,758 Canadian households on their spending habits. The results are used to construct a typical basket of goods and services purchased by a typical household. Which of the following is not one of the broad categories of the basket? A) alcohol and tobacco B) health and personal care C) stocks and savings D) clothing and footwear E) shelter Answer: C Diff: 1 Type: MC Topic: Consumer Confidence Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 26) The producer price index measures the prices that firms A) pay for imported natural resources that go into the production process. B) receive for the goods and services they export. C) receive for the goods and services they use at all stages of production. D) pay for labour, whether or not the labour is foreign or domestic. E) pay the government in taxes and licencing fees. Answer: C Diff: 1 Type: MC Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 27) The inflation rate measures the average prices of goods and services in the economy. Answer: FALSE Diff: 1 Type: TF Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

28) Cashmere socks cost 35 cents a pair in 1915. Cashmere socks now cost about $40 a pair. This means that cashmere socks are much less affordable now than in 1915. Answer: FALSE Diff: 1 Type: TF Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 29) Shelter is the largest component of the Canadian CPI market basket. Answer: TRUE Diff: 1 Type: TF Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 30) The GDP deflator is the best measure that reflects the prices of goods and services purchased by the typical household. Answer: FALSE Diff: 1 Type: TF Topic: Price Indexes Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 31) Why does the substitution bias cause the consumer price index to overstate inflation and the cost of living? Why does the increase in quality bias cause the consumer price index to overstate inflation and the cost of living? Answer: The substitution bias causes the CPI to overstate inflation and the cost of living because the CPI, being based on a fixed market basket of goods and services, implicitly assumes that consumers do not switch away from products whose prices are rising and into products whose prices are falling (or rising less). Consumers dodge some price increases by switching to other products, therefore decreasing their cost of living below what the CPI indicates. The increase in quality bias causes the CPI to overstate inflation and the cost of living because a portion of the price increase of many goods and services is due to an increase in quality. Statistics tries to filter out the portion of the price increase due to quality, but does not fully adjust the price increase for quality improvements. Diff: 2 Type: ES Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

Table 5.7 Product Tacos Earplugs Toothbrushes

Quantity 5 10 3

Base Year Price (2012) $1.50 6.00 2.50

Price (2021) $2.00 7.50 3.50

Price (2022) $2.25 7.00 3.50

32) Refer to Table 5.7. Consider a simple economy that produces only three products: tacos, earplugs, and toothbrushes. Use the information in the table to calculate the inflation rate for 2022, as measured by the consumer price index. Answer: Total expenditures for 2012 = (5 × $1.50) + (10 × $6.00) + (3 × $2.50) = $75.00. Total expenditures for 2021 = (5 × $2.00) + (10 × $7.50) + (3 × $3.50) = $95.50. Total expenditures for 2022 = (5 × $2.25) + (10 × $7.00) + (3 × $3.50) = $91.75. The CPI for 2021 = [($95.50/$75.00) × 100] = 127.33; CPI for 2022 = [($91.75/$75.00) × 100] = 122.33. So, the inflation rate for 2022 = [((122.33 − 127.33)/127.33) × 100)] = -3.9%. Diff: 3 Type: ES Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 33) The broadest measure of the price level that includes all final goods and services is A) the producer price index. B) the consumer price index. C) the GDP deflator. D) the wholesale price index. E) house price index. Answer: C Diff: 1 Type: MC Topic: Price Indexes Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 34) The most widely used measure of inflation is based on which of the following price indices? A) the producer price index B) the consumer price index C) the GDP deflator D) the wholesale price index E) the S&P 500 index Answer: B Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

35) The CPI is also referred to as A) the GDP deflator. B) the inflation-consumption index. C) the cost-of-living index. D) the producer price index. E) the consumer profitability indicator. Answer: C Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 36) Which of the following is the smallest portion of the market basket of goods that makes up the CPI? A) shelter B) food C) transportation D) alcohol and tobacco E) clothing Answer: D Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking Table 5.8 Year 2021 2022

CPI (2012 = 100) 122.7 124.5

37) Refer to Table 5.8. Suppose that the data in the table above reflect price levels in the economy. What is the inflation rate between 2021 and 2022? A) 1.5% B) 1.8% C) 22.7% D) 24.5% E) 101% Answer: A Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate

Table 5.9 Year 2021 2022

CPI (2021 = 100) 100 120

38) Refer to Table 5.9. Suppose that the data in the table above reflect the price levels in the economy. What is the inflation rate in between 2021 and 2022? A) 2% B) 5% C) 10% D) 12% E) 20% Answer: E Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate Table 5.10 Year 2021 2022

CPI (2021 = 100) 100 113

39) Refer to Table 5.10. Suppose that the data in the table above reflect the price levels in the economy. Given that data, we can say that the cost of living rose by ________ between 2021 and 2022. A) 2% B) 5% C) 8% D) 11% E) 13% Answer: E Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate

40) Monthly expenditures for a family of 4 in 2021 averaged $1,400. In 2022, the cost of the same purchases was $1,500. If 2021 is the base year, what was the CPI in 2022? A) 110 B) 107 C) 100 D) 93 E) 85 Answer: B Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 41) If the CPI changes from 125 to 120 between 2021 and 2022, how did prices change between 2021 and 2022? A) Prices increased by 5%. B) Prices decreased by 5%. C) Prices increased by 25%. D) Prices decreased by 4%. E) Prices increased by 125%. Answer: D Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 42) Which of the following describes the accuracy of the Consumer Price Index? A) Changes in the CPI accurately reflect the true rate of inflation. B) Changes in the CPI understate the true rate of inflation. C) Changes in the CPI overstate the true rate of inflation. D) Changes in the CPI accurately reflect changes in quality. E) Changes in the CPI accurately reflect changes in substitutes. Answer: C Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

43) If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the cost of living changed between these two years? A) The cost of living has increased by 6%. B) The cost of living has increased by 2.9%. C) The cost of living has increased by 12.7%. D) The cost of living has decreased by 6%. E) The cost of living has decreased by 5.1%. Answer: B Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 44) If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as compared to the CPI basket, then A) changes in the CPI accurately reflect the true rate of inflation. B) changes in the CPI understate the true rate of inflation. C) changes in the CPI overstate the true rate of inflation. D) changes in the CPI accurately reflect changes of the substitute products. E) changes in the CPI accurately reflect changes in the quality of the products. Answer: C Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 45) Most economists believe that biases cause changes in the CPI to overstate the inflation rate by ________ percentage points. A) 0.1 to 0.2 B) 0.2 to 2.0 C) 0.4 D) 0.5 to 1.0 E) 1.0 to 3.0 Answer: D Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

46) The formula for calculating the CPI is A) (expenditures in the current year/expenditures in the base year) × 100. B) (expenditures in the current year × expenditures in the base year)/100. C) (expenditures in the base year/expenditures in the current year). D) (expenditures in the base year × 100)/(expenditures in the current year). E) (expenditures in the current year)/(average of base year and current year expenditure) × 100. Answer: A Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 47) When the price of gasoline rises, some consumers begin riding their bikes more frequently or riding the bus instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behaviour is called A) outlet bias. B) increase in quality bias. C) substitution bias. D) discrimination bias. E) new product bias. Answer: C Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 48) The base period for CPI calculations is generally 2002. In 2014, 55% of Canadians had a smartphone, but in 2002 almost no one had a smartphone. This potential for bias in the CPI is referred to as ________ bias and results in ________. A) outlet; the CPI underestimating the true change in the cost of living B) new product; the CPI overestimating the true change in the cost of living C) outlet; the CPI overestimating the true change in the cost of living D) new product; the CPI underestimating the true change in the cost of living E) substitution; the CPI underestimating the true change in the cost of living Answer: B Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

49) What is outlet bias? A) the tendency for households to spend more money over time B) the tendency for households to spend their money at discount stores as prices rise C) the tendency for the quality of products to improve over time even though the CPI does not measure changes in quality D) the tendency for consumers to purchase newer, more technologically advanced products even though they have higher prices E) the tendency for households to substitute one good for another in response to price changes Answer: B Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 50) More and more students are buying textbooks online instead of in the university bookstore. The CPI does not account for this change in purchasing habits. This is an example of A) outlet bias. B) substitution bias. C) new product bias. D) increase in quality bias. E) brick and mortar bias. Answer: A Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 51) In 1986, an Apple IIe computer with 65 kilobytes of memory cost around $1,500. Today, a $2,500 Apple Macbook Pro computer comes with 16 gigabytes of memory. This illustrates the potential for what kind of bias in CPI calculations? A) new product bias B) increase in quality bias C) substitution bias D) outlet bias E) Moore's law bias Answer: B Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

Table 5.11

Product Quantity (2002) Computers 1 Books 10 Burgers 50 Total

Price (2002) $1,200 25 3

Expenditure (2002) $1,200 250 150 $1,600

Price (2020) $900 30 4

Expenditure (on base year quantities) (2022) $900 300 200 $1,400

52) Refer to Table 5.11. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above. If 2002 is the base year, then what is the CPI for 2022? A) 14.3 B) 87.5 C) 93.2 D) 114.3 E) 160 Answer: B Diff: 3 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Table 5.12

Product Quantity (2018) Hair cuts 6 Backpacks 4 Tacos 100 Total

Price (2018) $50 25 1

Expenditure (2018) $300 100 100 $500

Price (2022) $70 30 5

Expenditure (on base year quantities) (2022) $420 120 500 $1,040

53) Refer to Table 5.12. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above. If 2018 is the base year, then what is the CPI for 2022? A) 40.08 B) 100 C) 180 D) 208 E) 251 Answer: D Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

54) The PPI is the A) price parity index. B) prime producer index. C) producer price index. D) production performance indicator. E) partial prime interest rate. Answer: C Diff: 1 Type: MC Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 55) What does the PPI measure? A) the average change in the prices paid for all goods produced in the economy over a given year B) the average of the prices received by producers of goods and services at all stages of the production process C) the level of production of goods and services generated in the economy in a given year D) the difference between the prices consumers pay for goods and services and the prices producers pay for goods and services E) the average change in prices paid by producers for their factors of production Answer: B Diff: 1 Type: MC Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 56) The inflation rate measures the percentage increase in the price level from one year to the next. Answer: TRUE Diff: 1 Type: TF Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 57) If the CPI falls from 142 to 140 between two consecutive years, this implies that prices fell by 2% between those two years. Answer: FALSE Diff: 1 Type: TF Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 58) The producer price index tracks the prices firms receive for goods and services at all stages of production. Answer: TRUE Diff: 1 Type: TF Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 72 Copyright © 2024 Pearson Canada Inc.

59) List three different price indices and explain how they differ in terms of the market basket on which they are based. Answer: Three examples of price indices are the GDP deflator, the consumer price index, and the producer price index. All three differ by the kinds of goods that are contained in the market basket that is used to calculate the average level of prices. The GDP deflator is based on the average price of all final goods and services produced. The consumer price index is based on the average price of goods/services purchased by the typical urban family. The producer price index is based on the prices received by producers of goods and services at all stages of the production process. Diff: 2 Type: SA Topic: Price Indexes Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 60) Explain how the CPI is constructed. Answer: Statistics Canada surveys a sample of Canadian households to determine their spending habits and to construct a listing or market basket of these goods. The survey is also used to determine the importance of the items in the consumer's budget. Each month Statistics Canada collects the prices of the goods in the market basket. A weighted average is taken of those prices, with the more important items receiving higher weights. A base year is chosen and the CPI is set to 100 in the base year. In every other year, the CPI is calculated as the ratio of the cost of the market basket in that year, divided by the cost of the market basket in the base year, times 100. Diff: 2 Type: SA Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking Table 5.13 Product Burritos Flashlights Golf balls

Quantity 10 15 8

Base Year Price (2012) $1.00 5.00 2.00

Price (2021) $1.50 7.00 3.00

Price (2022) $1.75 6.75 3.50

61) Refer to Table 5.13. Consider a simple economy that produces only three products: burritos, flashlights, and golf balls. Use the information in the table to calculate the inflation rate for 2022, as measured by the consumer price index. Answer: Total expenditures for 2012 = (10 × $1.00) + (15 × $5.00) + (8 × $2.00) = $101.00 Total expenditures for 2021 = (10 × $1.50) + (15 × $7.00) + (8 × $3.00) = $144.00 Total expenditures for 2022 = (10 × $1.75) + (15 × $6.75) + (8 × $3.50) = $146.75 The CPI for 2021 = [($144.00/$101.00) × 100] = 142.57 The CPI for 2022 = [($146.75/$101.00) × 100] = 145.30 So, the inflation rate for 2022 = [((145.30 − 142.57)/142.57) × 100] = 1.9%. Diff: 3 Type: SA Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 73 Copyright © 2024 Pearson Canada Inc.

5.5

Use price indexes to adjust data for the effects of inflation

1) The real wage equals the nominal wage ________ the CPI, all times 100. A) divided by B) times C) minus D) plus E) to the power of Answer: A Diff: 1 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking 2) If your nominal wage rises faster than the price level, we can say your real wage has ________ and the purchasing power of your income has ________. A) fallen; fallen B) fallen; risen C) risen; risen D) risen; fallen E) remained unchanged; fallen Answer: C Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking 3) You earned $30,000 in 2015, and your salary rose to $80,000 in 2022. If the CPI rose from 82 to 202 between 2015 and 2022, which of the following is true? A) There was deflation between 2015 and 2022. B) The purchasing power of your salary fell between 2015 and 2022. C) The purchasing power of your salary remained constant between 2015 and 2022. D) The purchasing power of your salary increased between 2015 and 2022. E) There is no way to compare the purchasing power of your salary between 2015 and 2022. Answer: D Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

Table 5.14 Year 1956 2020

Nominal Average Hourly Earnings $1.53 25.14

CPI (2002 = 100) 14.3 127.3

The table above reports the nominal average hourly wage and the consumer price index for 1956 and 2020. 4) Refer to Table 5.14. The real average hourly earnings for 1956 in 2002 dollars equals A) $0.22. B) $10.70. C) $13.02. D) $21.88. E) $25.32. Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 5) Refer to Table 5.14. The percentage change in real average wage from 1956 to 2020 equals A) 2.0 percent. B) 8.7 percent. C) 21.7 percent. D) 84.6 percent. E) 154.3 percent. Answer: D Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 6) Refer to Table 5.14. The real average hourly earnings for 1956 in 2020 dollars equal A) $1.53. B) $2.82. C) $10.69. D) $13.62. E) $15.83. Answer: D Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

Table 5.15 Year 2020 2021 2022

Nominal Average Hourly Earnings $15 15 18

CPI 100 105 110

7) Refer to Table 5.15. Looking at the table above, real average hourly earnings in 2020 were A) $9.00. B) $14.29. C) $15.00. D) $16.50. E) $19.82. Answer: C Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 8) Refer to Table 5.15. Looking at the table above, real average hourly earnings were equal to ________ in 2021. A) $13.63 B) $14.29 C) $15.00 D) $16.50 E) $18.36 Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 9) Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 219 in 2022, then the value of your grandfather's salary in 2022 dollars is approximately A) $84,774. B) $63,830. C) $37,200. D) $26,280. E) $19,568. Answer: A Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

10) Nominal income is equal to real income if the CPI is less than 100. Answer: FALSE Diff: 1 Type: TF Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking 11) Currently, the base year for the CPI is 2002. Answer: TRUE Diff: 1 Type: TF Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking

Table 5.16 Year 1989 2015

Median Salary: New York Yankees $500,000 3,300,000

CPI 124 238

Salaries in major league baseball have soared over the last 30 to 40 years. Some of the salary increase is due to inflation. The table above reports the consumer price index and the median nominal salary of the New York Yankees for 1989 and 2015. Source: USA Today Salaries Database, http://www.usatoday.com/sports/mlb/yankees/salaries/2015/team/all/ 12) Refer to Table 5-16. Calculate the real median salary of the New York Yankees in both 1982-1984 dollars and 2015 dollars. Calculate the percentage increase in the median salary of the Yankees from 1989 to 2015 in both nominal terms and in real terms. Answer: Real median salary =

× 100.

Real median salary in 2015 dollars = Real median salary in 1982-1984 dollars ×

Year 1989 2015

Median Salary: CPI New York (1982-1984 = Yankees 100) $500,000 124 3,300,000 238

In nominal terms, the median salary increased In real terms, the median salary increased

Real Median Salary (19821984 dollars) $403,226 1,386,554

Real Median Salary (2015 dollars) $773,933 3,300,000 × 100 = 560 percent

× 100 = 244 percent

Diff: 3 Type: ES Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

13) The CPI in 1997 was 90.4, and the CPI in 2016 was 126.6. If you earned a salary of $60,000 in 1997, what would be a salary with equivalent purchasing power in 2016? A) $54,240 B) $75,960 C) $84,027 D) $127,214 E) $136,841 Answer: C Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 14) If your nominal wage rises more slowly than the price level, we can say your real wage has ________ and the purchasing power of a dollar has ________. A) fallen; fallen B) fallen; risen C) risen; risen D) risen; fallen E) remained constant; remained constant Answer: A Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking Table 5.17 Year 2020 2021 2022

Nominal Average Hourly Earnings $25.11 25.48 25.90

CPI (2002 = 100) 126.6 128.1 131.5

15) Refer to Table 5.17. Looking at the table above, nominal wages ________ from 2021 to 202, and real wages ________ from 2021 to 2022. A) rose; rose B) rose; fell C) fell; rose D) fell; fell E) rose; remained constant Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

Table 5.18 Year 2020 2021 2022

Nominal Average Hourly Earnings $25.11 25.48 25.90

CPI (2002 = 100) 126.6 128.1 131.2

16) Refer to Table 5.18. Looking at the table above, the real average hourly wage in 2020 was A) $19.13 in 2002 dollars. B) $19.89 in 2002 dollars. C) $26.30 in 2002 dollars. D) $314.80 in 2002 dollars. E) $423.93 in 2002 dollars. Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 17) Refer to Table 5.18. Looking at the table above, real average hourly earnings between 2020 and 2021 changed by A) 0.3%. B) 1.5%. C) 2.2%. D) 5%. E) 6.5%. Answer: A Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 18) Refer to Table 5.18. Looking at the table above, real hourly earnings between 2021 and 2022 changed by A) -1.8 percent. B) -0.75 percent. C) 0.3 percent. D) 1.6 percent. E) 2.4 percent. Answer: B Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

19) Between 2021 and 2022, the CPI of a small nation rose from 182 to 185. If household incomes rose by 3 percent during that period of time, which of the following is true? A) The purchasing power of household income rose between 2021 and 2022. B) The purchasing power of household income fell between 2021 and 2022. C) The purchasing power of household income remained constant between 2021 and 2022. D) The purchasing power of household income rose by 3 percent in 2021 and in 2022. E) The purchasing power of household income fell by 3 percent in 2021 and in 2022. Answer: A Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 20) Between 2021 and 2022, the CPI of a small nation fell from 185 to 182. If household incomes fell by 3 percent during that period of time, which of the following is true? A) The purchasing power of household income rose between 2021 and 2022. B) The purchasing power of household income fell between 2021 and 2022. C) The purchasing power of household income remained constant between 2021 and 2022. D) The purchasing power of household income rose by 3 percent in 2021 and in 2022. E) The purchasing power of household income fell by 3 percent in 2021 and in 2022. Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Table 5.19 Year 2020 2021 2022

Nominal Average Hourly Earnings $23.00 23.50 24.00

CPI (2002 = 100) 119.9 121.7 122.8

21) Refer to Table 5.19. Looking at the table above, what is the rate of growth of real average hourly earnings from 2021 to 2022? A) 1.2% B) 2% C) 4.3% D) -1% E) -1.8 % Answer: A Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

22) Refer to Table 5.19. Looking at the table above, what is the approximate rate of growth of real average hourly earnings from 2020 to 2021? A) 0.67% B) 2% C) 0% D) -2% E) -0.5% Answer: A Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 23) Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average price level from 2020 to 2021? A) 0.9% B) 1.5% C) 2% D) 2.1% E) 19% Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 24) Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average price level from 2021 to 2022? A) 0.9% B) 1.5% C) 2% D) 2.6% E) 5.25% Answer: A Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 25) To obtain real average hourly earnings, nominal average hourly earnings are multiplied by the CPI. Answer: FALSE Diff: 1 Type: TF Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking

26) The CPI in 2020 was 125.2, while the CPI in 1991 was 82.8. If you had $5,000 in 1981, its equivalent purchasing power in 2020 would be $3306.71. Answer: FALSE Diff: 2 Type: TF Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Table 5.19 Year 2020 2021 2022

Nominal Average Hourly Earnings $23.00 23.50 24.00

CPI (2002 = 100) 119.9 121.7 122.8

27) Refer to Table 5.19. Using the above table, calculate real average hourly earnings for 2020, 2021, and 2022. Calculate the rate of growth of real average hourly earnings from 2021 to 2022. Answer: Real average hourly earnings in 2020 are

× 100 = $19.18 in 2002 dollars.

Real average hourly earnings in 2021 are

× 100 = $19.31 in 2002 dollars.

Real average hourly earnings in 2022 are

× 100 = $19.54 in 2002 dollars.

The rate of growth of real average hourly earnings from 2021 to 2022 is × 100% = 1.2%. Diff: 3 Type: SA Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

Table 5.20 Year

Nominal Minimum Wage

1981 2015

$3.50 11.00

CPI (2002 = 100) 49.5 126.6

28) Refer to Table 5.20. The table above lists the actual minimum wage and CPI in 1981 and in 2015. Using the above table, calculate the real minimum wage for 1981 and 2015. Calculate the rate of growth of the real minimum wage from 1981 to 2015. Are workers better off in terms of the purchasing power of a dollar in 1981 or 2015? Explain why. Answer: The real minimum wage in 1981 is

× 100 = $7.07 in 2002 dollars.

The real minimum wage in 2015 is

× 100 = $8.69 in 2002 dollars.

The rate of growth of the real wage from 1981 to 2015 is

× 100 = 22.9%

Workers who earned the minimum wage were better off in 2015 as compared to 1981. The value of the real minimum wage was higher in 2015. It has increased by 22.9% from 1981 to 2015. The nominal minimum wage rose faster than the general price level. Diff: 3 Type: SA Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

Table 5.21 Year 2020 2021 2022

Nominal Average Hourly Earnings $10 11 12

CPI (2002 = 100) 100 105 110

29) Refer to Table 5.21. Using the above table, calculate real average hourly earnings for 2020, 2021, and 2022. Calculate the rate of growth of real average hourly earnings from 2020 to 2021. Answer: Real average hourly earnings in 2020 are

× 100 = $10.

Real average hourly earnings in 2021 are

× 100 = $10.48.

Real average hourly earnings in 2022 are

× 100 = $10.91.

The rate of growth of real average hourly earnings from 2020 to 2021 is Diff: 3 Type: SA Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

× 100 = 4.103%.

5.6

Distinguish between the nominal interest rate and the real interest rate

1) The nominal interest rate equals the real interest rate ________ the inflation rate. A) times B) divided by C) plus D) minus E) to the power of Answer: C Diff: 1 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 2) The real interest rate equals the nominal interest rate ________ the inflation rate. A) times B) divided by C) plus D) minus E) to the power of Answer: D Diff: 1 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 3) The stated interest rate on a loan is the A) real interest rate. B) nominal interest rate. C) actual inflation rate. D) expected inflation rate. E) past interest rate. Answer: B Diff: 1 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

4) If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest? A) -9.5% B) -3.5% C) 1.5% D) 3.5% E) 9.5% Answer: D Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 5) Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest. If the inflation rate was 4%, what was the real interest rate you paid? A) 16 percent B) 12 percent C) 8 percent D) 6 percent E) 3 percent Answer: C Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 6) Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest. If the inflation rate was 7%, what was the real interest rate you paid? A) 17 percent B) 10 percent C) 7 percent D) 3 percent E) 1.5 percent Answer: D Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills

7) Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5 percent, then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation A) equal to 0 percent. B) greater than 7 percent. C) equal to 7 percent. D) less than 7 percent. E) equal to 3 percent. Answer: B Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 8) Suppose you lend $1,000 at an interest rate of 10 percent over the next year. If the expected real interest rate at the beginning of the loan contract is 4 percent, then what rate of inflation over the upcoming year would be most beneficial to you as the lender? An inflation rate A) less than 6 percent. B) greater than 6 percent. C) equal to 6 percent. D) equal to 4 percent. E) equal to 2 percent. Answer: A Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 9) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. Inflation during that year is 5%. As a result, you will receive ________ at the end of the year, but that money has a purchasing power of ________. A) $5,050; $5,025 B) $5,100; $5,050 C) $5,500; $5,250 D) $6,000; $5,500 E) $5,500; $6,000 Answer: C Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills

10) When deflation occurs, A) the real interest rate is greater than the nominal interest rate. B) the nominal interest rate is greater than the real interest rate. C) the nominal interest rate is equal to the real interest rate and inflation is negative. D) the nominal interest rate is equal to the real interest rate and inflation is positive. E) the real interest rate is positive while the nominal interest rate is negative. Answer: A Diff: 2 Type: MC Topic: Deflation Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 11) When prices are rising, which of the following will be true? A) The real interest rate will be lower than the nominal interest rate. B) The real interest rate will be negative. C) The real interest rate will be higher than the nominal interest rate. D) The nominal interest rate will be negative. E) The nominal interest rate will be lower the real interest rate. Answer: A Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 12) In 2020, the nominal interest rate paid by banks on savings deposits was 0.55 percent. At the same time the inflation rate was 1.5 percent. What was the real interest rate paid on savings? A) -2.05 percent B) -1.05 percent C) 0.55 percent D) 2.05 percent E) 3.10 percent Answer: B Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 13) The nominal interest rate plus the inflation rate equals the real interest rate. Answer: FALSE Diff: 2 Type: TF Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

14) If inflationary expectations are increasing, we would expect that the nominal interest rate would also be increasing, holding all else constant. Answer: TRUE Diff: 2 Type: TF Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 15) Real interest rates at times have been negative. Why would anyone lending money agree to a negative real interest rate? Answer: The lender did not agree to a negative real interest rate, instead unanticipated inflation occurred. If the actual inflation rate exceeds the anticipated inflation rate, the actual real interest rate received by lenders and paid by borrowers can end up negative. Diff: 3 Type: ES Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 16) During the 1990s, Japan experienced periods of deflation and very low nominal interest rates, approaching zero percent. Why would lenders of money agree to a nominal interest rate of almost zero? Answer: With the deflation, the real interest rate exceeded the nominal interest rate. Lenders were making their decisions based on the higher real interest rate, not the very low nominal interest rate. Diff: 3 Type: ES Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 17) During a deflationary period, A) the nominal interest rate is less than the real interest rate. B) the real interest rate is less than the nominal interest rate. C) the price level rises. D) the nominal interest rate does not change. E) the nominal interest rate will be negative. Answer: A Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

18) The real rate of interest is A) the nominal interest rate plus the inflation rate. B) the nominal interest rate minus the inflation rate. C) the interest rate determined by the supply and demand in the money market. D) the nominal interest rate. E) the interest rate stated on a loan contract. Answer: B Diff: 1 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 19) If the nominal interest rate is 6% and the inflation rate is 9%, then the real interest rate is A) -3%. B) 3%. C) 6.67%. D) 15%. E) 25%. Answer: A Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 20) If you want to earn a real interest rate of 3% on money you lend, and you expect that inflation will be 2%, what nominal rate of interest will you charge? A) 1% B) 5% C) 6% D) 9% E) 12% Answer: B Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills

21) If the nominal interest rate is 6% and the inflation rate is 2%, then the real interest rate is A) 8%. B) 4%. C) 3%. D) 2%. E) 1%. F) -8%. Answer: B Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 22) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. The CPI over that year rises from 180 to 190. What is the real rate of interest you will earn? A) 0% B) 4.4% C) 5.5% D) 5.8% E) 7.8% Answer: B Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 23) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. If inflation over the year is 2%, what is the real interest rate you are paying? A) 2% B) 2.5% C) 3% D) 5% E) 7% Answer: C Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills

24) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 180 to 200. What is the real interest rate you are paying? A) 15% B) 5% C) -1.1% D) -6.1% E) -8.1% Answer: D Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 25) The nominal interest rate will be less than the real interest rate when A) the rate of inflation is positive but decreasing. B) the rate of inflation is positive and increasing. C) the rate of inflation is negative. D) the real interest rate is negative. E) the rate of inflation is positive and constant. Answer: C Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 26) You agree to lend $1,000 for one year at a nominal interest rate of 10%. You anticipate that inflation will be 4% over that year. If inflation is instead 3% over that year, which of the following is true? A) The real interest rate you earn on your money is lower than you expected. B) The purchasing power of the money that will be repaid to you will be lower than you expected. C) The person who borrowed the $1,000 will be worse off as a result of the unanticipated decrease in inflation. D) The real interest rate you earn on your money will be negative. E) The unexpected inflation has increased the opportunity cost of making the loan. Answer: C Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 27) The nominal interest rate minus the inflation rate equals the real interest rate. Answer: TRUE Diff: 2 Type: TF Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

28) If inflation is higher than expected, this helps borrowers (by reducing the real interest rate they pay) and hurts lenders (by reducing the real interest rate they receive). Answer: TRUE Diff: 2 Type: TF Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 29) What is the difference between the nominal interest rate and the real interest rate? Answer: The nominal interest rate is the stated interest rate on a loan, while the real interest rate is the nominal interest rate minus the inflation rate. Diff: 1 Type: SA Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 30) Suppose you obtain a fixed rate mortgage during a period of relatively high inflation. During the next ten years, inflation falls. Are you a winner or a loser due to inflation? Explain why. Answer: You would be a loser under this scenario. Your mortgage rate is the sum of the real rate of interest plus the amount of inflation that was expected over the life of the mortgage. When inflation is high, people's expectations of future inflation are high. In those circumstances, your fixed mortgage rate contains a high expected-inflation premium. Therefore, as inflation falls, the real rate of interest on your mortgage increases. Diff: 3 Type: SA Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

5.7

Discuss the problems inflation can cause

1) Suppose that in 2022, all prices in the economy double and that all wages and salaries have also doubled. In 2022 you A) are worse off than you were in 2021 as you can no longer afford to buy as many goods and services. B) are better off than you were in 2021 as your salary is higher than it was in 2021 and you can now buy more goods and services. C) are no better off or worse off than you were in 2021 as the purchasing power of your salary has remained the same. D) cannot determine whether you are better off or worse off than you were in 2021 because the purchasing power of your salary cannot be determined. E) are better off as an increase in your income always increases your options. Answer: C Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 2) Which of the following describes a situation in which the person is hurt by inflation? A) a retiree whose pension is adjusted for inflation B) a person who borrows money during a period when inflation is underpredicted C) a person who lends money during a period when inflation is overpredicted D) a person who paid a fixed income during an inflationary period E) a worker who gets regular cost of living adjustments Answer: D Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Analytic Skills 3) If inflation is positive and is perfectly anticipated, A) those who borrow money lose. B) those who lend money lose. C) those who hold paper money lose. D) no one in the economy loses. E) those who receive government benefits lose. Answer: C Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

4) Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is currently 6%. If actual inflation turns out to be 7% over the loan contract period, then A) borrowers gain 1% of the loan value. B) lenders gain 1% of the loan value. C) borrowers lose 3% of the loan value. D) lenders gain 3% of the loan value. E) lenders gain 2% of the loan value. Answer: A Diff: 2 Type: MC Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Analytic Skills 5) The cost to firms of changing prices A) is small even when there is rapid inflation. B) is called a menu cost. C) does not exist if inflation is perfectly anticipated. D) will make prices perfectly fixed. E) all of the above Answer: B Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 6) When actual inflation is less than expected inflation, A) borrowers lose and lenders gain. B) borrowers gain and lenders lose. C) borrowers and lenders both gain. D) borrowers and lenders both lose. E) borrowers and lenders are indifferent. Answer: A Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

7) Which of the following is not an example of inflation causing a redistribution of income because the inflation was unanticipated? A) A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation per year, and the actual rate of inflation ends up being 7 percent per year. B) A worker receives a raise in salary that is less than the rate of inflation because management underpredicted inflation. C) Firms have to hire an extra worker to change prices in its store because of inflation. D) A bank collects a lower amount of interest from a loan because inflation was underpredicted. E) A professional pays more income taxes because tax brackets were not adjusted for inflation. Answer: C Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Analytic Skills 8) Which of the following is a cost of anticipated inflation? A) The real interest rate differs from what borrowers and lenders expected. B) The risk associated with lending decreases. C) The value of cash held by consumers falls. D) Economics classes become harder. E) Workers' nominal income will rise. Answer: C Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 9) The costs to firms of changing prices are called menu costs. Answer: TRUE Diff: 1 Type: TF Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 10) If inflation is unanticipated, no redistribution of income can occur. Answer: FALSE Diff: 1 Type: TF Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 11) If inflation is anticipated, some effects of inflation on the redistribution of income can be avoided. Answer: TRUE Diff: 1 Type: TF Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

12) Describe how inflation can be costly even if it is anticipated. Answer: First, there will be redistribution as some incomes fall behind even an anticipated level of inflation. Second, firms and individuals must hold money to perform transactions. Those holding money lose purchasing power at a rate equal to inflation. Third, firms must pay individuals to change prices. These costs, called menu costs, can be substantial at very high levels of inflation. Fourth, investors have to pay higher taxes on interest and capital gains income as the government taxes nominal interest and capital gains income. Investors then lose real after-tax income. Diff: 2 Type: ES Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 13) When the actual inflation rate turns out to be greater than the expected inflation rate, who gains — the borrower or the lender — and who loses? Explain why. Answer: The borrower gains because he pays back the loan in cheaper dollars — dollars that have lost more purchasing power than was expected. The lender loses because she receives dollars that have lost more purchasing power than was expected. Diff: 2 Type: ES Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 14) Explain whether you agree or disagree with the following statement: "The reason that inflation is bad is because it increases the cost of living — the costs of goods and services we buy — without increasing income in general." Answer: Disagree. Inflation, in general, must increase both our cost of living and nominal income. The increases in the prices of goods and services will be paid to the factors of production. Since the payments to the factors of production make up national income, nominal income will increase, in general, along with the cost of living. Diff: 2 Type: ES Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Analytic Skills 15) Which of the following individuals would be most negatively affected by anticipated inflation? A) a retired railroad engineer who receives a fixed income payment every month B) a union contractor whose pay is adjusted based on changes in the CPI C) a full-time employee at a pizza parlour who makes more than the minimum wage D) a student who borrows $10,000 at a nominal interest rate of 5% to finance educational expenses E) a financial manager who gets paid a percentage of the money they manage Answer: A Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

16) If inflation is completely anticipated, A) no one loses in the economy. B) borrowers lose in the economy. C) lenders lose in the economy. D) firms lose because they incur menu costs. E) income cannot be redistributed. Answer: D Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 17) If inflation increases unexpectedly, then A) borrowers pay a higher real interest rate than they expected. B) lenders receive a lower real interest rate than they expected. C) lenders gain and borrowers gain. D) neither borrowers nor lenders lose. E) borrowers gain from a higher than expected real interest rate. Answer: B Diff: 2 Type: MC Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 18) Which of the following do not suffer the costs of inflation? A) persons on fixed incomes B) persons whose incomes rise more rapidly than inflation C) firms that have to devote more time and labour to raising prices D) investors who have to pay higher taxes because of the inflation E) lenders who did not forecast inflation accurately Answer: B Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 19) Inflation that is ________ than what is expected benefits ________ and hurts ________. A) less; lenders; borrowers B) less; borrowers; lenders C) greater; lenders; borrowers D) greater; lenders; no one E) less; no one; borrowers Answer: A Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

20) The costs to firms of changing prices are called A) redistribution costs. B) menu costs. C) anticipation costs. D) money illusion costs. E) an inflation tax. Answer: B Diff: 1 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 21) What are menu costs? A) the full list of a firm's costs of production B) the costs to a firm of changing prices C) the cost to a household of borrowing money when there is deflation D) the opportunity cost of dining in a restaurant instead of at home E) the cost of borrowing money to start a restaurant Answer: B Diff: 1 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 22) Which of the following is not a cost posed by inflation? A) Inflation reduces the affordability of goods and services to the average consumer. B) The money that consumers and firms hold loses its purchasing power. C) Firms must pay for changing prices on products and printing new catalogues. D) Banks can lose if they under predict inflation and charge an interest rate that does not completely compensate for inflation. E) Firms must hire experts to predict inflation more accurately. Answer: A Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 23) If inflation is higher than anticipated, which of the following is most likely to be true? A) It will be easier to repay your student loans. B) It will be easier to get a new mortgage. C) Income will be more even distributed than before. D) Forecasting the future inflation rate will become easier. E) The money in your piggy bank will increase in value. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 100 Copyright © 2024 Pearson Canada Inc.

24) The problem with inflation is that as prices rise, consumers can no longer afford to buy as many goods and services. Answer: FALSE Diff: 1 Type: TF Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 25) Inflation redistributes income to a greater extent when the inflation is unanticipated compared to when the inflation is anticipated. Answer: TRUE Diff: 1 Type: TF Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 26) There are no costs to inflation if it is fully anticipated. Answer: FALSE Diff: 2 Type: TF Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 27) Explain why you would rather be a borrower during a period of unexpected rising inflation, and a lender during a period of unexpected declining inflation. Answer: The nominal interest rate includes a charge to compensate the lender for the loss in purchasing power due to inflation. If inflation unexpectedly rises, the lender does not get compensated enough for the loss in purchasing power. Likewise, the borrower pays too little to compensate the lender for inflation. So it is better to be a borrower in times of unexpected rising inflation. When inflation unexpectedly falls, then the lender gets compensated too much for inflation and the borrower pays too much for inflation. So it is better to be a lender than a borrower during a period of unexpected declining inflation. Diff: 3 Type: SA Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

28) Describe how a lender can lose during inflation if the inflation is unanticipated and the loan is a fixedinterest-rate loan. How would a variable-interest-rate loan (one that adjusts over the contract period) eliminate these losses? Answer: Lenders require compensation for inflation when charging interest. The nominal interest rate (also called the market interest rate) they charge equals the real rate of interest plus the expected inflation over the loan contract period. The interest rate they charge is determined at the beginning of the loan period, so the charge for inflation is a prediction of what the lender thinks inflation will be over the contract period. If the loan has a fixed rate, the interest rate does not change over the period of the loan. If the lender underpredicts inflation, then the lender will not be compensated enough for the loss in purchasing power due to inflation. The lender will lose to the extent of the underprediction. If the loan is a variable-rate loan, the interest rate can be adjusted upwards if the lender underpredicts inflation. This can lower the loss to the lender. The variable rate automatically adjusts for mistakes in predicting inflation. The more frequently the rate can be adjusted, the less the lender's losses. Diff: 3 Type: SA Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

Macroeconomics, 4Ce (Hubbard) Chapter 6 Economic Growth, the Financial System, and Business Cycles 6.1

Discuss the importance of long-run economic growth

1) For many years after the end of World War II in 1945, most business cycle recessions were mild, seldom lasting more than a year, with only short-lived unemployment which did not rise above A) 6 percent. B) 7 percent. C) 10 percent. D) 15 percent. Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytical Thinking Special Feature: Chapter Opener: Gen Z Experience the iPhone, Snapchat, . . . and a Pandemic 2) As a result of the Great Recession or the COVID-19 pandemic, college graduates entered the worst job market Canada has experienced in decades. Many firms were just struggling to survive, and unemployment rates were A) above 20 percent. B) between 20 and 25 percent. C) above 10 percent. D) below 10 percent. Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytical Thinking Special Feature: Chapter Opener: Gen Z Experience the iPhone, Snapchat, . . . and a Pandemic 3) Technological advances generally result in A) decreased incomes. B) increased life expectancy. C) increased infant mortality rates. D) increased average number of hours worked per day. E) rising unemployment. Answer: B Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Economic Prosperity and Health

4) A good measure of the standard of living is A) real GDP per capita. B) nominal GDP per capita. C) total real GDP. D) total nominal GDP. E) the real interest rate. Answer: A Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 5) Since 1961, real GDP per capita has ________ and this measure ________ the actual growth in standards of living in Canada over this time. A) increased; understates B) increased; overstates C) decreased; understates D) decreased; overstates E) decreased; not changed Answer: A Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 6) Since 1961, real GDP in Canada has grown A) more rapidly than the population. B) more slowly than the population. C) as rapidly as the population. D) in a random unpredictable manner relative to the population. E) at exactly the same rate as population growth in all periods. Answer: A Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

7) If real GDP per capita measured in 2007 dollars was $16,000 in 1961 and $48,500 in 2022, we would say that in the year 2022, the average Canadian could buy approximately ________ times as many goods and services as the average Canadian in 1961. A) 0.3 B) 2 C) 3 D) 7 E) 12 Answer: C Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 8) If real GDP in a small country in 2021 is $8 billion and real GDP in the same country in 2022 is $8.3 billion, the growth rate of real GDP between 2021 and 2022 is A) -3.0%. B) 3.0%. C) -3.6%. D) 3.6%. E) 3.75%. Answer: E Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 9) If real GDP per capita doubles between 2007 and 2022, what is the average annual growth rate of real GDP per capita? A) 4.7% B) 7.25% C) 10.5% D) 15% E) 21% Answer: A Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

10) If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to double your money? A) 1 year and 3 months B) 2 years and 6 months C) 5 years and 6 months D) 8 years and 9 months E) 9 years and 3 months Answer: D Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 11) If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from A) 23.3 years to 17.5 years. B) 28.0 years to 21.0 years. C) 11.2 years to 10.8 years. D) 23.3 years to 20.6 years. E) 30.4 years to 23.5 years. Answer: A Diff: 3 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills Table 6.1 Year 2019 2020 2021 2022

Real GDP (billions of 2007 dollars) $1,669 1,706 1,748 1,767

12) Refer to Table 6.1. Using the table above, what is the approximate growth rate of real GDP from 2021 to 2022? A) 1.0% B) 1.7% C) 1.9% D) 2.2% E) 3.0% Answer: A Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

13) Refer to Table 6.1. Using the table above, what is the approximate growth rate of real GDP from 2019 to 2020? A) 1.0% B) 1.7% C) 1.9% D) 2.2% E) 3.0% Answer: E Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 14) Refer to Table 6.1. Using the table above, what is the approximate growth rate of real GDP from 2020 to 2021? A) 1.0% B) 1.7% C) 1.9% D) 2.2% E) 3.0% Answer: E Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 15) Refer to Table 6.1. Using the table above, what is the approximate average annual growth rate from 2019 to 2022? A) 1.0% B) 1.7% C) 1.9% D) 2.2% E) 3.0% Answer: B Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

16) Increases in real GDP since 1961 can actually underestimate growth in the standard of living for Canadians because A) the level of pollution in 1961 was much higher than it is today. B) the crime rate was higher in 1961 than it is today. C) goods and services are more expensive today as compared to 1961. D) the quality of health care that exists today was not available in 1961. E) fewer women participated in the paid labour force in 1961. Answer: D Diff: 2 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 17) People born in wealthier countries can expect A) to live shorter lives than those born in poorer countries. B) to live just as long as those born in poorer countries because wealth and life expectancy are unrelated. C) to live longer than those born in poorer countries because wealthy countries can provide more health care. D) to live shorter lives than those born in the same country 40 years ago. E) to live shorter lives than those in poorer countries due to the pollution associated with economic activity. Answer: C Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Economic Prosperity and Health 18) If real GDP grows by 3% in 2020, 3.2% in 2021, and 2.5% in 2022, what is the average annual growth rate of real GDP? A) 1.4% B) 2.9% C) 3.3% D) 4.2% E) 5.3% Answer: B Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

19) If real GDP grows by 2.9% in 2020, 0% in 2021, and 1.2% in 2022, what is the average annual growth rate of real GDP? A) 1.4% B) 2.9% C) 3.3% D) 4.2% E) 5.3% Answer: A Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 20) If real GDP grows by 7.0% in 2020, falls by 3% in 2021, and grows by 6% in 2022, what is the average annual growth rate of real GDP? A) 1.4% B) 2.9% C) 3.3% D) 4.2% E) 5.3% Answer: C Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 21) Countries with high rates of economic growth tend to have A) a labour force that is more productive. B) a lower life expectancy at birth. C) low rates of technological advancement. D) a declining incidence of business cycle fluctuations. E) higher levels of corruption. Answer: A Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

22) According to the "Rule of 70," how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%? A) less than 1 year B) 5 years C) 14 years D) 35 years E) 70 years Answer: C Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 23) China has enjoyed a rate of economic growth near 7% a year for the last several years. Based on this growth rate the Chinese economy will double in size every ________ years. A) 2 B) 5 C) 10 D) 15 E) 70 Answer: C Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 24) The quantity of goods and services that can be produced by one worker or by one hour of work is referred to as A) technology. B) labour productivity. C) real GDP. D) human capital. E) unit efficiency. Answer: B Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

25) Which of the following increases labour productivity? A) an increase in the aggregate hours of work B) decreases in the availability of computers and factory buildings C) inventions of new machinery, equipment, or software D) a decline in the health of the population E) an increase in regulations Answer: C Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 26) The total amount of physical capital available in a country is known as the country's A) labour productivity. B) savings. C) investment. D) capital stock. E) technology. Answer: D Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 27) What two factors are the keys to determining labour productivity? A) the business cycle and the growth rate of real GDP B) the growth rate of real GDP and the interest rate C) technology and the quantity of capital per hour worked D) the average level of education of the workforce and the price level E) investment and average number of hours worked Answer: C Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 28) If labour productivity growth slows down in a country, this will A) accelerate the increase in real GDP per capita. B) accelerate the increase in nominal GDP. C) slow down the increase in real GDP per capita. D) slow down the increase in nominal GDP. E) maintain the current rate of nominal GDP increase. Answer: C Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

29) If labour productivity growth slows down in a country, this means that the growth rate in ________ has declined. A) labour force participation B) the quantity of goods or services that can be produced by one hour of work C) the working-age population D) nominal GDP E) real interest rates Answer: B Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 30) Which of the following is an example of human capital? A) a computer B) a factory building C) a university or college education D) a software program E) computers used by human resource departments Answer: C Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 31) Human capital refers to which of the following? A) the quantity of goods and services that can be produced by one worker or by one hour of work B) the accumulated knowledge and skills workers acquire from education and training or from their life experiences C) manufactured goods that are used to produce other goods and services D) physical equipment that is made by human labourers, not machines E) the number of workers that apply for a specific job or can be hired on short notice Answer: B Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

32) Long-run economic growth requires all of the following except A) technological change. B) increases in capital per hour worked. C) government provision of secure property rights. D) political instability. E) an impartial court system. Answer: D Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 33) Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy? A) growth in capital per hour accompanied by technological change B) increases in labour force participation rates as workers who are out of the labour force pursue rising wages C) a shift of workers in the economy from the agricultural sector to the nonagricultural sector D) an influx of immigrant labour into an economy without any accompanying technological change E) an increase in the minimum wage to $15/hour Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 34) India's recent rapid growth can be explained by A) a decline in the use of central planning. B) a decline in the importance of services in the economy. C) accelerating population growth. D) an increase in the portion of the population employed in agriculture. E) increased government involvement in the manufacturing sector. Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Can India Sustain Its Rapid Growth?

35) The sustainability of India's economic growth is particularly threatened by A) a weak public education system. B) poor access to international capital markets. C) a lack of telecommunications companies. D) a lack of access to international markets in goods and services. E) the lack of "tech" sector. Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Can India Sustain Its Rapid Growth? 36) Which of the following does not describe governmental policy actions that are helpful in supporting growth in an economy? Governmental policies that A) avoid playing any role in developing communication systems. B) provide secure rights to private property. C) establish an independent court system that enforces contracts. D) facilitate the development of an efficient financial system. E) provide public education. Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 37) Potential GDP refers to A) the level of GDP attained when all firms are producing at capacity. B) the level of GDP attained by the country with the highest growth in real GDP in a given year. C) the difference between the highest level of real GDP per quarter and the lowest level of real GDP per quarter within any given year. D) the extent to which real GDP is above or below nominal GDP. E) the level of GDP that would be achieved if government spending did not crowd out private sector spending. Answer: A Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

38) The output gap is A) negative if potential GDP is smaller than real GDP. B) a measure of potential output. C) negative if potential GDP is larger than real GDP. D) constant throughout the business cycle. E) shrinking all the time. Answer: C Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 39) Actual real GDP will be above potential GDP if A) firms are producing below capacity. B) firms are producing at capacity. C) firms are producing above capacity. D) inflation is rising. E) the current price level is lower than the price level in the base year. Answer: C Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 40) If the federal government regulated airline ticket prices to prevent them from falling during a recession, there would be a ________ of airline tickets which would likely ________ the airline profits. A) shortage; increase B) shortage; reduce C) surplus; increase D) surplus; reduce E) shortage; not change Answer: D Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

41) According to the "Rule of 70," it will take 4 years for real GDP per capita to double when the growth rate of real GDP per capita is A) 4 percent. B) 12.25 percent. C) 17.5 percent. D) 28 percent. E) 32 percent. Answer: C Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 42) Centrally-planned economies tend to grow more quickly than market economies. Answer: FALSE Diff: 1 Type: TF Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 43) Accumulating a greater number of inputs will ensure that an economy will experience economic growth. Answer: FALSE Diff: 1 Type: TF Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 44) Increases in capital per hour worked cannot sustain high rates of economic growth unless accompanied by technological change. Answer: TRUE Diff: 1 Type: TF Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 45) Potential GDP is the maximum output a firm is capable of producing. Answer: FALSE Diff: 1 Type: TF Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

46) The growth rate of real GDP in Canada rises from 4.2% to 4.4%. Explain and calculate how this increase in the growth rate of real GDP affects the number of years it will take for real GDP to double. Answer: The "Rule of 70" states that the number of years it takes for GDP to double is equal to 70 divided by the growth rate of real GDP. Given this formula, at a growth rate of 4.2%, it will take 70/4.2 = 16.67 years for GDP to double. If the growth rate increases by two-tenths of a percent (to 4.4%), the number of years it will take for GDP to double will decrease to 70/4.4 = 15.9 years. Diff: 2 Type: ES Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 47) How is economic growth connected to life expectancy? Based on this connection, in what country would you expect to have a longer life expectancy, Canada or India? Explain. Answer: Countries with the lowest levels of GDP per capita also have the shortest life expectancies. Technological advances in medicine, agriculture, and water purification improve nutrition and increase incomes. Since economic growth in Canada has historically been greater than that in India, we would expect Canadian residents to have a longer life expectancy than residents of India. However, as India's economy begins to grow more dramatically, life expectancy in India is rapidly approaching that of Canada. Diff: 2 Type: ES Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Economic Prosperity and Health 48) What is "human capital," and how does human capital affect labour productivity and economic growth? Answer: Human capital is the accumulated knowledge and skills workers acquire from education and training or from their life experiences. Increases in human capital increase labour productivity, which will eventually increase real GDP per capita. Diff: 1 Type: ES Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 49) What factors increase potential GDP? Include a definition of potential GDP in your answer. Answer: Potential GDP is the level of GDP attained when all firms are producing at capacity. Growth in potential GDP is determined by growth in the labour force and the capital stock and by technological change. Capital investments accompany growth in the labour force, encouraging technological progress and increasing potential GDP. Diff: 2 Type: ES Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

50) When potential GDP increases, is it necessarily the case that real GDP increases as well? Explain. Answer: An increase in potential GDP is a result of an expanding labour force, growth in the capital stock, and technological change. The actual level of real GDP may be higher or lower than potential GDP. If firms are all producing at capacity, we would expect potential GDP and real GDP to be equal. If firms are producing below capacity, we would expect real GDP to be below potential GDP. And if firms are temporarily producing above capacity, real GDP will be above potential GDP. Diff: 2 Type: ES Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 51) The only way the standard of living of the average person in a country can increase is if ________ increases faster than ________. A) production; population B) population; GDP per capita C) population; production D) population; income E) debt; GDP per capita Answer: A Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 52) When production in an economy grows more quickly than the population in that economy, which of the following must be occurring? A) Real GDP is falling. B) Incomes are growing at a slower rate than the population. C) Real GDP per capita is rising. D) Living standards are falling. E) The price level is falling. Answer: C Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

53) Which of the following describes the growth in real GDP per person in Canada from 1960 to the present? A) It has decreased. B) It has increased by three times. C) It has doubled. D) It has increased by four times. E) It has increased by five times. Answer: B Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 54) The best measure of the standard of living is A) nominal GDP. B) real GDP. C) nominal GDP per capita. D) real GDP per capita. E) the unemployment rate. Answer: D Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 55) According to Robert Fogel, economic growth ________ health, and health ________ economic growth. A) improves; worsens B) improves; improves C) worsens; improves D) worsens; worsens E) does not impact; does not impact Answer: B Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Economic Prosperity and Health

56) Suppose that real GDP for 2021 was $1,000 billion and real GDP for 2022 was $1,100 billion. What is the rate of growth of real GDP between 2021 and 2022? A) 1% B) 2% C) 5% D) 7% E) 10% Answer: E Diff: 1 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 57) Suppose that real GDP for 2021 was $1,000 billion and real GDP for 2022 was $950 billion. What is the rate of growth of real GDP between 2021 and 2022? A) -10% B) -5% C) -2% D) -1% E) 2% Answer: B Diff: 1 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 58) If GDP grew 3% in 2020, 2.2% in 2021, and 2.5% in 2022, what is the average annual growth rate over this period? A) 5% B) 4% C) 2.6% D) -2.2% E) -3.1% Answer: C Diff: 1 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

Table 6.2 Year 2019 2020 2021 2022

Real GDP (billions of 2007 dollars) $1,669 1,706 1,748 1,767

59) Refer to Table 6.2. Using the table above, what is the approximate growth rate of real GDP from 2019 to 2020? A) -4% B) -2% C) 2% D) 4% E) 6% Answer: C Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 60) Refer to Table 6.2. Using the table above, what is the approximate growth rate of real GDP from 2020 to 2021? A) -2.5% B) -1% C) 1% D) 2.5% E) 3.4% Answer: D Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 61) Refer to Table 6.2. Using the table above, what is the approximate average annual growth rate from 2019 to 2022? A) -1% B) 1% C) 2% D) 3% E) 4% Answer: C Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

62) If GDP grows at a rate of 3% per year, approximately how long will it take for GDP to double in size? A) 12 years B) 21 years C) 23 years D) 35 years E) 42 years Answer: C Diff: 1 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 63) If an economy is growing at a rate of 2.5% per year, how long will it take the economy to double in size? A) 60 years B) 43 years C) 36 years D) 28 years E) 19 years Answer: D Diff: 1 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 64) The rule of 70 states that A) it takes an economy 70 years to double its real GDP. B) the number of years it takes an economy to double in size is 70 divided by the growth rate. C) the number of years it takes an economy to double in size is the growth rate times 70. D) the number of years it takes an economy to double in size is the growth rate divided by 70. E) the number of years it takes an economy to shrink by half is 70 divided by the growth rate. Answer: B Diff: 1 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

65) If, between 2012 and 2022, the economy's real GDP grew from $20 billion to $40 billion, what was the average annual growth rate in the economy? A) 3% B) 7% C) 20% D) 100% E) 125% Answer: B Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 66) If GDP is currently $1.7 trillion and is growing at a rate of 2.3% per year, how long will it take GDP to reach $3.4 trillion? A) about 7 years B) about 15 years C) about 17 years D) about 25 years E) about 30 years Answer: E Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 67) Labour productivity is A) the quantity of output produced in one hour by several workers. B) the quantity of capital one worker can produce in one day. C) the quantity of output produced by one worker or by one hour of work. D) the quantity of output produced in one hour by one machine. E) the quantity of capital produced by one machine in one hour. Answer: C Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

68) Labour productivity will increase if the ________ increases and ________. A) quantity of capital per hour worked; technology improves B) quantity of labour per unit of capital; technology improves C) quantity of capital per hour worked; immigration increases while capital is fixed D) quantity of labour per unit of capital; immigration increases while capital is fixed E) quantity of labour in the economy; capital depreciates more quickly Answer: A Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 69) An increase in labour productivity A) allows the average consumer to increase consumption. B) will increase the labour force participation rate. C) will create short-run, but not long-run, economic growth. D) will increase output and decrease wages in the long run. E) causes a decrease in the demand for labour in the long run. Answer: A Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 70) ________ depend on increases in labour productivity. A) Advances in technology B) Increases in real GDP per capita C) Decreases in the inflation rate D) Decreases in the unemployment rate E) Increases in capital stock Answer: B Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 71) Workers in high-income countries have ________ to work with than do workers in low-income countries. A) less physical capital B) more physical capital C) more labour D) more labour and less physical capital E) less human capital Answer: B Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 22 Copyright © 2024 Pearson Canada Inc.

72) What is human capital? A) a slang term for the underground labour market B) manufactured goods that are used to produce other goods C) accumulated knowledge and skills acquired by a worker D) the manager or owner of a business E) the number of workers a firm can hire on short notice Answer: C Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 73) Which of the following is most likely to be able to sustain economic growth in an economy? A) sustained increases in the labour force participation rate B) technological change C) increases in capital per hour worked D) accumulations of economic resources E) increases in the supply of labour Answer: B Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 74) India has enjoyed substantial economic growth over the past decade. Which of the following best captures the concerns about the sustainability of this growth? A) Without better human capital and infrastructure, the high growth rates cannot be sustained. B) As long as the labour force participation rate is rising, growth can still continue, despite a lack of technological progress. C) As long as the amount of capital per hour worked continues to expand, the growth rate in India will continue to rise at an increasing rate. D) Agricultural workers will continue to expand their productivity, thereby allowing India to achieve growth rates above those of higher-income countries. E) India will become overly reliant on local demand and should focus more on export led growth. Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Can India Sustain Its Rapid Growth?

75) Which of the following is not a challenge to India's continued economic growth? A) poor physical infrastructure B) a lack of innovative companies C) corruption D) cultural, ethnic, and linguistic divisions E) a large and growing population Answer: B Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Can India Sustain Its Rapid Growth? 76) Which of the following will result in an increase in labour productivity? A) a decrease in the number of people attending institutions of higher education B) a decline in the amount of human capital per worker C) an increase in technology D) a decline in the capital stock per hour worked E) an increase in the labour force participation rate Answer: C Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 77) Potential GDP is defined as A) the maximum GDP that the economy can produce. B) the amount of GDP produced if there is no frictional unemployment. C) the level of GDP attained when all firms are producing at capacity. D) the amount of GDP produced if there is no structural unemployment. E) the lowest level of GDP at which a country can feed its people. Answer: C Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 78) Potential GDP is estimated to grow at a rate of 2% in Canada. Actual GDP in Canada A) always grows at a slower rate than potential GDP. B) always grows at a faster rate than potential GDP. C) always grows at the same rate as potential GDP. D) is the same as potential GDP if all firms in the economy are working at capacity. E) is always lower than potential GDP. Answer: D Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 24 Copyright © 2024 Pearson Canada Inc.

79) Potential GDP in Canada A) does not change over time. B) grows as the economy grows. C) changes over a given business cycle. D) declines over time. E) grows at the same rate every year. Answer: B Diff: 2 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 80) Potential GDP in Canada A) grows as people become more educated. B) shrinks as natural resource prices rise. C) does not change over time. D) grows as demand for our exports grows. E) grows at the same rate every year. Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 81) Potential GDP is always greater than real GDP in an economy. Answer: FALSE Diff: 2 Type: TF Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 82) The key to sustained economic growth is increasing labour productivity. Answer: TRUE Diff: 1 Type: TF Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 83) Market economies tend to grow more quickly than centrally-planned economies. Answer: TRUE Diff: 1 Type: TF Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

84) Economic growth depends more on technological change than on increases in capital per hour worked. Answer: TRUE Diff: 1 Type: TF Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 85) Explain why a centrally-planned economy might not grow as rapidly as a market economy. Answer: Technological change is very important for growth. Simply accumulating inputs will not ensure growth unless technological change occurs. This is essentially what happened in the Soviet Union. The former Soviet Union failed to enhance growth when it simply increased its capital to labour ratio because it did not foster technological change at the same time. In a market economy, entrepreneurs make decisions about employing technology and seeking innovation. If the entrepreneur makes a correct decision, then he or she stands to make a large profit. In a centrally planned economy, these decisions are made by managers employed by the government. If the innovation works out, the manager may not reap any sort of benefit from it. Likewise, if the innovation fails, the manager's financial position is unaffected. Because of this, managers employed by the central government may be slower to adopt new technologies as compared to entrepreneurs in a market economy. The profit incentive spurs entrepreneurs in market economies to move more quickly. Diff: 2 Type: SA Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 86) Use the rule of 70 to illustrate how small differences in growth rates can have a large impact on how rapidly the standard of living in a country increases. Answer: The rule of 70 refers to a calculation that determines, for a given growth rate, the number of years it will take for real GDP to double in an economy. The formula is as follows: Number of years to double =

If the growth rate is 1%, it will take 70 years for GDP to double. If the growth rate is 2%, GDP will double in 70/2 years = 35 years. A small increase in the growth rate (from 1% to 2%) cuts the years it takes for the economy to double in half. If the growth rate is 5%, GDP will double in 14 years. So when the rate of growth jumps 3 more percentage points, GDP doubles in less than half the time as when growth was 2%. Diff: 1 Type: SA Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

87) Suppose you are a famous international economic advisor. You have been asked to assess the possibilities for growth in an African country. It is a country abundant in labour and some natural resources. The capital to labour ratio is low. It has a free market economy. You have found that this country does not have a very strong banking system, however the political system is stable and the government does a good job of protecting property rights. Assess this country's prospects for growth. Recommend two things that would enhance the country's growth. Answer: The prospects for this country's growth are fairly good. It has a lot of labour and natural resources. Having abundant factors of production can contribute to strong growth. The free market system is also another characteristic that should help enhance economic growth. Entrepreneurs can respond quickly and adopt technological innovations. We know that technological change can increase labour productivity. Also, the fact that the government enforces property rights can help the free market to flourish. The political stability of the government is also a good sign. Investors won't be afraid to risk investing in the country. Two things the country could do to increase growth would be to raise the capital-to-labour ratio and develop the financial sector. The country could increase the capital-to-labour ratio by attracting foreign investment, or perhaps by giving tax breaks to firms that increase the amount they invest. This is probably one of the most effective ways to increase growth. Diff: 3 Type: SA Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 88) Outline the various actions the government sector could take to promote growth. Answer: The government should secure private property rights. Private property rights are crucial for a smoothly functioning market system. The government should create a court system that will enforce contracts. It should also assist in the development of the country's financial system. Additional endeavors include strengthening the education, communication, and transportation systems. Diff: 2 Type: SA Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

6.2

Discuss the role of the financial system in facilitating long-run economic growth

1) Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth in the economy. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; holds constant Answer: D Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Do You Help the Economy More if You Spend or if You Save? 2) A firm can fund an expansion of its operations by A) issuing bonds. B) buying stock. C) paying dividends. D) loaning money. E) paying bonuses. Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 3) Liquidity refers to A) the ability to purchase a very small share of a company. B) the ease with which an asset can be converted into a different asset. C) the number of times a dollar changes hands in the creation of GDP in an economy. D) the number of shares of stock a corporation issues. E) the number of bonds a firm has issued. Answer: B Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

4) Which of the following is most liquid? A) a mutual fund share B) a government bond C) a corporate bond D) a five dollar bill E) a painting Answer: D Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 5) Financial securities that represent promises to repay a fixed amount of funds are known as A) bonds. B) stocks. C) pension funds. D) insurance premiums. E) preferred shares. Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 6) One difference between stocks and bonds is that A) stocks are financial securities, while bonds are labour market securities. B) stocks are usually issued in electronic form, while bonds are usually issued in paper form. C) stocks represent ownership in companies, while bonds represent ownership in banks. D) stocks do not involve a promise to repay a purchaser of the stock, while bonds represent a promise to repay the purchase price of the bond. E) stocks do not offer owners any income stream while bonds offer a steady stream of income. Answer: D Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 7) In a closed economy, which of the following components of GDP is not included? A) investment B) government spending C) net exports D) consumption E) taxation Answer: C Diff: 1 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 29 Copyright © 2024 Pearson Canada Inc.

8) In a closed economy, which of the following equations reflects investment? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers) A) Y - C - G B) Y - C - T C) Y - T + TR D) C + G -T E) C + I + G + TR Answer: A Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 9) In a closed economy, private saving is equal to which of the following? (Y = GDP, , , T = Taxes, and TR = Transfers) A) Y - C - T B) Y - G - T C) Y - G - T + TR D) Y + TR - C - T E) C + I + G Answer: D Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 10) In a closed economy, public saving is equal to which of the following? (Y = GDP, , , T = Taxes, and TR = Transfers) A) Y - C - T B) Y - G - T C) T - G - TR D) Y - C - T + TR E) C + I + G Answer: C Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Scenario 6.1 Consider the following data for a closed economy: Y = $1 200 billion C = $800 billion I = $200 billion G = $200 billion TR = $200 billion T = $300 billion 11) Refer to Scenario 6.1. Based on the information above, what is the level of private saving in the economy? A) 90 billion B) $100 billion C) $300 billion D) $400 billion E) $800 billion Answer: C Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 12) Refer to Scenario 6.1. Based on the information above, what is the level of public saving? A) $0 B) $100 billion (a surplus of $100 billion) C) $200 billion (a surplus of $200 billion) D) negative $100 billion (a deficit of $100 billion) E) negative $200 billion (a deficit of $200 billion) Answer: D Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 13) In a closed economy, public saving plus private saving is equal to A) investment. B) taxes minus transfers. C) the budget surplus. D) the budget deficit. E) net exports. Answer: A Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

14) Under which of the following circumstances would the government be running a deficit in a closed economy? A) G = $5 trillion T = $5 trillion TR = $1 trillion B) G = $5 trillion T = $7 trillion TR = $1 trillion C) G = $7 trillion T = $7 trillion TR = $0 D) G = $7 trillion T = $10 trillion TR = $3 trillion E) G = $5 trillion T = $13 trillion TR = 3 trillion Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

15) Under which of the following circumstances would private saving be positive in a closed economy? A) Y = $10 trillion C = $5 trillion TR = $2 trillion G = $2 trillion public saving = $1 trillion B) Y = $9 trillion C = $5 trillion TR = $1 trillion G = $1 trillion public saving = $3 trillion C) Y = $8 trillion C = $2 trillion TR = $4 trillion G = $2 trillion public saving = $4 trillion D) Y = $6 trillion C = $2 trillion TR = $8 trillion G = $3 trillion public saving = $1 trillion Answer: A Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 16) What is investment in a closed economy if you have the following economic data? Y = $10 trillion C = $5 trillion TR = $2 trillion G = $2 trillion A) $2 trillion B) $3 trillion C) $5 trillion D) $7 trillion E) cannot be determined without information on taxes (T) Answer: B Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

17) There is a government budget surplus if A) T - TR > G. B) G > T. C) G > TR. D) TR < T. E) G-TR > T. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 18) If government saving is negative, then A) T > TR. B) G > T. C) T - TR < G. D) Y + TR < C - T. E) G - TR > T. Answer: C Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 19) In 2022, the Canadian federal government was forecast to have a deficit of approximately $36 billion. This meant A) T - TR < G. B) G < T. C) G > TR. D) T + TR < G. E) G -TR > T. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 20) In 2021, Norway had a budget surplus of approximately $16 billion. This meant A) T + TR < G. B) G < T. C) G > TR. D) T - TR < G. E) G -TR > T. Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 34 Copyright © 2024 Pearson Canada Inc.

21) When the government runs a budget deficit, we would expect to see that A) private saving will fall. B) investment will fall. C) G + TR < T. D) public saving is positive. E) government spending will rise. Answer: B Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 22) There is a federal budget deficit when A) the government spends less than it collects in taxes. B) the government spends more than it collects in taxes. C) the government spends the same amount it collects in taxes. D) taxes are too high. E) transfers are too generous. Answer: B Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 23) If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the following is true? A) Public saving is $500 million. B) The budget deficit is $100 million. C) The budget deficit is $500 million. D) Public saving is $100 million. E) Private savings is $1,300 million. Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

24) Which of the following will increase investment spending in the economy, holding everything else constant? A) an increase in the federal government surplus B) an increase in the budget deficit C) an increase in consumer dissavings D) an increase in transfer payments E) an increase in interest rates Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 25) The demand for loanable funds is downward sloping because the ________ the interest rate, the ________ the number of profitable investment projects a firm can undertake, and the ________ the quantity demanded of loanable funds. A) lower; greater; greater B) lower; smaller; greater C) greater; greater; lower D) greater; smaller; lower E) lower; smaller; lower Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 26) A government budget surplus from reduced government spending (no change in net taxes) will ________ the level of investment in the economy and ________ the level of saving (private plus public) in the economy. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease E) increase; not change Answer: B Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

27) If consumers decide to be more frugal and save more out of their income, then this will cause A) a shift in the supply curve for loanable funds to the right. B) a shift in the supply curve for loanable funds to the left. C) a movement to the right along the supply curve for loanable funds. D) a movement to the left along the supply curve for loanable funds. E) a shift in the demand for loanable funds to the right. Answer: A Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 28) An increase in the demand for loanable funds will occur if there is A) an increase in the real interest rate. B) a decrease in the real interest rate. C) an increase in expected profits from firm investment projects. D) an increase in the nominal interest rate accompanied by an equal increase in inflation. E) a decrease in taxation. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 29) Which of the following would you expect to increase the equilibrium interest rate? A) an increase in the percentage of income after net taxes that households save B) an increase in the budget deficit C) a decrease in the profitability of investment projects firms are considering D) a change from an income tax to a consumption tax E) an increase in household savings Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.1

30) Refer to Figure 6.1. Which of the following is consistent with the graph depicted above? A) An expected recession decreases the profitability of new investment. B) Technological change increases the profitability of new investment. C) The government runs a budget surplus. D) Households become spendthrifts and begin to save less. E) Firms expect lower profits in the future. Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.2

31) Refer to Figure 6.2. Which of the following is consistent with the graph depicted above? A) An expected expansion increases the profitability of new investment. B) The government runs a budget surplus. C) There is a shift from an income tax to a consumption tax. D) New regulations decrease the profitability of new investment. E) Households save more of their incomes (spend less). Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.3

32) Refer to Figure 6.3. Which of the following is consistent with the graph depicted above? A) Taxes are changed so that real interest income is taxed rather than nominal interest income. B) An expected recession decreases the profitability of new investment. C) The government runs a budget deficit. D) Technological change increases the profitability of new investment. E) Firms expect lower profits in the future. Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.4

33) Refer to Figure 6.4. Which of the following is consistent with the graph depicted? A) an increase in household income B) an increase in transfer payments to households C) an increase in the proportion of income after net taxes used for consumption D) an increase in tax revenues collected by the government E) an increase in the future profitability of firms operations Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 34) In comparison to a government that runs a balanced budget, when the government runs a budget deficit, A) the equilibrium interest rate will fall. B) business investment will fall. C) household savings will fall. D) the demand for loanable funds will shift to the right. E) the supply of loanable funds will shift to the left. Answer: B Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

35) The response of investment spending to an increase in the government budget deficit is called A) expansionary investment. B) private dissaving. C) crowding out. D) income minus net taxes. E) accelerating investment. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking Figure 6.5

36) Refer to Figure 6.5. "Crowding out" of firm investment as a result of a budget deficit is illustrated by the movement from ________ in the graph above. A) A to B B) B to A C) B to C D) C to A E) A to C. Answer: A Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

37) How will an increase in the government budget surplus as a result of lower government spending (with no change in net taxes) affect private saving in the economy? A) Private saving will increase by the amount of increase in the budget surplus. B) Private saving will decrease by the amount of increase in the budget surplus. C) Private saving will decrease by less than the amount of increase in the budget surplus. D) Private saving will be unaffected by the increase in the budget surplus. E) Private saving will increase by less than the amount of decrease in public savings. Answer: C Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 38) How would the equilibrium interest rate respond to a change from an income tax to a consumption tax? A) The equilibrium interest rate would rise. B) The equilibrium interest rate would fall. C) The equilibrium interest rate would be unaffected. D) The equilibrium interest rate may rise or fall based on whether the demand or supply of loanable funds changes. E) The equilibrium interest rate would rise while the quantity of funds lent rises. Answer: B Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 39) How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax? A) The equilibrium quantity of loanable funds would rise. B) The equilibrium quantity of loanable funds would fall. C) The equilibrium quantity of loanable funds would be unaffected. D) The equilibrium quantity of loanable funds may rise or fall based on whether household saving increases or decreases as a result of the change from an income tax to a consumption tax. E) The equilibrium quantity of loanable funds will initially fall and then return to its initial value. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

40) Which of the following would encourage economic growth through increases in the capital stock? A) a change from an income tax to a consumption tax B) an increase in household saving C) a decrease in the government deficit D) all of the above E) none of the above Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 41) If net taxes fall by $80 billion, we would expect A) the government deficit to fall by $80 billion. B) household saving to rise by $80 billion. C) household saving to rise by less than $80 billion. D) household saving to fall by more than $80 billion. E) household saving to remain constant. Answer: C Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 42) Which of the following will not occur as the result of a decrease in net taxes? A) decreased household saving B) decreased government saving C) a shift to the left of the supply curve for loanable funds D) a fall in the interest rate E) all of the above Answer: A Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

43) If, in an economy experiencing inflation, the government decided to tax real interest income rather than nominal interest income, this change would cause the real interest rate to ________ and the equilibrium quantity of loanable funds to ________. A) fall; rise B) fall; fall C) rise; fall D) rise; rise E) rise; remain constant Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 44) In July 2020, CIBC (a bank) sold bonds with a negative nominal interest rate. The most likely explanation is A) the supply of loanable funds was exceptionally large. B) the demand for loanable funds was exceptionally low. C) nominal interest rates were much higher than is typical. D) CIBC so popular that people just want to give them money. E) the demand for loanable funds was higher than ever before. Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 45) Countries without well-developed financial systems are able to sustain high levels of economic growth. Answer: FALSE Diff: 1 Type: TF Topic: Long-Run Economic Growth Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 46) In an open economy, there is interaction with other economies in terms of both trading of goods and services and borrowing and lending. Answer: TRUE Diff: 1 Type: TF Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

47) If there is public dissaving, investment spending in the economy will decline, holding everything else constant. Answer: TRUE Diff: 2 Type: TF Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 48) An increase in the real interest rate will decrease consumption and investment. Answer: TRUE Diff: 2 Type: TF Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 49) Nominal interest rate must be positive. Answer: FALSE Diff: 2 Type: TF Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 50) Use the equations for public and private saving to demonstrate how total saving in the economy equals investment. Answer: Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR. Adding private saving and public saving together yields (Y + TR - C - T) + (T - G - TR) = Y - C - G. In a closed economy (with no net exports), Y = C + I + G, so Y - C - G = I, and the sum of public and private saving is equal to investment. Diff: 2 Type: ES Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

51) Consider the following data for a closed economy: a. Y = $12 trillion b. C = $8 trillion c. I = $3 trillion d. TR = $2 trillion e. T = $3 trillion Use the data provided to calculate the level of private saving and the level of public saving and demonstrate their relationship to investment. Answer: Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR. Plugging in the appropriate numbers for private saving, private saving = Y + TR - C - T = $12t + $2t - $8t - $3t = $3 trillion. Using the identity for output in a closed economy, G = Y - C - I = $12t - $8t - $3t = $1t, so public saving = $3t - $1t - $2t = $0. Adding together private saving of $3 trillion and public saving of $0 yields saving of $3 trillion, which is exactly equal to investment of $3 trillion. Diff: 3 Type: ES Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 52) Explain and show graphically how an increase in household saving affects the equilibrium interest rate and the equilibrium quantity of loanable funds. Answer: An increase in household saving increases the supply of loanable funds, shifting the supply curve for loanable funds to the right, as shown below. The increase in the supply of loanable funds results in a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of loanable funds.

53) Explain and show graphically how government deficits can "crowd out" private investment. Answer: When the government runs a deficit public saving falls, reducing the supply of loanable funds and shifting the supply curve for loanable funds to the left, as shown below. The decrease in the supply of loanable funds results in an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds, moving from point A to point B below. As the equilibrium interest rate rises, the quantity of loanable funds demanded by firms for investments in capital decreases. Increased government deficits raise interest rates, thereby "crowding out" private investment by firms.

Diff: 2 Type: ES Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

54) Explain and show graphically how an increase in government spending affects the equilibrium interest rate in the market for loanable funds. Answer: When government spending increases, government saving (T - G - TR) falls. This decrease in government saving shifts the supply curve for loanable funds to the left, increasing the equilibrium interest rate as shown below.

Diff: 2 Type: ES Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 55) If net taxes rise by $150 billion would you expect household saving to fall by $150 billion, by more than $150 billion, or by less than $150 billion? Answer: Private saving is equal to Y - C - T, so if taxes increase private saving will fall. When taxes increase, however, disposable income also falls, so households will consume less. With the increase in taxes and the decrease in consumption, saving will fall, but buy less than $150 billion. Some of the decrease in taxes will be reflected by reduced consumption, not simply reduced saving. Diff: 3 Type: ES Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 56) ________ are financial securities that represent partial ownership of a firm. A) Stocks B) Bonds C) Treasury bills D) Certificates of deposit E) Savings deposits Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 49 Copyright © 2024 Pearson Canada Inc.

57) ________ are financial securities that represent promises to repay a fixed amount of funds. A) Stocks B) Bonds C) Interest rates D) Mutual funds E) Index tracking funds Answer: B Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 58) What is one difference between stocks and bonds? A) Bonds earn a higher rate of return than stocks. B) Stocks earn a higher rate of return than bonds. C) Bonds are purchased at a bank, while stocks are purchased through the federal government. D) Stocks represent partial ownership in a firm, while bonds do not. E) Stocks represent a guarantee of future payment, while bonds do not. Answer: D Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 59) Which one of the following is not considered a financial intermediary? A) a bank B) a pension fund C) an insurance company D) a credit counsellor E) a credit union Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 60) ________ is the ease with which a financial security can be exchanged for another. A) Risk B) The face value C) Liquidity D) The rate of return E) Convertability Answer: C Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

61) Which of the following financial securities is most liquid? A) a savings account B) a share of stock C) a cashier's cheque D) a $20 bill E) a certificate of deposit Answer: D Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 62) Which of the following is not one of the key services provided by the financial system? A) decreasing taxes B) risk sharing C) liquidity D) communication of information E) collection of information Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 63) A financial intermediary's main function is to match ________ with excess funds to ________ with shortages of funds. A) savers; borrowers B) borrowers; savers C) governments; households D) firms; insurance companies E) lenders; government Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

64) A country with no trade and no borrowing and lending relationships with other countries is known as a(n) A) planned economy. B) market economy. C) open economy. D) closed economy. E) a stable economy. Answer: D Diff: 1 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 65) In a closed economy, A) I = Y - C - G. B) I = Y + C - G. C) I = Y - C + G. D) I = Y + C + G. E) Nx = Y - C - I - G. Answer: A Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 66) Private saving is defined as A) Y + TR - C - T. B) T + G + TR. C) T - G + TR. D) Y + TR + C - T. E) C + I + G. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 67) Public saving in the economy can be increased by A) lowering taxes. B) raising government spending. C) raising taxes. D) raising transfer payments. E) reducing consumption. Answer: C Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 52 Copyright © 2024 Pearson Canada Inc.

68) If real GDP in a closed economy is $40 billion, consumption is $20 billion, and government purchases are $10 billion, what is investment? A) $10 billion B) $30 billion C) $40 billion D) $55 billion E) $70 billion Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 69) If, in a closed economy, real GDP is $30 billion, consumption is $20 billion, and government purchases are $5 billion, what is total saving in the economy? A) $5 billion B) $15 billion C) $25 billion D) $45 billion E) $55 billion Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 70) In a closed economy, what is the relationship between saving and investment? A) Saving is greater than investment. B) Investment is greater than saving. C) Investment is equal to saving. D) Investment may be greater or smaller than saving. E) Saving is greater than investment, but they both grow at the same rate. Answer: C Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

71) The sum of public and private saving in an economy is equal to A) Y - C - T. B) T - TR - G. C) Y - C - G. D) I - C - G. E) C + I + G. Answer: C Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 72) When the government runs a deficit, which of the following is true? A) T > TR - G B) G > T + TR C) G > TR - T D) T < G + TR E) C > Y - T + TR Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 73) If taxes are less than transfers plus government spending, then A) there is positive saving. B) there is a balanced budget. C) there is a budget surplus. D) there is public dissaving. E) there is private saving. Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 74) There is public dissaving if A) G + TR > T. B) G + TR < T. C) TR > G + T. D) TR < G + T. E) TR - G < T. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

75) Which of the following would increase public saving? A) an increase in taxes B) an increase in transfers C) an increase in government purchases D) an increase in consumption E) All of the above would increase public saving. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 76) An increase in government purchases, ceteris paribus, will A) increase public saving. B) increase the supply of loanable funds. C) reduce investment. D) reduce real GDP. E) reduce household consumption. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 77) The budget deficit is defined as A) T - (G + TR), and this is negative. B) T - (G + TR), and this is positive. C) T + (G - TR), and this is negative. D) T + (G + TR), and this is negative. E) T + (G × TR), and this is positive. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 78) The federal budget deficit can be reduced by A) raising taxes. B) raising government spending. C) raising transfer payments. D) higher interest rates. E) reducing consumption. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

79) Which of the following is not a way to reduce the government's budget deficit? A) issuing government bonds B) selling government assets C) raising taxes D) reducing government spending E) promoting economic growth Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 80) An increase in public saving has what impact on the market for loanable funds? A) The supply of loanable funds increases. B) The demand for loanable funds increases. C) The supply of loanable funds decreases. D) The demand for loanable funds decreases. E) The quantity of funds lent decreases. Answer: A Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 81) The demand for loanable funds has a ________ slope because the lower the interest rate, the ________ the number of profitable investment projects, and the ________ the quantity of loanable funds demanded. A) negative; greater; greater B) negative; greater; lower C) negative; lower; greater D) positive; lower; lower E) negative; lower; lower Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 82) Which of the following changes would be most beneficial to a saver? A) an increase in the government's budget deficit B) corporations cutting back on their investment plans C) other people increasing their savings D) a decrease in the government budget deficit E) a decrease in consumption spending Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 56 Copyright © 2024 Pearson Canada Inc.

83) An increase in the real interest rate does which of the following? A) reduces the demand for loanable funds B) reduces saving C) reduces consumption spending D) increases the demand for loanable funds E) reduces public savings Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 84) The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects. A) government B) households C) banks D) firms E) foreigners Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 85) Using the market for loanable funds, which of the following has the potential to raise the real interest rate? A) an increase in the demand for loanable funds B) an increase in the quantity of loanable funds demanded C) an increase in the supply of loanable funds D) an increase in the quantity of loanable funds supplied E) a decrease in consumption spending Answer: A Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

86) An increase in the real interest rate results in which of the following? A) an increase in the demand for loanable funds B) a decrease in the demand for loanable funds C) an increase in the quantity of loanable funds supplied D) a decrease in the supply of loanable funds E) Both B and C will occur as a result of an increase in the real interest rate. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 87) A decrease in the real interest rate will A) increase consumption and reduce investment. B) increase saving and investment. C) decrease investment and government spending. D) increase consumption and investment. E) increase the quantity of funds lent. Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 88) The supply of loanable funds has a ________ slope because the greater the interest rate, the ________ the reward to saving, and the ________ the quantity of loanable funds supplied. A) positive; lower; lower B) positive; greater; lower C) negative; lower; greater D) positive; greater; greater E) vertical; greater; greater Answer: D Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

89) Which of the following is most likely to lead to an increase in the interest rate, based on the market for loanable funds? A) baby boomers retiring and reducing their savings B) a decrease in government infrastructure spending C) firms "hoarding" cash to avoid paying corporate income taxes D) consumers becoming increasingly worried about their jobs E) a decrease in the expected profitability of new projects Answer: A Diff: 3 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 90) Equilibrium in the loanable funds market determines A) the nominal interest rate. B) the current interest rate. C) the real interest rate. D) the expected interest rate. E) the overnight interest rate. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 91) If technological change increases the profitability of new investments for firms, then the ________ curve for loanable funds will ________. A) supply; shift to the right B) supply; shift to the left C) demand; shift to the right D) demand; shift to the left E) demand; remain constant Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

92) Because ________ in the government budget deficit increase the real interest rate, budget deficits can ________. A) decreases; decrease capital stock B) increases; increase capital stock C) decreases; increase firm investment D) increases; decrease firm investment E) increases; increase firm investment Answer: D Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 93) Ebenezer Scrooge's (the main character in Charles Dickens' A Christmas Carol) change in behaviour from miser to spender might actually be detrimental to the economy because A) Scrooge's miserly saving helped contribute to the production of investment goods rather than consumption goods. B) Scrooge was happiest when he was saving money, and happiness is the key to economic growth. C) saving has to be greater than consumption for the economy to grow. D) Scrooge's consumption habits were more detrimental to the environment than were his earlier saving habits. E) Scrooge's spending is likely to reduce the demand for loanable funds. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Do You Help the Economy More if You Spend or if You Save? 94) If technological change increases the profitability of new investment for firms, then the ________ curve for loanable funds will shift to the ________ and the equilibrium real interest rate will ________. A) supply; right; fall B) supply; left; rise C) demand; right; rise D) demand; left; fall E) supply; left; fall Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.6

95) Refer to Figure 6.6. The loanable funds market is in equilibrium, as shown in the figure above. An increase in the supply of loanable funds could result in which of the following combinations of the real interest rate and quantity of loanable funds at a new equilibrium? A) The real interest rate is 5 percent, and the quantity of loanable funds is $150 million. B) The real interest rate is 5 percent, and the quantity of loanable funds is $90 million. C) The real interest rate is 3 percent, and the quantity of loanable funds is $150 million. D) The real interest rate is 3 percent, and the quantity of loanable funds is $90 million. E) The real interest rate is 1 percent and the quantity of loanable funds is $180 million. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 96) Refer to Figure 6.6. The loanable funds market is in equilibrium, as shown in the figure above. As a result of an increase in the government budget deficit, the ________ for loanable funds will ________, thereby ________ the equilibrium real interest rate and ________ the equilibrium quantity of loanable funds. A) demand; rise; increasing; decreasing B) supply; rise; decreasing; increasing C) demand; fall; decreasing; decreasing D) supply; fall; increasing; decreasing E) demand; rise; increasing; increasing Answer: D Diff: 3 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 61 Copyright © 2024 Pearson Canada Inc.

97) Refer to Figure 6.6. The loanable funds market is given in the figure above. If the current real interest rate is 5 percent, which of the following is true? A) The loanable funds market is in equilibrium. B) There is a surplus of loanable funds in the market. C) There is a shortage of loanable funds in the market. D) The quantity of loanable funds being demanded in the market is less than $90 million. E) The quantity of loanable funds is undetermined. Answer: C Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 98) Refer to Figure 6.6. The market is in equilibrium. If the government budget deficit rises, which of the following would you expect to see? A) The quantity of loanable funds demanded by firms will rise above $120 million. B) The quantity of loanable funds demanded by firms will fall below $120 million. C) The budget deficit will have no impact on the quantity of loanable funds demanded by firms. D) The interest rate will fall below 4 percent. E) The interest rate will rise about 10 percent. Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 99) An increase in the government budget deficit will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________. A) supply; right; fall B) supply; left; rise C) demand; right; rise D) demand; left; fall E) supply; right; rise Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

100) An increase in the government budget surplus will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________. A) supply; right; fall B) supply; left; rise C) demand; right; rise D) demand; left; fall E) demand; left; rise Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 101) Which of the following will increase the real interest rate? A) an increase in the supply of loanable funds B) an increase in household saving C) an increase in the demand for loanable funds D) an increase in the budget surplus E) a fall in the demand for loanable funds Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 102) What is the main difference between a consumption tax and an income tax? A) A consumption tax requires households to pay taxes only on the income they have left after consumption, while an income tax requires households pay taxes on all earned income before consumption. B) A consumption tax requires households to pay taxes only on the income they spend, while an income tax requires households pay taxes on all earned income. C) A consumption tax always generates less revenue than an income tax. D) A consumption tax cannot be designed with exemptions, while an income tax can be. E) There is no difference between a consumption tax and an income tax. Answer: B Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

103) Which of the following would occur if the federal government of Canada cut all income taxes to zero and increased the GST (the federal consumption tax) to make up for the lost revenue? A) Consumption would increase. B) The supply of loanable funds would decrease. C) Saving would increase. D) Tax revenues would rise. E) Demand for loanable funds would fall. Answer: C Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 104) Retained earnings are sufficient to finance a firm's rapid expansion in a high-growth economy. Answer: FALSE Diff: 2 Type: TF Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 105) Financial markets and financial intermediaries comprise the financial system. Answer: TRUE Diff: 1 Type: TF Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 106) Empirical evidence shows that the impact of government budget deficits and surpluses on the equilibrium interest rate is quite large. Answer: FALSE Diff: 1 Type: TF Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 107) In an open economy, the relationship between GDP (Y) and expenditures is Y = C + I + G. Answer: FALSE Diff: 2 Type: TF Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

108) In 2006, the federal government ended the special tax treatment of dividends paid by income trusts, essentially raising the marginal tax rate on dividends. Using the loanable funds market, describe what will happen to saving, investment, economic growth, the real interest rate, and the quantity of loanable funds exchanged. Answer: Dividends are the portion of corporate profits paid to shareholders. When taxes on dividends are increased, this reduces the after-tax rate of return on stocks that offer dividends. Because the return to saving would decrease, saving will decrease and the supply of loanable funds will decrease. The shift to the left by the supply curve for loanable funds should raise the real interest rate and decrease the quantity of loanable funds exchanged. This will reduce investment spending in the economy. As investment spending shrinks, the capital stock and capital per hour worked should fall, and the rate of economic growth should decrease. Diff: 3 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 109) Carefully define the two categories of saving in the economy. Answer: There are two categories of saving in the economy: private saving by households and public saving by the government. Private saving is what is left of income after consumption expenditures and income taxes. Public saving is the amount of tax revenue that the government collects minus government expenditures and transfer payments. Diff: 1 Type: SA Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

110) Using equations for public and private saving, show that saving must equal investment in a closed economy. Begin with the expression for total saving in the economy. Answer: Start with the expression of total saving in the economy. This is the sum of private saving and public saving: S = Sprivate + Spublic (1) where private saving is: Sprivate = Y + TR - C - T.

(2)

This states that private saving is what is left over from household income after consumption expenditures (C) and taxes (T) are subtracted and transfers (TR) are added. Public saving is: Spublic = T - G - TR. (3) Public saving is what is left over after government spending (G) and transfer payments (TR) are subtracted from taxes (T). Combining (2) and (3) into (1) we get S = Y + TR - C - T + T - G - TR. Note that taxes and transfers cancel each other out, leaving: S = Y - C - G. (4) Because we know that income (Y) is exactly equal to production or Y = C + I + G in a closed economy, we can substitute the right-hand side of this expression into (4), and we get S = C + I + G - C - G. The consumption values cancel, as does the level of government spending, leaving S = I. Diff: 3 Type: SA Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 111) Explain why increasing the government budget deficit can decrease investment spending. Answer: Saving must equal investment in the economy; that is, S = I. Saving in the economy is equal to the sum of private saving plus public saving or S = Sprivate + Spublic, and because saving must equal investment we get: I = Sprivate + Spublic. Interpreting this expression, the larger saving is in the economy, the larger investment. One way to increase saving is to increase public saving. Public saving is Spublic = T - G - TR. The budget deficit is defined as the difference between taxes (T) and government spending plus transfers. When the expression for public saving is negative, the government is running a deficit. When this occurs, the total amount of saving in the economy falls. Since the total amount of saving in the economy equals investment, investment falls. Diff: 3 Type: SA Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

112) How does a decrease in the tax rate on income earned on saving affect saving, investment, the interest rate, and economic growth? Answer: One determinant of the amount of household saving is the interest rate or the after-tax rate of return that households earn on the amount that they save. The higher the rate of return, the more the household will save. Individuals care about the rate of return that they earn from saving after taxes. Decreasing the tax rate on income earned from saving will increase the after-tax return from saving. Since the after-tax rate of return rises for every dollar invested, the supply of loanable funds will increase, shifting the curve for loanable funds to the right. If the supply curve for loanable funds shifts to the right, this will lower the interest rate. As the interest rate declines, more investment projects become profitable. Firms will respond by increasing the amount of investment. This will raise the amount of capital available per worker. As the capital-to-labour ratio increases, so does labour productivity and growth in the economy. Diff: 2 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 113) Explain why the demand curve for loanable funds has a negative slope. Answer: The demand for loanable funds reflects the willingness of firms to borrow the money that they need to launch new investment projects, such as building a new factory or overhauling the equipment that they use for production. Most firms do not have the funds internally in retained earnings to finance these projects, so they must borrow them. Firms undertake these ventures in order to earn profit. Each of these projects has a rate of return. It is profitable for a firm to undertake a project as long as the rate of return of the project exceeds the cost of borrowing, or the interest rate. That is, if a firm expects to earn a 12% return on opening a new factory, the project will be profitable if the firm can borrow the funds at a rate less than 12%. As the interest rate falls, more investment projects become viable for the firm, so as the interest rate falls, the quantity of loanable funds demanded rises because the will firm require more loanable funds to invest in these newly profitable projects. Diff: 2 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

114) Explain and show graphically how a decrease in household saving affects the equilibrium interest rate and the equilibrium quantity of loanable funds. Answer: A decrease in household saving decreases the supply of loanable funds, shifting the supply curve for loanable funds to the left, as shown below. The decrease in the supply of loanable funds results in an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds.

Diff: 2 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

115) Explain and show graphically how a decrease in government spending affects the equilibrium interest rate and equilibrium quantity of loanable funds in the market for loanable funds. Answer: When government spending decreases, government saving (T - G - TR) rises. This increase in government saving shifts the supply curve for loanable funds to the right, decreasing the equilibrium interest rate and increasing the equilibrium quantity of loanable funds, as shown below.

Diff: 2 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

6.3

Explain what happens during the business cycle

1) Which of the following explains the cause of the change in the unemployment rate during the early stages of recovery? A) At the end of a recession, the number of new firms being created (and therefore hiring workers) falls. B) Firms rapidly hire new workers at the first sign of an increase in demand for their goods. C) Discouraged workers return to the labour force and this makes the unemployment rate fall. D) Discouraged workers return to the labour force and this makes the unemployment rate rise. E) There is a rise in the number of new workers entering the labour force for the first time. Answer: D Diff: 3 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 2) During the expansion phase of the business cycle, which of the following eventually increases? A) production B) employment C) income D) prices E) all of the above Answer: E Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 3) During the recession phase of the business cycle, A) production is usually rising. B) interest rates are usually falling. C) unemployment is usually falling. D) income is usually rising. E) labour force participation is usually rising. Answer: B Diff: 1 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

4) The period between a business cycle peak and a business cycle trough is called A) expansion. B) recession. C) diffusion. D) recalculation. E) calibration. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 5) In Canada, from June 2009 to February 2020, the business cycle was in a period of A) expansion. B) recession. C) trough. D) peak. E) depression. Answer: A Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 6) The period of expansion ends with ________ and the period of recession ends with ________. A) a business cycle peak; a business cycle trough B) a business cycle trough; a business cycle peak C) a business cycle peak; rising interest rates D) falling interest rates; a business cycle trough E) falling interest rates; rising interest rates Answer: A Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 7) What is the name of the organization that officially defines business cycle peaks and troughs in Canada? A) the Bureau of Labour Statistics B) the Bank of Canada C) Statistics Canada D) the federal Department of Finance E) There is no such organization in Canada. Answer: E Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 71 Copyright © 2024 Pearson Canada Inc.

8) As the economy nears the end of an expansion, which of the following do we typically see? A) rising firm profits B) rising levels of firm investment C) rising interest rates D) falling wages relative to output prices E) falling prices Answer: C Diff: 2 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 9) As the economy nears the end of a recession, which of the following do we typically see? A) further decreases in consumer spending B) increased spending on capital goods by firms C) increasing interest rates D) decreasing participation in the labour force E) all of the above Answer: B Diff: 2 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 10) The demand for durable goods A) has decreased over time. B) declines by a greater percentage than does GDP during a recession. C) declines by a smaller percentage than does GDP during a recession. D) rises by a greater percentage than does GDP during a recession. E) rises by a smaller percentage than does GDP during a recession. Answer: B Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 11) Purchases of which of the following goods would be dramatically reduced during a recession? A) tomatoes B) ink pens C) gasoline D) refrigerators E) used cars Answer: D Diff: 1 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

12) During a recession, spending on ________ tends to fall more dramatically than spending on ________. A) necessities; luxuries B) durable goods; nondurable goods C) nondurable goods; durable goods D) food; cars E) education; travel Answer: B Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 13) Purchases of Huggies diapers should A) remain fairly constant over the business cycle. B) increase in recessions and decrease in expansions. C) decrease in recessions and increase in expansions. D) increase in recessions and remain constant in expansions. E) increase in both recessions and expansions. Answer: A Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 14) The effect of a recession on a company like Bombardier is such that A) sales decline more sharply for Bombardier as compared to firms that do not produce durable goods. B) profits fall less sharply as compared to firms that do not produce durable goods. C) the decline in sales is more short-lived as compared to firms that do not produce durable goods. D) there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods. E) sales rise sharply as Bombardier's sales rise. Answer: A Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

15) Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle. A) increase; decrease B) decrease; increase C) decrease; decrease further D) increase; increase further E) decrease; remain constant Answer: A Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 16) Which of the following is a correct statement? A) Inflation is measured as the percent change in the CPI. B) The CPI is a widely used measure of the inflation rate. C) Real GDP is our best measure of economic growth. D) The PPI measures inflation as experienced by producers. E) Inflation is measured as changes in the unemployment rate. Answer: A Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Price Level and the Inflation Rate 17) When the economy enters a recessionary phase of the business cycle, unemployment tends to A) decrease. B) increase. C) be unchanged. D) change in the same direction as the rate of inflation. E) change in the same direction as the labour force participation rate. Answer: B Diff: 1 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

18) Typically, as an economy begins to emerge from a recessionary phase of the business cycle, A) unemployment falls immediately. B) unemployment continues to rise. C) inflation begins to fall. D) investment begins to fall. E) government spending rises. Answer: B Diff: 2 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 19) Most economists believe that the return of ________ during the 2008-2009 recession is a key reason why the recession was so severe. A) high tariffs B) financial instability C) rapid inflation D) high interest rates E) high unemployment Answer: B Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 20) According to the commonly used definition, Canada has experienced ________ recession(s) since 1980. A) 1 B) 2 C) 3 D) 4 E) 5 Answer: C Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 21) Canada was in recession during A) 2007-2009. B) 2008-2009. C) 2007-2008. D) 2008-2012. E) 2015-2016. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 75 Copyright © 2024 Pearson Canada Inc.

22) Economists have not found a way to predict when recessions will begin and end. Answer: TRUE Diff: 1 Type: TF Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 23) The commonly accepted definition of a recession is at least two consecutive quarters of falling real GDP. Answer: TRUE Diff: 2 Type: TF Topic: Defining a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 24) At the end of an expansion, wages of workers are usually rising faster than prices. Answer: TRUE Diff: 2 Type: TF Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 25) In Canada, since the 1970s, expansions are more common than recessions. Answer: TRUE Diff: 1 Type: TF Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 26) Explain how unemployment changes over the business cycle. Why do these changes occur? Answer: Unemployment will fall during an expansion and rise during a recession. When the economy begins slowing down during a recession, firms cut back on production and workers get laid off. But it doesn't stop there. The unemployment rate typically rises even after the end of the recession. This happens for a couple of different reasons. First, it reflects the behaviour of discouraged workers. When the economy goes into recession, the number of discouraged workers rises. When a discouraged worker drops out of the labour force, this actually lowers the unemployment rate. During the recession, the unemployment rate does not rise as much as it would if we counted discouraged workers as unemployed. When the recovery begins, these former discouraged workers enter back into the labour force and start searching for work again. This influx of people without jobs into the labour force raises the unemployment rate. Second, firms are reluctant to start adding back workers when the recovery begins to take hold. They are cautious and want to be sure that the recession is over. They work their workers overtime rather than add new workers. Both these effects, discouraged workers re-entering the labour market and firm's reluctance to hire in the early part of a recovery, contribute to keeping the unemployment rate high. Diff: 2 Type: ES Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 76 Copyright © 2024 Pearson Canada Inc.

27) How are unemployment, inflation, and the business cycle related? Answer: A recessionary phase of a business cycle usually begins with decreased investment spending by firms or with reductions in consumption spending. As spending decreases firm sales decrease, and firms begin laying off workers, thereby increasing unemployment. As firms find it more difficult to sell their goods they will also find it more difficult to raise prices and the rate of inflation will be relatively low. As the economy moves toward the expansionary phase of the business cycle firms begin to increase investment spending, households begin to increase their spending, and unemployment begins to fall. As spending increases producers find it easier to raise prices and the rate of inflation tends to rise during this expansionary phase. Diff: 2 Type: ES Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Analytic Skills 28) How have government policies and programs affected the volatility of the business cycle in Canada? Explain and provide at least two specific examples of policies or programs that may have had an impact. Answer: Government programs like Employment Insurance and other income support programs have helped to shorten recessions since they provide additional income to individuals who might not otherwise be able to continue consumption spending. Since the Great Depression the federal government has also become more actively committed to maintaining low unemployment, which may have reduced the severity of recessions and prolonged expansions. Diff: 2 Type: ES Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Analytic Skills 29) During the expansion phase of the business cycle, A) production increases. B) employment decreases. C) income decreases. D) unemployment increases. E) the price level falls. Answer: A Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

30) A period of expansion in the business cycle ends when A) real GDP is equal to potential GDP. B) the business cycle reaches its peak. C) the business cycle reaches its trough. D) real GDP is less than potential GDP. E) real GDP returns to growth. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 31) When the economy reaches a trough in a business cycle, which of the following will occur? A) Income, production, and employment will continue to fall. B) Income, production, and employment will begin to rise. C) Income and production will rise, but employment will continue to fall. D) Employment rises, but income and production will continue to fall. E) Unemployment, the price level, and output will all rise. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 32) ________ officially decides when a recession begins and ends. A) The Minister of Finance B) Statistics Canada C) The Bank of Canada D) The Council of Economic Advisors E) None of the above Answer: E Diff: 2 Type: MC Topic: Defining a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 33) A(n) ________ comes to an end with a business cycle ________. A) recession; peak B) recession; trough C) expansion; trough D) expansion; bubble E) expansion; depression Answer: B Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

34) The generally accepted definition of a recession is A) two consecutive quarters of declining real GDP. B) two consecutive quarters of declining nominal GDP. C) a significant decline in activity visible in industrial production, employment, real income, and wholesale/retail trade lasting more than a few months. D) a significant decline in inflation and unemployment lasting more than a few months. E) 9 months of rising unemployment and falling inflation. Answer: A Diff: 2 Type: MC Topic: Defining a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 35) Which of the following might make it a good idea for a business to expand during a recession? A) The cost of capital is typically low during a recession. B) It is often difficult to find skilled workers during a recession. C) Most other business are expanding at the same time. D) Consumers have increased their savings, meaning they have more to spend. E) Demand for most products is stronger during recessions than other times. Answer: A Diff: 2 Type: MC Topic: Defining a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 36) As the economy nears the end of an expansion, interest rates usually ________, and wages rise more ________ than prices. A) rise; rapidly B) rise; slowly C) fall; rapidly D) fall; slowly E) stabilize; slowly Answer: A Diff: 2 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

37) A recession begins with a(n) ________ in spending by firms on capital goods and a(n) ________ in spending on durable goods by households. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease E) levelling off; increase Answer: D Diff: 2 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 38) Which of the following goods would see the largest decline in demand during a recession? A) automobiles B) food C) clothing D) haircuts E) Huggies diapers Answer: A Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 39) When a recession ends, A) interest rates decrease. B) households decrease spending on durable goods. C) the household sector decreases spending substantially. D) firms increase the amount of borrowing. E) households demand fewer products of all categories. Answer: D Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 40) Which of the following goods would be most likely to see demand increase during a recession? A) instant noodles B) steak C) cars D) houses E) smart phones Answer: A Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 80 Copyright © 2024 Pearson Canada Inc.

41) Because Bombardier produces expensive durable goods, the demand for their goods A) is likely to increase during recession. B) declines when incomes in the economy are rising. C) is consistently high, regardless of the state of the economy. D) tends to follow the business cycle. E) move counter to the business cycle. Answer: D Diff: 1 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking Special Feature: Chapter Opener: Growth and the Business Cycle at Bombardier 42) For the recessions in Canada since the 1980s, A) cyclical unemployment has been nonexistent. B) unemployment rises as the recession comes to an end. C) unemployment falls 6 months after a recession begins. D) unemployment peaks 6 months after the peak of the business cycle. E) unemployment falls throughout the recession. Answer: B Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 43) For the recessions in Canada since the 1980s, A) inflation has been nonexistent. B) the inflation rate rises as a recession begins. C) the inflation rate peaks just before a recession. D) deflation occurs. E) the inflation falls as the recession comes to an end. Answer: C Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 44) Recessions cause the unemployment rate to ________ and the inflation rate to ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall E) fall; remain constant Answer: B Diff: 1 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 81 Copyright © 2024 Pearson Canada Inc.

45) During an expansion, how do inflation and unemployment typically change? A) Inflation and unemployment both rise. B) Inflation and unemployment both fall. C) Inflation falls and unemployment rises. D) Inflation rises and unemployment falls. E) Inflation rises and unemployment is constant. Answer: D Diff: 2 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 46) Between 1980 and 2018, the average length of recessions in Canada was A) about one month. B) about three months. C) about six months. D) about eighteen months. E) about three years. Answer: D Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 47) Inflation is measured A) using the level of the consumer price index. B) as the percentage change in the consumer price index. C) using the level of real GDP. D) as the percentage change in real GDP. E) as the change in the value of the Canadian dollar. Answer: B Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

48) If the CPI is currently 202, what does this tell you about inflation between last year and this year? A) There was deflation in the economy between this year and last year. B) Inflation in the economy between this year and last year was 2%. C) Inflation in the economy between this year and last year was 102%. D) The CPI measures only the level of prices in a given year, not the percentage change in prices from one year to the next. E) This economy is suffering from deflation. Answer: D Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Price Level and the Inflation Rate 49) Since 1980, recessions in Canada A) have not occurred. B) have only occurred once. C) have occurred twice. D) have occurred three times. E) have occurred four times. Answer: E Diff: 1 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 50) Since 1980, A) economic expansions in Canada have been so short that expansions barely exist. B) the average length of expansions in Canada has become shorter. C) the average length of expansions in Canada has become longer. D) the average length of expansions in Canada has remained about the same. E) the average length of a recession has fallen to zero. Answer: C Diff: 1 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

51) Which of the following explains why the unemployment rate tends to rise as a recession ends? A) Discouraged workers begin to search for jobs. B) The federal government uses a different definition of "unemployed" during recession. C) Employment insurance tends to be more generous during recessions. D) The birth rate tends to rise during recessions. E) Firms reducing hiring as recessions come to an end. Answer: A Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 52) Which of the following indicates that the Canadian economy has become more stable since 1980? A) longer recessions B) shorter expansions C) less severe fluctuations in real GDP D) the price level is more stable than before 1980 E) all of the above Answer: C Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 53) If you spend more of your income on consumption goods, which of the following will occur? A) The production of investment goods will fall. B) Economic growth will be stimulated. C) Investments in education will rise. D) For every dollar you spend on consumption, real GDP will fall by a dollar. E) The federal government will run a budget deficit. Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Do You Help the Economy More if You Spend or if You Save?

54) Since 1980, A) the Canadian economy has spent more time in expansion than in recession. B) the Canadian economy has spent more in time in recession than expansion. C) the Canadian economy has spent equal time in recession and expansion. D) the Canadian economy has experienced almost no economic growth. E) the Canadian economy has experienced one long depression. Answer: A Diff: 1 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 55) Which of the following is a true statement about the length of recessions and expansions in the Canadian economy? A) After 1980, the length of expansions equaled the length of recessions. B) After 1980, the length of expansions was much less than the length of recessions. C) After 1980, the length of expansions was much longer than the length of recessions. D) After 1980, the length of expansions was brief and almost nonexistent. E) After 1980, the length of expansions was approximately one half the length of recessions. Answer: C Diff: 1 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 56) All else equal, a(n) ________ would be mostly likely to ________ demand for vacation travel and ________ demand for Bombardier aircraft. A) recession; increase; increase B) recession; reduce, reduce C) boom; reduce; increase D) recession; reduce; increase E) expansion; reduce; reduce Answer: B Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

57) According to Statistics Canada, in Canada the recession in 2020 resulting from the COVID-19 pandemic occurred A) during the first portion of 2020. B) between April and December 2020. C) from 2020 to 2021. D) from 2020 to 2022. Answer: A Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Analytical Thinking 58) The lengths of the recession and expansion phases and which sectors of the economy are most affected will rarely be the same in any two business cycles. Answer: TRUE Diff: 1 Type: TF Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 59) A period of economic expansion ends with a business cycle trough. Answer: FALSE Diff: 1 Type: TF Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 60) The Canadian economy has been more stable since 1995. Answer: TRUE Diff: 1 Type: TF Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 61) Inflation usually increases during a recession and decreases during an expansion. Answer: FALSE Diff: 2 Type: TF Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

62) Suppose you are employed by a large corporation to forecast the state of the economy. You are asked to look at macroeconomic data to evaluate whether the economy is entering a recession. Which data do you look at? How does the economy behave at the onset of a recession? Answer: Since the generally agreed definition of a recession is two consecutive quarters of negative real GDP growth, looking at data on real GDP would be essential. You would likely want to consider spending on capital goods by firms, as capital spending tends to fall as the economy enters a recession. Consumer spending can also be used as an indicator of the future state of the economy, as consumers cut back on their purchases of durables—like cars—at the beginning of a recession. We've also seen that inflation tends to rise as the economy nears a recession and then falls fairly quickly. Finally, a series of layoffs would also be a potential indicator of a coming recession. Diff: 3 Type: SA Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 63) What type of consumer goods are most affected by the business cycle: durable goods or nondurable goods? Why? Answer: Some workers lose income during a recession and cut back on their spending. Other workers fear losing their jobs or may suffer wage cuts. These workers also reduce their spending. When they cut back on their spending, workers are more likely to cut back on consumer durable goods. Consumer durable goods such as automobiles, appliances, and furniture, are goods that are expected to last for three or more years. Since these goods last three or more years, the consumer can continue to use these goods for some time. The consumer will put off trying to replace these expensive goods until his/her income position is stronger and job security more assured. Diff: 2 Type: SA Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 64) Explain what happens to inflation during the business cycle. Give an intuitive explanation as to why inflation changes the way it does over the business cycle. Answer: Inflation will rise during an expansion and fall during a recession. Inflation usually rises near the end of an expansion. Recessions consistently lower the inflation rate. The business cycle has this effect on inflation because spending is usually strong during an expansion and firms will find it easier to raise prices. During a recession, the opposite is true. Spending by firms and households is weak and firms might not be able to sell their goods if they aggressively raise prices. Diff: 2 Type: SA Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

Macroeconomics, 4Ce (Hubbard) Chapter 7 Long-Run Economic Growth: Sources and Policies 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth 1) The process of new technologies advancing living standards while destroying many existing firms is known as A) catch-up. B) convergence. C) creative destruction. D) the Industrial Revolution. Answer: C Diff: 1 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytical Thinking Special Feature: Chapter Opener: Technological Change, Creative Destruction, and Rising Living Standards 2) Regardless of what happens to any one firm, the process of long run growth moves forward, ________ new opportunities for some firms and ________ the products of other firms. A) reducing; eliminating. B) wiping out; creating. C) creating; wiping out. D) increasing; increasing. E) eliminating; reducing. Answer: C Diff: 1 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytical Thinking Special Feature: Chapter Opener: Technological Change, Creative Destruction, and Rising Living Standards

3) The rapid growth of the Chinese economy should A) benefit Canadian consumers, as they have access to less expensive consumer goods. B) make it more difficult for citizens of Canada to find a job. C) make the cost of living for Canadians rise. D) not affect the mix of jobs available in Canada. E) not affect the types of products available in Canada. Answer: A Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Would You Be Better Off without China? 4) The Industrial Revolution began in A) England around 1750. B) the United States around 1820. C) Canada around 1867. D) Germany around 1780. E) France around 1777. Answer: A Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 5) Which of the following is a reason why the Industrial Revolution began in England, and not in China, India, Africa, or Japan? A) The British system ensured the property rights of entrepreneurs. B) English inventors were more productive than those in other countries. C) British government was less stable than those in other countries. D) The British people had a longer history of embracing technological change. E) The British Navy prevented China from growing. Answer: A Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England?

6) Suppose that in 2022 real GDP grew in Estonia by 3% and that the population increased by 5%. Therefore in 2022, Estonia experienced A) economic growth, but not an increase in living standards. B) economic growth and an increase in living standards. C) no economic growth, but an increase in living standards. D) no economic growth and no increase in living standards. E) economic collapse and an increase in living standards. Answer: A Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 7) The period of time from 1,000,000 BCE to 1300 CE was a period of A) no sustained economic growth. B) slow and steady economic growth. C) moderate economic growth. D) rapid and sustained economic growth. E) rapidly accelerating economic growth. Answer: A Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 8) Significant economic growth did not begin in the world until A) 1000 CE. B) 1750 CE. C) 1820 CE. D) 2000 CE. E) 1500 CE. Answer: B Diff: 2 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

9) According to Douglass North, the Industrial Revolution occurred in England because A) the British Parliament took control of the government and could credibly commit to upholding property rights. B) the British monarchy took control of the government and pledged not to raise taxes arbitrarily. C) the British courts became tied to the king and began to refuse to enforce property rights. D) the British Parliament instituted a command economy structure and implemented a planned economy. E) the British navy was the most powerful in the world. Answer: A Diff: 2 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 10) Growth in real GDP per capita for the world economy was greatest during A) the fifteenth century. B) the seventeenth century. C) the eighteenth century. D) the nineteenth century. E) the twentieth century. Answer: E Diff: 2 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 11) If Canada and Bolivia have annual per capita growth rates of 3.2% and 1.35%, respectively, and if Canada's per capita GDP is higher, then in the long run A) real GDP per capita in Canada will always be 1.9% higher than real GDP per capital in Bolivia. B) the difference between the level of real GDP per capita in Canada and real GDP per capita in Bolivia will shrink over time. C) the difference between the level of real GDP per capita in Canada and real GDP per capita in Bolivia will increase over time. D) the difference between the level of real GDP per capita in Canada and real GDP per capita in Bolivia will always be $1.9 trillion. E) the difference between the level of real GDP per capita in Canada and real GDP per capita in Bolivia will equalize over time. Answer: C Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

12) If real GDP per capita in Canada is $8,000, what will real GDP per capita in Canada be after 5 years if real GDP per capita grows at an annual rate of 3.2%? A) $8,520 B) $9,280 C) $9,365 D) $10,560 E) $12,350 Answer: C Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 13) If real GDP per capita in Ireland is estimated to be $7,400 in 2022, what will real GDP per capita be in 2027 if real GDP per capita grows at an annual rate of 2.8%? A) $7,607 B) $8,496 C) $9,472 D) $20,720 E) $21,375 Answer: B Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 14) If real GDP per capita in Canada is $8,000 in 2022, and if real GDP per capita is $12,000 in 2032, what is the average annual growth rate of GDP per capita between 2022 and 2032? A) 3.33% B) 8.45% C) 15% D) 33% E) 50% Answer: B Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage Change with the Total Percentage Change

15) If real GDP per capita in Canada is $8,000 in 2022, and if real GDP per capita is $12,000 in 2032, what is the total percent change in the growth rate of GDP per capita between 2022 and 2032? A) 3.33% B) 5% C) 15% D) 33% E) 50% Answer: E Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage Change with the Total Percentage Change 16) Increasing the growth rate of GDP per capita and sustaining this growth rate in an economy can A) increase infant mortality. B) increase standards of living. C) increase the level of poverty. D) lower life expectancy. E) eliminate poverty. Answer: B Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 17) Between 1960 and now, deaths rates among children have A) declined in most high-income countries and have risen in most low-income countries. B) declined in nearly all countries, including most low-income countries. C) remained relatively unchanged in most high-income countries and have declined in most low-income countries. D) declined in most high-income countries and have remained relatively unchanged in most low-income countries. E) risen in virtually all countries. Answer: B Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Is Income All That Matters?

18) Between 1970 and now, the percentage of people able to read and write in sub-Saharan Africa has A) more than doubled. B) increased by a factor of four. C) declined by 50 percent. D) increased only 10 percent. E) fallen by 25 percent. Answer: A Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Is Income All That Matters? 19) Small differences in economic growth rates result in small differences in living standards. Answer: FALSE Diff: 1 Type: TF Topic: Small Differences in Growth Rates Are Important Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 20) An economy that grows too slowly fails to raise living standards. Answer: TRUE Diff: 1 Type: TF Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 21) Most of the countries of Africa are considered newly industrializing countries. Answer: FALSE Diff: 1 Type: TF Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

22) Which of the following accurately describes economic growth and standards of living between and 1300 CE? A) Standards of living in 1300 CE were substantially better than what they were in 1,000,000 BCE. B) Standards of living substantially declined from 1,000,000 BCE to 1300 CE. C) Significant economic growth took place between 1,000,000 BCE and 1300 CE. D) No sustained economic growth occurred between 1,000,000 BCE and 1300 CE. E) Standards of living grew slowly, but steadily between 1,000,000 BCE and 1300 CE. Answer: D Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 23) Entrepreneurship in Mexico is A) still risky due to government corruption and organized crime. B) the sole responsibility of the Mexican government. C) a relatively new phenomenon. D) the main reason Mexico does not enjoy the same standard of living as the United States and Canada. E) much safer than in Canada. Answer: A Diff: 2 Type: MC Topic: The Chinese Economic Miracle Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking, Multicultural and Diversity Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China? 24) The best measure of a country's standard of living is A) GDP per labour hour. B) GDP per unit of capital. C) GDP per capita. D) total nominal GDP. E) the employment population ratio. Answer: C Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

25) If a country's real GDP is rising by 3% per year while its population is rising at 5% per year, which of the following is true? A) The country's standard of living is falling. B) The country's standard of living is rising. C) Growth in nominal GDP outweighs growth in the population. D) Growth in nominal GDP is less than the growth in the population. E) Nominal GDP per capita must be constant. Answer: A Diff: 2 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Table 7.1 Country Sweden Ireland

GDP (billions of dollars) $385 223

Population (millions of people) 9.05 4.21

26) Refer to Table 7.1. Based on the table above, which country has a higher standard of living and why? A) Sweden has a higher standard of living because its GDP is higher. B) Ireland has a higher standard of living because its GDP per capita is higher. C) Sweden has a higher standard of living because its GDP per capita is higher. D) Ireland has a higher standard of living because growth in GDP is greater in Ireland than in Sweden. E) Ireland and Sweden have almost identical standards of living. Answer: B Diff: 2 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 27) According to the World Bank, in 2016 China's GDP was approximately $11.2 trillion (in U.S. dollars). That same year, India's GDP was approximately $2.3 trillion (also in U.S. dollars). With which of the following populations would China's standard of living have been considered higher than India's that year? A) China's population = 1.1 billion; India's population = 1.3 billion B) China's population = 5.3 billion; India's population = 1.4 billion C) China's population = 500 million; India's population = 125 million D) China's population = 2.0 billion; India's population = 0.7 billion E) China's population = 3.0 billion; India's population = 1.0 billion Answer: A Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 9 Copyright © 2024 Pearson Canada Inc.

28) The Industrial Revolution A) marked the beginning of significant economic growth in the world. B) started in France around the year 1750. C) produced goods exclusively using human or animal power. D) had no impact on standards of living in the world. E) marked the beginning of poverty around the world. Answer: A Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 29) Which of the following is not a reason why the Industrial Revolution occurred when and where it did? A) The British government was committed to upholding private property rights. B) The British government was able to eliminate arbitrary increases in taxes. C) The British government was able to more easily seize wealth. D) Institutional changes by the British government helped protect wealth. E) The British courts were effective at enforcing contracts. Answer: C Diff: 2 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 30) During which of the following periods was growth in GDP per capita the fastest? A) prior to 500 CE B) 500 CE to 1500 CE C) 1500 CE to 1800 CE D) 1800-1900 CE E) 1900-2000 CE Answer: E Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

31) In the long run, ________ differences in economic growth rates result in ________ differences in GDP per capita. A) large; small B) large; no C) small; large D) small; no E) no; large Answer: C Diff: 1 Type: MC Topic: Small Differences in Growth Rates Are Important Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 32) GDP in a country grew from $10 billion to $14 billion over the span of 5 years. The average annual growth rate of GDP was A) 2%. B) 4%. C) 7%. D) 10%. E) 40%. Answer: C Diff: 1 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage Change with the Total Percentage Change 33) GDP in a country grew from $10 billion to $14 billion over the span of 5 years. The total percentage change in GDP was A) 4%. B) 7%. C) 10%. D) 40%. E) 2%. Answer: D Diff: 1 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage Change with the Total Percentage Change

34) If GDP per capita rises by 2% between 2021 and 2022, which of the following is necessarily true? A) Real GDP has risen by more than 2%. B) Real GDP has risen by 2%. C) The population has decreased. D) The population has increased, but by less than 2%. E) None of the above is necessarily true. Answer: E Diff: 3 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 35) The key factors in raising standards of living in low-income countries have been increases in A) capital accumulation and the money supply. B) technology and knowledge. C) foreign aid and population. D) income and government ownership of resources. E) trade restrictions. Answer: B Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Is Income All That Matters? 36) ________ is considered a high-income country, ________ a developing country, and ________ a newly industrializing country. A) Japan; Hong Kong; South Korea B) The United States; Somalia; Taiwan C) Canada; France; Singapore D) Honduras; New Zealand; South Korea E) India; Russia; Canada Answer: B Diff: 2 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

37) Which of the following countries had the lowest GDP per capita in 2020? A) Tunisia B) Mexico C) Burundi D) Lao E) Somalia Answer: C Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 38) Which of the following countries had the highest GDP per capita in 2020? A) Nigeria B) Qatar C) Liechtenstein D) the United States E) Japan Answer: B Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 39) High-income countries are also referred to as A) developing countries. B) industrialized countries. C) growing countries. D) agrarian countries. E) newly developed countries. Answer: B Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

40) The small group of East Asian countries that experienced high rates of growth in the 1980s and 1990s are referred to as A) newly industrializing countries. B) countries with low standards of living. C) education-deprived countries. D) industrial countries. E) newly decolonized countries. Answer: A Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking, Multicultural and Diversity 41) According to Nobel Laureate Douglass North, one reason why the Industrial Revolution occurred in England before many other countries was because the King of England consistently maintained control over the court system and the government. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking, Multicultural and Diversity Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 42) Most economic growth in the world occurred between 1,000,000 BCE and 1300 CE. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 43) In 2016, South America had a lower average GDP per capita than any other continent. Answer: FALSE Diff: 1 Type: TF Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

44) Only income can produce increases in standard of living. Answer: FALSE Diff: 1 Type: TF Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Apply the Concept: Is Income All That Matters? 45) What features made England in the eighteenth century the place where the Industrial Revolution occurred? Answer: The British Parliament had just gained control over the government from the king; British courts became independent of the king, upheld property rights and protected wealth, and markets in England at the time were "efficient" in that prices for the same products were the same across regions after accounting for transportation costs. Diff: 2 Type: SA Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 46) What are some of the reasons used to explain improvements in health, education, democracy, and political stability in many low-income countries? Answer: Reasons include increases in technology and knowledge, such as the development in inexpensive vaccines or the use of mosquito nets, and changes in attitudes, such as placing greater value on education or increasing support for political freedoms. Diff: 2 Type: SA Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Apply the Concept: Is Income All That Matters? 47) How do economic growth rates affect a nation's standard of living? Answer: The speed at which an economy grows determines the standard of living of its people. If an economy grows too slowly, then standards of living can decline. If a country is already poor, then slow growth can fail to raise standards of living of its citizens. This can result in people living in poverty, poor health, having poor nutrition, low life expectancy, high infant mortality, and an overall poor quality of life. On the other hand, more rapid rates of growth can improve standards of living. This can lift people out of poverty, raise life expectancy, improve health, eliminate hunger, and improve the general quality of life. Diff: 2 Type: SA Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

Table 7.2 Country Bangladesh India Singapore Turkey

Population GDP (measured in (thousands) thousands of U.S. dollars) 131,200 $53,800,000 1,052,000 517,300,000 4,200 113,500,000 69,600 204,870,000

48) Refer to Table 7.2. Calculate the GDP per capita for each country in the table. Which country has the highest standard of living? Why? Answer: GDP per capita = GDP / Population. GDP per capita in Bangladesh: $53,800,000 / 131,200 = $410.06. GDP per capita in India: $517,300,000 / 1,052,000 = $491.73. GDP per capita in Singapore: $113,500,000 / 4,200 = $27,023.81. GDP per capita in Turkey: $204,870,000 / 69,600 = $2,943.53. Singapore has the highest standard of living because it has the highest GDP per capita. Diff: 2 Type: SA Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills

7.2

Use the economic growth model to explain why growth rates differ across countries

1) An economic growth model explains A) changes in real GDP per capita in the long run. B) how changes in the money supply affect real interest rates. C) changes in government tax policies over time. D) the growth rate of the price level over time. E) changes in a country's population over time. Answer: A Diff: 1 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 2) If the growth rate of GDP is adjusted downward, and the number of hours worked upward, how will figures on the growth rate of labour productivity be adjusted? A) The growth rate will be adjusted downwards. B) The growth rate will be adjusted upwards. C) The growth rate will not be adjusted. D) The level will be adjusted upwards and the growth rate downwards. E) The level will be adjusted downwards and the growth rate upwards. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 3) Which of the following is not one of the three sources of technological change? A) additional amounts of existing capital B) better machinery C) increases in human capital D) better means of managing production E) better equipment Answer: A Diff: 2 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

4) Which of the following would you expect to result in faster economic growth? A) the invention of new computers that increase labour productivity B) a decrease in the average level of education in the economy C) a decrease in the stock of capital per worker D) a decrease in research and development spending E) an increase in the rate of population growth Answer: A Diff: 1 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 5) An economy can improve its standard of living by A) organizing production so that the quantity of goods produced per hour will decrease. B) reducing the amount of human capital workers have. C) increasing the amount of capital available per hour worked. D) increasing the minimum wage. E) all of the above Answer: C Diff: 1 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 6) When an economy faces diminishing returns, A) the slope of the per-worker production function becomes steeper. B) the slope of the per-worker production function becomes flatter. C) the per-worker production function shifts to the left. D) the per-worker production function shifts to the right. E) the per-worker production function becomes convex. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

7) When additions of input to a fixed quantity of another input lead to progressively smaller increases in output, we say we are facing A) diminishing returns. B) negative returns. C) accelerating returns. D) decreasing production. E) diseconomies of scale. Answer: A Diff: 1 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 8) Suppose that an increase in capital per hour worked from $15,000 to $20,000 increases real GDP per hour worked by $500. If capital per hour worked increases further to $25,000, by how much would you expect real GDP per hour worked to increase if there are diminishing returns? A) by less than $500 B) by exactly $500 C) by more than $500 but less than $5,000 D) by more than $5,000 but less than $20,000 E) by more than $20,000 Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

Figure 7.1

9) Refer to Figure 7.1. Diminishing marginal returns is illustrated in the per-worker production function in the figure above by a movement from A) A to C. B) B to C. C) C to D. D) D to C. E) A to D. Answer: A Diff: 1 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 10) Refer to Figure 7.1. Technological change is illustrated in the per-worker production function in the figure above by a movement from A) A to B. B) B to C. C) B to A. D) D to C. E) D to A. Answer: B Diff: 1 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

11) Refer to Figure 7.1. Using the per-worker production function in the figure above, the largest changes in an economy's standard of living would be achieved by a movement from A) A to B to C. B) B to C to D. C) C to B to A. D) D to C to B. E) C to D to A. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 12) Refer to Figure 7.1. Suppose the per-worker production function in the figure above represents the production function for the Canadian economy. If Canada decided to double its support of university research, this would cause a movement from A) A to B. B) B to C. C) B to A. D) D to C. E) C to A. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 13) Refer to Figure 7.1. Within a country, the impact of wars and revolutions and their subsequent destruction of capital is reflected in the per-worker production function in the figure above by a movement from A) A to B. B) B to C. C) B to A. D) C to A. E) B to D. Answer: D Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

14) Refer to Figure 7.1. Many countries in Africa strongly discouraged and prohibited foreign direct investment in the 1950s and 1960s. By doing so, these countries were essentially preventing a moment from A) A to B. B) B to C. C) B to A. D) D to C. E) D to A. Answer: B Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 15) Refer to Figure 7.1. Which of the following could cause an economy to move from point C to B? A) restrictions on foreign direct investment and international migration B) government funding of universities C) policies that encourage firms to adopt new production technology D) the introduction of computer coding classes in primary education E) an economy gaining more capital Answer: A Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 16) In the eighteenth century, Honoré Blanc, a French gunsmith, revolutionized the arms manufacturing industry by focusing on interchangeable parts and standardization and the integration of the assembly line. What impact did his methods for producing muskets have on the per-worker production function? A) It became flatter. B) It shifted up. C) It shifted down. D) It became linear. E) It no longer passed through the origin. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

17) If the per-worker production function shifts down, A) it now takes more capital per hour worked to get the same amount of real GDP per hour worked. B) an economy can increase its real GDP per hour worked without changing the level of capital per hour worked. C) the per-worker production function becomes steeper. D) positive technological change has occurred in the economy. E) workers have acquired more human capital. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 18) Because of diminishing returns, an economy can continue to increase real GDP per hour worked only if A) there are decreases in human capital. B) the per-worker production function shifts downward. C) there continue to be decreases in capital per hour worked. D) there is technological change. E) there continue to be increases in capital per hour worked. Answer: D Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 19) In a small European country, it is estimated that a $10,000 increase in capital per hour worked will increase real GDP per hour worked by $300. Based on this information, what is the slope of the perworker production function in this range? A) 0.03 B) 0.3 C) 3.3 D) 33.3 E) 333 Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

20) In a small European country, it is estimated that changing the level of capital from $8 million to $10 million will increase real GDP from $2 million to $3 million. If the number of hours worked in the labour force does not change, what does this information tell you about the slope of the per-worker production function in this range? A) The slope is -2. B) The slope is 1/2. C) The slope is 2. D) The slope is 4. E) The slope is 8. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 21) In a small European country, it is estimated that changing the level of capital from $8 million to $10 million will increase real GDP from $2 million to $3 million. What level of GDP would you expect the economy to be able to reach if spending on capital continued to rise to $12 million, assuming no technological change and no change in the hours of work? A) GDP would increase further, but by less than $1 million. B) GDP would increase further by exactly $1 million. C) GDP would increase further by more than $1 million. D) GDP would increase further by exactly $4 million. E) GDP would increase further by more than $4 million. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 22) If the slope of the per-worker production function is 1/2 in a given range, how will a $10,000 increase in capital per hour worked affect real GDP per hour worked in the same given range? A) Real GDP per hour worked will increase by $5,000. B) Real GDP per hour worked will increase by $20,000. C) Real GDP per hour worked will increase by $10,000. D) Real GDP per hour worked will decrease by $20,000. E) Real GDP per hour worked will increase by more than $20,000. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

23) The Soviet Union's economy grew rapidly in terms of GDP per hour worked in the 1950s, but eventually this growth slowed. Why did this occur? A) Capital per hour worked grew rapidly from 1950 to 1980, but technological change occurred very slowly. B) Capital per hour worked grew slowly, but technological change grew very rapidly. C) Increasing implementation of new technologies eventually suffered diminishing marginal returns. D) The centrally planned economy invested too heavily in technological change. E) The Soviet labour force grew too slowly to maintain growth. Answer: A Diff: 2 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union? 24) Under the Soviet system of communism, A) managerial pay was determined by the extent to which managers could lower the per-unit costs of production. B) technological progress was slow because managers had little incentive to develop new technologies. C) competitive pressures in the Soviet Union allowed the country's technological progress to keep pace with the rest of the world. D) the per-worker production function in the Soviet Union shifted up more rapidly than production functions in other countries. E) workers' incentives to exert effort were too strong, ultimately leading to an increase in productivity. Answer: B Diff: 2 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union? 25) Technological improvements are more likely to occur if A) the economy is centrally planned. B) entrepreneurs are compensated with higher profits for taking risks. C) economic decisions are made by politicians rather than entrepreneurs. D) companies face little competition in their markets. E) governments directly control research and development. Answer: B Diff: 2 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union?

Figure 7.2

26) Refer to Figure 7.2. Based on the per-worker production function above, if the Canadian economy raises capital per hour worked from $35,000 to $40,000, by how much will real GDP per hour worked increase? A) $150 B) $1,850 C) $2,000 D) $5,000 E) $35,000 Answer: A Diff: 1 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of the Soviet Economy 27) Refer to Figure 7.2. Assuming no technological change, if Canada increases capital per hour worked by $40,000 every year between 2017 and 2022, we would expect to see A) real GDP per hour worked will increase by the same increment each year between 2017 and 2022. B) real GDP per hour worked will be lower in 2022 than it was in 2017. C) the per-worker production function will get flatter over time. D) the per-worker production function will shift up every year there is increase in capital per hour worked. E) the per worker production function will become steeper every year. Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of the Soviet Economy 26 Copyright © 2024 Pearson Canada Inc.

28) According to new growth theory, A) technological change is influenced by economic incentives. B) centrally-planned economies are the most efficient. C) growth in real GDP per capita occurs only if there are increasing returns. D) economic growth is determined by forces outside the control of the market system. E) capital accumulation will accelerate GDP growth. Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 29) Paul Romer, an economist at Stanford University, is most closely associated with what economic theory? A) new growth theory B) labour productivity theory C) the process of creative destruction D) the Communist Manifesto E) the quantity theory of money Answer: A Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 30) According to new growth theory, A) physical capital is nonexcludable. B) knowledge capital is excludable. C) knowledge capital is subject to increasing returns. D) knowledge capital is rival and excludable. E) knowledge capital can be exhausted by advanced economies. Answer: C Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

31) New growth theory assumes A) knowledge capital is subject to decreasing returns at the firm level and increasing returns over the entire economy. B) physical capital is subject to decreasing returns at the firm level and increasing returns over the entire economy. C) physical capital is subject to increasing returns at the firm level and decreasing returns over the entire economy. D) knowledge capital is subject to increasing returns at the firm level and decreasing returns over the entire economy. E) the returns to knowledge capital can be exhausted in specific industries. Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 32) Knowledge capital is A) rival. B) nonrival. C) nonexcludable. D) both B and C E) both A and B Answer: D Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 33) Why would knowledge capital exhibit increasing returns for an entire economy, but not for an individual firm? A) Its non-rival nature means small gains in productivity can be enjoyed by thousands of firms at once. B) Its non-rival nature means that firms must compete to enjoy the benefits of knowledge capital. C) Its non-excludable nature means that firms have an extra incentive to produce knowledge capital. D) Its non-excludable nature means that use by one firm does not reduce the benefit of knowledge capital to another. E) Its non-excludable nature means that small gains in productivity cannot be captured by just one firm. Answer: A Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

34) Knowledge capital is nonrival in the sense that A) two people can use the same knowledge to develop and produce a product. B) firms do not compete to be the first to develop new technologies. C) no single company can be excluded from the benefits of new technologies. D) firms can benefit from the research and development of rival firms without paying for that benefit. E) countries around the world all have access to the same technology. Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 35) Firms free ride on the research and development of other firms when they A) buy a firm's newly developed product, and then give it away to consumers. B) use knowledge other firms have developed without paying for that knowledge. C) license a new technology from a firm that developed the new technology. D) choose a level of research and development that is inefficiently high. E) file a patent with the appropriate government. Answer: B Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 36) Which of the following government provisions would help increase the accumulation of knowledge capital? A) patents B) copyrights C) education subsidies D) research support E) All of the above are correct. Answer: E Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

37) Because firms can free ride on the research and development of other firms, A) firms choose a level of research and development where the marginal cost of research is equal to the economy's marginal return of research. B) firms choose a level of research and development where the marginal cost of research is above the economy's marginal return of research. C) firms choose a level of research and development where the marginal cost of research is below the economy's marginal return of research. D) firms choose a level of research and development where the marginal cost of research is below the individual firm's marginal return of research. E) firms will always face marginal costs of research and development that exceed their marginal return of research. Answer: C Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 38) A patent grants an inventor exclusive rights to a product for how long? A) 14 years B) 17 years C) 20 years D) the lifetime of the inventor E) the lifetime of the product Answer: C Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 39) Why do some firms choose not to file for a patent and instead try to keep the results of their research a trade secret? A) because firms must disclose information about the product or process being patented in a patent application B) because trade secrets are never divulged C) because a patent only gives the inventor exclusive rights to a product or process for 5 years D) because trade secrets provide the same exclusive legal rights to a product as a patent does E) because legal enforcement of patents is uncertain in North America Answer: A Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

40) Which of the following government policies would most likely result in an increase in economic growth? A) a decrease in the life of a patent from 20 years to 15 years B) a decrease in the interest rate at which the government provides student loans C) a decrease in government spending on grants issued through the National Institutes of Health D) decreased copyright protection on music and movies E) an increase in taxes on research and development spending Answer: B Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 41) According to Joseph Schumpeter, economic growth is achieved through A) focusing only on making old products better rather than inventing new ones. B) centralizing economic production. C) a process termed "creative destruction." D) removing the entrepreneur from the production function. E) protection of existing firms. Answer: C Diff: 1 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 42) Creative destruction means that A) firms develop new products that replace old products in the economy, thereby encouraging economic growth. B) economic growth can only be sustained if capital depreciates rapidly. C) knowledge capital can be created through a system of government subsidies for education and research and development. D) research and development should only be financed if research and development is incremental (a result of making small changes to existing products). E) breaking up existing companies using competition law is required for economic growth. Answer: A Diff: 2 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

43) Human capital refers to the percentage of the working-age population in the labour force. Answer: FALSE Diff: 1 Type: TF Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 44) Technological change is the key to sustaining economic growth. Answer: TRUE Diff: 1 Type: TF Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 45) One drawback of the patent system is that firms must disclose to the public information about the product or process. Answer: TRUE Diff: 2 Type: TF Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

46) Explain how advances in technology are critical to sustaining economic growth, even if capital per hour worked is consistently increasing. Provide a graph of a per-worker production function to support your answer. Answer: As the level of capital per hour worked increases, an economy moves along the per-worker production function toward higher levels of real GDP per hour worked. However, diminishing returns imply that successive increases in capital per hour work increase real GDP per hour worked at a decreasing rate. As shown in the graph below, moving from point A to point B implies an increase in capital per hour worked. As a result, real GDP per hour worked increases from $780 to $800 (an increase of $20). Moving from point B to point C implies a similar increase in capital per hour worked, but real GDP per hour worked increases from $800 to $810 (an increase of only $10). Without technological change that shifts the per-worker production function upward, continual growth in real GDP per hour worked cannot be sustained even if capital per hour worked continues to increase.

Diff: 2 Type: ES Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

47) Starting at point B in the diagram below, identify which combinations of points illustrate technological change. Give a brief explanation to support your answer.

Answer: The movement from B to D in the diagram illustrates technological change. Technological change is constant along a given production function. Technological change will shift the production function up as more output is produced ($17,000 GDP per hour vs. $16,000 GDP per hour) with the same amount of capital per hour worked ($60,000). Diff: 2 Type: ES Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 48) Explain how market economies are generally better able to achieve technological progress than are centrally planned economies. Answer: In a centrally planned economy, decisions regarding the allocation of resources are made by government employees paid a salary, not by independent entrepreneurs whose own finances are at stake. Independent entrepreneurs make choices for the use of resources based on the expected profitability of various projects. This drive for profit provides an incentive for technological change that centrally planned economies are unable to duplicate. The result is that technological progress is more likely in market economies than in centrally planned economies. Diff: 2 Type: ES Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union?

49) Provide examples of three kinds of government policies that can help increase the accumulation of knowledge capital and explain why government policies are often necessary to encourage the accumulation of knowledge capital. Answer: Knowledge capital is a result of research and development that culminates in new technology. Because research and development is costly, and the resulting knowledge capital is both nonrival and nonexcludable, firms have an incentive not to disclose new technologies. If other firms can receive some of the benefits without incurring the costs of research and development, firms have less incentive to invest in research and development (they act as "free riders"), so government policies are sometimes necessary to encourage research and development. For example, government policies that protect intellectual property rights with patents and copyrights guarantee firms exclusive rights to profits from new technologies for a period of time. This will encourage the accumulation of knowledge capital. In addition, subsidies for research and development through grants to researchers or tax benefits to firms that invest in research and development can also encourage the accumulation of knowledge capital. Finally, government subsidies for education will increase the number of workers who receive education, thereby reducing firms' costs of training and increasing the level of research and development firms will be willing to undertake. Diff: 2 Type: ES Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 50) Is knowledge capital subject to the law of diminishing returns? Explain. Answer: The law of diminishing returns states that successive increases in capital result in successively smaller and smaller increases in output. Knowledge capital may not be subject to the same law of diminishing returns that physical capital is. In fact, knowledge capital may experience increasing returns because knowledge, once discovered, is available to everyone and is therefore more likely to generate new technologies and economic growth. Diff: 2 Type: ES Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

51) Describe the process of "creative destruction" using a specific example. Answer: Creative destruction, based on the ideas of Joseph Schumpeter, describes the process whereby older products are driven out of the market by newer products. New products that meet consumer wants in qualitatively better ways will increase the overall standard of living for an economy. Here are some current and historical examples of creative destruction: DVD players replaced video tapes and VHS recorders, calculators replaced slide rules, clocks replaced sundials, cars replaced horses and buggies, disposable diapers replaced cloth diapers, Game Boys and Xboxes replaced Ataris, Internet Explorer replaced NCSA Mosaic, CD players replaced tape players, indoor plumbing replaced outhouses, iPods replaced Walkmans, phones replaced the telegraph, planes replaced trains for travel, digital cameras replaced film cameras, and electricity replaced candlelight and gas lights. Diff: 2 Type: ES Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 52) An economic growth model A) explains changes in nominal GDP per capita in the long run. B) explains changes in real GDP per capita in the long run. C) explains changes in nominal GDP per capita in the short run. D) explains changes in real GDP per capita in the short run. E) explains changes in the unemployment rates in the long run. Answer: B Diff: 1 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 53) Which factors explain labour productivity? A) technological change; the quantity of labour per hour worked B) diminishing returns; the quantity of labour per hour worked C) diminishing returns; the quantity of capital per hour worked D) technological change; the quantity of capital per hour worked E) population; the unemployment rate; and minimum wages Answer: D Diff: 1 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

54) The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant. A) labour; real GDP; technology B) capital; real GDP; technology C) labour; capital; real GDP D) capital; labour; real GDP E) capital; nominal GDP; labour Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Figure 7.3

55) Refer to Figure 7.3. Technological change is shown in the figure above by the movement from A) B to C. B) B to D. C) B to E. D) B to A. E) D to C. Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 37 Copyright © 2024 Pearson Canada Inc.

56) Refer to Figure 7.3. Which of the following would cause an economy to move from a point like A in the figure above to a point like B? A) an improvement in technology B) a decrease in capital per hour worked C) an increase in capital per hour worked D) a technological regression E) a rise in the population Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 57) Refer to Figure 7.3. Many workers leaving a region is shown in the figure above by a movement from A) B to C. B) B to A. C) B to E. D) E to B. E) C to E. Answer: A Diff: 2 Type: MC Topic: People Respond to Incentives Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 58) Refer to Figure 7.3. A large group of new workers entering the labour force is shown in the figure above by a movement from A) C to B. B) A to B. C) B to E. D) E to B. E) C to D. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Communication

59) The per-worker production function has a ________ slope, indicating that increases in capital per hour worked ________ real GDP. A) negative; increase B) positive; increase C) negative; decrease D) positive; decrease E) vertical; decrease Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 60) A small economy increased its capital per hour worked (K/L) from $40,000 to $50,000. As a result, real GDP per worker (Y/L) grew from $20,000 to $25,000. If the economy increases its capital per hour worked by another $10,000 to $60,000, but there is no change in technology, by how much more and in what direction will output per worker change? A) Output per worker will increase by exactly $5,000. B) Output per worker will increase by more than $5,000. C) Output per worker will increase by less than $5,000. D) Output per worker will fall by more than $5,000. E) Output per worker will increase by more than $10,000. Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 61) What is human capital? A) labour productivity B) buildings, equipment, and machinery owned by individuals rather than firms C) buildings, equipment, and machinery owned by firms D) the accumulated knowledge and skills that workers acquire from education, training, and life experiences E) the employees available to be hired by a firm Answer: D Diff: 1 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

62) If there is a change in the ability of a firm to produce a given level of output with a given level of inputs, we say there is A) human capital investment. B) technological change. C) an increase in labour productivity. D) a movement along a given per-worker production function. E) the accumulation of physical capital. Answer: B Diff: 1 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 63) Technological change will A) shift the per-worker production function up. B) shift the per-worker production function down. C) move the economy to a point beneath the per-worker production function. D) move the economy along a given per-worker production function. E) make the per-worker production flatter. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills, Use of Information Technology 64) In the long run, a country will experience an increasing standard of living only if it experiences A) a high rate of consumption. B) continuous technological change. C) a high rate of labour-force growth. D) a slow rate of population growth. E) a high rate of capital accumulation. Answer: B Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

65) If, after an outflow of workers in a country, it now takes more capital per hour worked to get the same amount of GDP per hour worked, this indicates ________ the per-worker production function in that country. A) a movement up B) a movement down C) an upward shift of D) a downward shift of E) a flattening out of Answer: D Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 66) If an outflow of workers leaves a country with a smaller but more productive workforce and the capital per hour worked does not change, there will be ________ the per-worker production function in that country. A) a movement up B) a movement down C) an upward shift of D) a downward shift of E) a flattening out of Answer: C Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 67) Which of the following describes the former Soviet Union's economy through most of the second half of the 20th century? A) The Soviet economy grew rapidly in the later half of the 20th century. B) The Soviet economy increased capital per worker very slowly from 1950 through 1980. C) The Soviet economy grew slowly because of the slow rate of technological change. D) The Soviet economy grew because it added labour through its immigration policy in the 1950s. E) The Soviet economy grew because it was able to develop new technology faster than most others. Answer: C Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union?

68) The former Soviet Union consistently increased the amount of capital available to its workers, but found that increases in capital resulted in progressively smaller and smaller increases in GDP per worker. This phenomenon is referred to as A) a rising standard of living. B) diminishing returns to capital. C) new growth theory. D) a shift of the per-worker production function. E) diseconomies of scale. Answer: B Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of the Soviet Economy 69) New growth theory A) states that the rate of technological change is determined outside the working of the market system. B) does not adequately explain the factors that determine productivity. C) states that the rate of technological change is caused by economic incentives. D) states that the rate of technological change is unaffected by economic incentives. E) states that the rate of capital accumulation determines the rate of economic growth. Answer: C Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 70) If the per-worker production function shifts up, A) it now takes more capital per hour worked to get the same amount of real GDP per hour worked. B) an economy can increase its real GDP per hour worked without changing the level of capital per hour worked. C) the per-worker production function becomes flatter. D) negative technological change has occurred in the economy. E) future production will require more resources than in the past. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

71) Knowledge capital is ________ in production and ________. As a result, firms ________ free ride. A) nonrival; nonexcludable; can B) nonrival; excludable; can C) rival; nonexcludable; cannot D) nonrival; nonexcludable; cannot E) rival; excludable; cannot Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 72) An increase in ________ shifts the production function ________, and makes it possible to produce a higher level of GDP with ________ capital per hour worked. A) technology; down; the same amount of B) technology; up; the same amount of C) consumption; up; a lesser amount D) labour productivity; down; the same amount of E) capital stock; up; a lesser amount Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Use of Information Technology 73) In a small Asian country, it is estimated that a $10,000 increase in capital per hour worked will increase real GDP per hour worked by $600. Based on this information, what is the slope of the perworker production function in this range? A) 0.0 B) 0.06 C) 0.6 D) 6.6 E) 66.6 Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

74) In a small Asian country, it is estimated that changing the level of capital from $8 million to $12 million will increase real GDP from $5 million to $6 million. If the number of hours worked in the labour force does not change, what does this information tell you about the slope of the per-worker production function in this range? A) The slope is -4. B) The slope is 1/4. C) The slope is 2. D) The slope is 4. E) The slope is 8. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 75) In a small Asian country, it is estimated that changing the level of capital from $8 million to $12 million will increase real GDP from $4 million to $6 million. What level of GDP would you expect the economy to be able to reach if spending on capital continued to rise to $16 million, assuming no technological change and no change in the hours of work? A) GDP would increase further, but by less than $2 million. B) GDP would increase further by exactly $2 million. C) GDP would increase further by more than $2 million. D) GDP would increase further by exactly $8 million. E) GDP would increase further by more than $8 million. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 76) If the slope of the per-worker production function is 1/4 in a given range, how will a $10,000 increase in capital per hour worked affect real GDP per hour worked in the same given range? A) Real GDP per hour worked will increase by $2,500. B) Real GDP per hour worked will increase by $40,000. C) Real GDP per hour worked will increase by $10,000. D) Real GDP per hour worked will decrease by $40.000. E) Real GDP per hour worked will decrease by $10,000. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

Figure 7.4

77) Refer to Figure 7.4. The movement from A to B to C illustrates A) an improvement in technology. B) a decline in capital per worker. C) diminishing returns to capital. D) diminishing returns to labour. E) rising labour force participation. Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 78) Refer to Figure 7.4. The movement from E to B to D in the figure above illustrates A) an improvement in technology. B) a decline in capital per worker. C) diminishing returns to capital. D) diminishing returns to labour. E) an increase in the price level. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

79) Refer to Figure 7.4. Suppose the economy gains more capital per hour worked and experiences technological change. This is shown in the figure above by the movement from A) E to B to D. B) A to B to C. C) A to E. D) A to D. E) D to A. Answer: D Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 80) Refer to Figure 7.4. Which of the following combinations of points illustrates changes in the Soviet Union's economy from 1950 to 1980? A) E to B B) B to D C) A to B to E D) A to B to C E) A to B to D Answer: D Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills, Multicultural and Diversity Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of the Soviet Economy 81) Refer to Figure 7.4. Using the per-worker production function in the figure above, the largest changes in an economy's standard of living would be achieved by a movement from A) A to B to C. B) E to B to D. C) C to B to A. D) D to B to E. E) D to A. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

82) Refer to Figure 7.4. Suppose the per-worker production function in the figure above represents the production function for the Canadian economy. If Canada decided to cut its support of university research in half, this would cause a movement from A) B to A. B) B to E. C) B to C. D) B to D. E) D to A. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 83) Refer to Figure 7.4. Within a country, the impact of wars and revolutions and their subsequent destruction of capital is reflected in the per-worker production function in the figure above by a movement from A) A to C. B) B to C. C) B to A. D) E to B. E) D to A. Answer: C Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 84) Refer to Figure 7.4. Many countries in Africa strongly discouraged and prohibited foreign direct investment in the 1950s and 1960s. By doing so, these countries were essentially preventing a movement from A) B to A. B) E to B. C) A to E. D) D to B. E) D to A. Answer: B Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

85) New growth theory states that increases in ________ capital will result in ________ at the ________ level. A) knowledge; increasing returns to scale; firm B) physical; decreasing returns to scale; firm C) knowledge; decreasing returns to scale; economy D) knowledge; increasing returns to scale; economy E) financial; constant returns to scale; economy Answer: D Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 86) According to new growth theory, the accumulation of ________ capital is subject to diminishing returns at the ________ level, but not at the level of the economy as a whole. A) physical; firm B) technological; personal C) knowledge; firm D) physical; production E) financial; individual Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 87) Because knowledge capital is nonexcludable and nonrival, firms have an incentive to ________ the research and development of other firms. A) make bids on B) not use C) ignore D) free ride on E) steal Answer: D Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

88) When firms benefit from the results of research and development they didn't pay for, we say firms are A) litigious. B) free riding. C) investing in knowledge capital. D) maintaining a level playing field. E) over investing in research and development. Answer: B Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 89) For how long does a patent give a firm the exclusive legal right to a product? A) 10 years B) 17 years C) 20 years D) the life of the product E) the life of the patent filer Answer: C Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 90) According to the text, there are three ways the government can help increase the accumulation of knowledge capital. What are they? A) protecting intellectual property rights, subsidizing research and development, and subsidizing education B) increasing taxes on firms, eliminating patents, and increasing the minimum wage C) encouraging the use of trade secrets, expanding student loan programs, and increasing the minimum wage D) reducing taxes on capital, increasing Social Security payments, and lowering the exchange rate E) reducing taxes on interest payments; enforcing contracts; and privatizing education Answer: A Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

91) According to Joseph Schumpeter, which of the factors of production is central to economic growth? A) land B) labour C) natural resources D) the entrepreneur E) human capital Answer: D Diff: 1 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 92) According to Joseph Schumpeter, the theory of creative destruction describes a process by which A) some new products unleash a gale of destruction that drive other new products out of the market. B) new products unleash a gale of destruction that drives old products out of the market. C) new products are created by the destruction of capital. D) the creation of new products never involves the destruction of old products. E) new products are bought out by existing large firms in their efforts to "destroy" competition. Answer: B Diff: 1 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 93) According to Joseph Schumpeter which of the following would be an indicator of on-going economic growth? A) new products displacing older ones B) growing concentration of wealth C) a more equal distribution of wealth D) growing government deficits E) consolidation of firms in key industries Answer: A Diff: 1 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

94) The easiest way for a country to obtain access to technology is through A) subsidizing education and training. B) promoting foreign direct investment. C) promoting policies to enhance saving. D) enacting policies to promote property rights. E) industrial espionage. Answer: B Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Use of Information Technology 95) The Soviet Union's economic growth rate slowed despite rapid increases in capital per hour worked. Answer: TRUE Diff: 2 Type: TF Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Multicultural and Diversity Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union? 96) Technological change allows the economy to produce more output with the same amount of capital and labour. Answer: TRUE Diff: 1 Type: TF Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Use of Information Technology 97) According to new growth theory, firms accumulate the efficient level of both physical and knowledge capital. Answer: FALSE Diff: 2 Type: TF Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

Table 7.3 Year 2019 2020 2021 2022

Real GDP per Capita (2007 prices) $28,000 29,000 30,000 31,000

Growth Rate in Real GDP per Capita

98) Refer to Table 7.3. Use the table above to calculate the annual growth rate in GDP. Also calculate the total percentage change in the growth from 2019 through 2022. Explain the difference between the average annual growth rate in real per capita GDP from 2019 through 2022 and the total percentage change in growth from 2019 and 2022. Answer: One calculates the average annual percent change in growth from 2019 through 2022 by finding the individual growth rates from year to year and then averaging them. The growth rates are calculated as follows: 2020 growth = (29,000 - 28,000) / 28,000 = 3.6% 2021 growth = (30,000 - 29,000) / 29,000 = 3.4% 2022 growth = (31,000 - 30,000) / 30,000 = 3.3% Because we are dealing with only a few years, we can approximate the average annual growth rate by averaging the growth rates for each year. The average annual growth rate is (3.6% + 3.4% + 3.3%) / 3 = 3.4% (approximately—calculated to accuracy to the tenth) The total percentage change in growth from 2019 through 2022 is calculated differently. In this case, one would find the growth rate that occurred over the entire period from 2019 through 2022. This is (31,000 28,000) / 28,000 = 10.7%. Note that the calculations result in very different answers. Diff: 2 Type: SA Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 99) The owner of a firm wants some advice on how to increase productivity. Suggest three ways the entrepreneur could increase labour productivity through improving technology. Answer: There are three main ways to improve technology. First, the entrepreneur could install the most up-to-date equipment and machinery. Second the owner could implement an on-the-job training program to improve the skills of his workers. He could even send a few of his workers to college. Finally, the owner could develop better means of organizing and managing the production process. Diff: 2 Type: SA Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

100) Your friend owns a snow cone stand that he works by himself. He produces about 25 snow cones per hour. He wants to be able to produce twice as many snow cones per hour, so he buys a second machine. He notices that he can only produce 10 more snow cones an hour. He jokes that he could have doubled his output with the second machine if he only had four hands. Using your knowledge of the production process, explain to your friend what you think has happened when he added more capital to his production process. Answer: The second machine does not add as much as the friend thinks it should because of the phenomenon of diminishing returns. He is able to produce more snow cones, but less with the second machine than with the first. This is because as the only worker, he is not physically able to work a second machine as rapidly as he could the first machine. He probably could double output if he added another worker. Diff: 2 Type: SA Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

101) Use production functions from the economic growth model to explain why Canada grew at a much faster rate than the former Soviet Union in the latter half of the 20th century. Answer:

The Soviet Union's strategy to increase growth from the 1950s through the 1980s was to increase capital per hour worked. While this can increase growth, according to the economic growth model, eventually diminishing returns to capital set in. This means that as the Soviet Union added more and more factories, the extra factories added less and less to output. From the diagram above, the Soviet Union took a path along Production function 1. They chose to increase capital per worker, and this moved them from A to B to C to D, where each time the increase in capital is the same, $10,000. It does increase output per worker. The most dramatic change is the movement from A to B, when real GDP per worker rises by $1,000. However, each subsequent addition to capital brings about smaller increases in real GDP per worker. The movement from B to C increases real GDP per worker by $400; the movement from C to D increases real GDP per worker by $100. Technological change is key to sustaining economic growth. The Soviet Union experienced very slow technological change. An extreme illustration of this is graphing the Soviet Union as moving along the same production function, Production function 1. In comparison, Canada experienced more rapid technological change. This would be illustrated by the shift up to Production function 2. Canada moved on a path from B to E. The Soviet Union moved on a path from B to C to D. The improvement in technology increases real GDP per worker by $1000. The movement from B to D increases real GDP per worker by only $500. Diff: 3 Type: SA Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills, Multicultural and Diversity Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union? 54 Copyright © 2024 Pearson Canada Inc.

102) Using the points on the diagram below, identify which combinations of these points illustrate diminishing returns to capital. Give a brief explanation to support your answer.

Answer: The movement from A to B to C illustrates diminishing returns to capital in the diagram. When technology is held constant, equal increases in capital per hour lead to diminishing increases in output per hour. Technology is held constant by moving along a given production function diagram. Capital per hour increases by $10,000 per worker in the movement from A to B and from B to C. The movement from A to B increases output per worker by $1,000. The movement from B to C increases output per worker by $400. Clearly, the additions to output are diminishing. Diff: 2 Type: SA Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

103) One of the results of Paul Romer's new growth theory is that investment in research and development will be too low in an economy. Explain how he comes to this conclusion. Answer: According to Romer, knowledge capital is a key determinant of economic growth. Firms contribute to an economy's knowledge capital by conducting research and development. But there is a problem. Knowledge capital is nonrival in that if one firm uses it, it does not prevent another firm from using it. Also knowledge capital is nonexcludable because if one firm gets it, all other firms get it too. That is, once the formula for a drug is known, it becomes widely available for other firms to use. If this is the case, when one firm invents a drug, once the formula for the drug is known, other firms cannot be prevented from benefiting from the research and development they did not pay for. These firms have the incentive to free ride. If this is the case, the original firm inventing the formula cannot capture all the benefits of the formula. Some of the marginal benefits will go to other firms. If this is the case, the firm will choose the amount of research and development equal to the amount that will equate the marginal costs and the marginal benefits for the firm. Since the marginal benefits to the firm will be low, then the firm will not invest enough in research and development. Diff: 3 Type: SA Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 104) Suggest two policies the federal government could pursue to help increase the accumulation of knowledge. Answer: Any two of the following three explanations are correct. First, the government could increase the incentive to engage in research and development by giving firms the exclusive rights to their discoveries for a long period of time. The Canadian government does this by granting patents, or the exclusive right to produce a product, for 20 years to firms that invent new products or processes. This allows the company to capture the profits from selling this product exclusively. Second, the government can encourage research and development by directly subsidizing research and development. This can be done by granting tax benefits to firms that invest in research and development, providing support for research at universities, or directly carrying out the research itself. Third, the government can subsidize education. This should increase the number of workers with technical training. Diff: 2 Type: SA Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

7.3

Discuss fluctuations in productivity growth in Canada

1) Growth in Canada from the 1870s to the1970s can be characterized as A) positive and increasing. B) positive and flat. C) positive and decreasing. D) negative. E) volatile. Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Analytic Skills 2) Growth in Canada from 1974 to 1995 can be characterized as A) positive and increasing. B) positive and flat. C) positive and decreasing. D) negative. E) volatile. Answer: C Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Analytic Skills 3) Which of the following explains the ability of the Canadian economy to avoid diminishing marginal returns and experience accelerating growth in the early to mid-20th century? A) continuing technological change B) immigration C) additions of a greater amount of capital of the same quality D) a decrease in the quality of labour E) ever faster capital accumulation Answer: A Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking

4) In Canada, the annual growth rate of real GDP per person between 2006 and 2020 averaged A) -1.0%. B) -0.3%. C) 1.6%. D) 2.8%. E) 3.6%. Answer: C Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 5) Growth in real GDP per person in Canada began to slow down during what period of time? A) 1870-1900 B) 1900-1949 C) 1950-1976 D) 1974-1995 E) 1996-2005 Answer: D Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 6) Growth in real GDP per person in Canada was the highest during what period of time? A) 1870-1900 B) 1900-1949 C) 1950-1976 D) 1974-1995 E) 1996-2005 Answer: C Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 7) Economic growth optimists cite which of the following when arguing that economic growth in Canada is likely to accelerate? A) falling productivity gains from information technology B) a shrinking working age population C) difficulty in measuring the productivity gains from information technology D) increasing energy efficiency E) the limited adoption of new technology by consumers Answer: C Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 58 Copyright © 2024 Pearson Canada Inc.

8) Secular stagnation is not caused by A) slowing population growth. B) modern inflation technology firms use much less capital than older manufacturing firms. C) economic growth shifting to countries other than Canada. D) falling costs of capital equipment. E) falling cost of capital. Answer: C Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 9) The current low interest rates are seen as an indicator of secular stagnation because of A) the high savings rates of baby boomers. B) insufficient demand for investment spending. C) increases in government borrowing. D) increases in consumer debt. E) increasing exports. Answer: B Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 10) Why might the slower GDP growth from 2006 to 2022 experienced by Canadians not mean standards of living are rising more slowly than in the past? A) Increases in the welfare payments have increased. B) The benefits of many technological improvements aren't captured by GDP. C) Falling oil prices mean gasoline is cheaper. D) The falling environmental standards of the period meant Canadians traded a clean environment for GDP. E) Fewer Canadians participated in the labour force during that period than in previous periods. Answer: B Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking

11) The "new economy" which some economists believe can lead to higher productivity growth in the future is based on A) manufacturing. B) financial services. C) information technology. D) retail sales. E) natural resource extraction. Answer: C Diff: 1 Type: MC Topic: The New Economy Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 12) Which of the following developments have the potential to significantly increase labour productivity and the standard of living? A) the increased use of the Internet in selling products and services B) expanded cell phone use C) the lower cost and increased availability of mobile computers D) improved education E) all of the above Answer: E Diff: 1 Type: MC Topic: The New Economy Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 13) The rate of growth of productivity in Canada was positive during the 20th century. Answer: TRUE Diff: 1 Type: TF Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 14) The labour productivity slowdown in Canada in the 1970s was due to declining quality of education in, because no other industrialized country experienced the same labour productivity slowdown at the same time. Answer: FALSE Diff: 1 Type: TF Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 15) Compared to the previous 20 years, productivity growth in Canada increased between 1995 and 2011. Answer: TRUE Diff: 1 Type: TF Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 60 Copyright © 2024 Pearson Canada Inc.

16) Describe the pattern of growth rates in real GDP per person in Canada since the early nineteenth century. Has output per hour worked consistently increased at the same rate? Explain. Answer: Growth in real GDP per hour worked averaged 1.7% throughout the nineteenth century and then increased to over 2% until the mid-1970s (when it fell to 1.7% again). Productivity slowed dramatically during the mid-1970s. This slowdown has persisted throughout the turn of the century, with average annual growth rates in GDP per person sitting at 1.6% through 2011. Diff: 2 Type: ES Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 17) Explain three reasons why the productivity slowdown of 1974-1995 occurred. Answer: Three explanations have been suggested for the productivity slowdown of 1973-1994: measurement problems, high oil prices, and transition from a goods-based economy to a service economy. Measurement problems in accounting for improvements to environmental and health safety laws as well as in measuring growth in the output of services may have resulted in additional output that was not reflected in estimates of real GDP. In the 1980s many economists believed high oil prices increased costs for many industries, reducing output as a result, but this theory does not hold through the declining oil prices of the late 1980s and early 1990s, which still saw slow growth rates. It is more difficult to measure increases in the output of services than to measure increases in the output of goods. Diff: 2 Type: ES Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 18) Which of the following accurately describes growth rates in Canada from 1900 to the present? A) Growth rates rose until the 1970s, then fell until the present. B) Growth rates have risen continuously from 1900 to the present. C) Growth rates rose until the 1970s, slowed until the 1990s, then rose up to the present. D) Growth rates have fallen continuously from 1900 to the present. E) Growth rates have alternated between periods of high growth and rapid shrinkage. Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 19) During which of the following periods was the Canadian growth rate the fastest? A) 1900-1949 B) 1950-1973 C) 1974-1995 D) 1996-2005 E) 2005-2016 Answer: B Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 61 Copyright © 2024 Pearson Canada Inc.

20) Because of the productivity slowdown in Canada from the mid-1970s through 2014, A) real GDP per capita grew more rapidly. B) real GDP per capita grew more slowly. C) the standard of living did not change. D) the standard of living increased in Canada. E) the value of the Canadian dollar rose. Answer: B Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking, Multicultural and Diversity 21) An explanation for the productivity slowdown from 1973 through 1995 is A) measurement problems. B) creative destruction. C) a decline in oil prices. D) an increase in labour quality. E) falling government deficits. Answer: A Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking, Multicultural and Diversity 22) Some economists argue that the productivity slowdown from mid-1970s to mid-1990s actually didn't happen, but just "appeared" to happen because A) services were becoming a more important part of the economy and it was hard to measure increases of output from services. B) new environmental laws had passed that forced firms to spend to reduce pollution, and this spending did not raise output. C) increased spending on health and safety raised worker productivity. D) A and B E) B and C Answer: D Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking

23) Some economists argue that the productivity slowdown of the mid-1970s to the mid-1990s was due to changes in oil prices that A) increased production costs, causing firms to reorganize production to conserve energy, which reduced output per worker. B) decreased production costs, causing firms to reorganize production to conserve energy, which reduced output per worker. C) increased production costs, causing firms to reorganize production to conserve energy, which increased output per worker. D) decreased production costs, causing firms to increase production, which reduced output per worker. E) increased participation in the labour force by people who would not have participated in the past. Answer: A Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 24) Given the fact that the productivity slowdown of the mid-1970s to the 2014 affected all industrial countries, which of the following explanations for the productivity slowdown in Canada is not likely to be correct? A) A deterioration of the Canadian education system caused a decline in the quality of labour. B) High oil prices increased costs. C) Services became a larger fraction of GDP. D) Firms had to meet stricter environmental regulations. Answer: A Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 25) Which of the following is not an implication of secular stagnation? A) Economic growth will resume as soon as savings increase. B) Economic growth requires higher levels of population growth. C) Falling costs of capital reduce the interest rate. D) Modern technology in firms reduced the need for capital. E) Slowing population growth reduces the demand for housing. Answer: A Diff: 2 Type: MC Topic: The New Economy Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 26) The productivity slowdown experienced in Canada from the mid-1970s to the mid-1990s was actually a global phenomenon. Answer: TRUE Diff: 1 Type: TF Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking, Multicultural and Diversity 63 Copyright © 2024 Pearson Canada Inc.

27) Over the last three decades in Canada, services have become a smaller fraction of GDP relative to goods. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 28) How might Canada's educational system have contributed to the productivity slowdown of the mid1970s to the mid-1990s? Answer: If the educational system was not preparing workers with the skills that they needed to perform their jobs, these workers would have had low rates of productivity. There was some evidence at the time that the educational system was deteriorating. Standardized tests scores had begun to decline in the 1970s. In addition, the skills necessary to perform many jobs were changing. The school system might not have responded to the change by incorporating teaching programs and methods designed to teach these skills. However, because it is difficult to quantify the skills necessary for a particular job, it is hard to measure this effect. Diff: 2 Type: SA Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking

7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth 1) Globalization is defined as the process of countries becoming ________ open to foreign trade and ________ open to foreign investment. A) more; less B) more; more C) less; more D) less; less Answer: B Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytical Thinking 2) The economic growth model predicts that A) the level of real GDP per capita in poor countries will grow faster than in rich countries. B) the per-worker production function of poor countries will be flatter than the per-worker production function of rich countries. C) lower-income industrial countries will forever be unable to catch up to higher-income industrial countries. D) economic growth in rich countries can only be accomplished at the expense of slow or even negative growth in poor countries. E) high income countries have a legal obligation to help poorer countries grow. Answer: A Diff: 1 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

3) Which of the following is a true statement regarding the economic growth model's predictions and how it actually affects the real world? A) The growth model predicts that poor countries should catch up with rich countries, but developing countries are not catching up to lower-income industrialized countries as a group. B) The growth model predicts that poor countries will never catch up with rich countries, but lowerincome industrialized countries are catching up to higher-income industrialized countries as a group. C) The growth model predicts that poor countries will catch up with rich countries, but lower-income industrialized countries are not catching up to higher-income industrialized countries as a group. D) The growth model predicts that poor countries will catch up with rich countries, and this is what we observe across all developmental categories of countries. E) The growth model predicts that rich countries will experience ever faster economic growth and this is what we observe among higher-income industrialized countries. Answer: A Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Figure 7.5

4) Refer to Figure 7.5. Based on the "catch-up line" drawn above, poorer countries are more likely to be at a point like ________, where growth in GDP is relatively ________, while richer countries are more likely to be at a point like ________, where growth in GDP is relatively ________. A) A; low; B; high B) A; high; B; low C) B; low; A; high D) B; high; A; low E) A; low; B; low Answer: B Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 66 Copyright © 2024 Pearson Canada Inc.

5) Consider two countries, Alpha and Beta. In Alpha, real GDP per capita is $6,000. In Beta, real GDP per capita is $9,000. Based on the economic growth model, what would you predict about the growth rates in real GDP per capita across these two countries? A) The growth rate of real GDP per capita will be lower in Alpha than it is in Beta. B) The growth rate of real GDP per capita will be higher in Alpha than it is in Beta. C) The growth rate of real GDP per capita in Alpha and Beta will be the same. D) The growth rate of real GDP per capita will be higher in Beta and the gap will narrow over time. E) The growth rate of real GDP per capita will be higher in Beta and the gap will widen over time. Answer: B Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Table 7.4 Country Taiwan Panama Colombia Costa Rica Venezuela

Real GDP per Capita, 1960 Growth in Real GDP per (in 2010 dollars) Capita, 1960-2018 $2,417 5.54% 2,734 3.73% 3,449 2.43% 4,684 2.07% 5,862 1.64%

6) Refer to Table 7.4. In the table above, which country is consistent with the predictions of the economic growth model? A) Taiwan B) Panama C) Colombia D) Costa Rica E) Venezuela Answer: A Diff: 3 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

7) Which of the following does not contribute to the explanation why some countries have not experienced relatively high growth rates in real GDP per capita despite relatively low initial levels of real GDP per capita? A) Many of these developing countries do not have a functioning court system that can enforce laws. B) Countries that are relatively poor are more likely to experience wars and revolutions. C) Countries that are relatively poor are likely to have a lower quality of health care and education. D) Countries that are relatively poor are more likely to have higher savings. E) Countries that are relatively poor or more likely to have free trade agreements with wealthy countries. Answer: D Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 8) According to the World Bank, Albania does one of the worst jobs as a country enforcing the rule of law. The consequence of a weak rule of law is A) difficulty in attracting investment and low economic growth. B) a decrease in cash transactions and increased efficiency. C) more risk taking on the part of entrepreneurs and greater economic investment. D) strong property rights enforcement leading to greater investment. E) higher levels of foreign investment. Answer: A Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 9) Despite its close relationship with the richest country in the world, Mexico's economy has not grown faster than the American economy. Over the same period, the Chinese economy was able to grow much faster than both the U.S. and Mexico. Which answer best explains Mexico's slower growth? A) Mexico's corruption and weak financial sector make lending difficult. B) American firms refuse to invest in Mexico. C) Mexico has not yet received sufficient aid from rich countries for it to grow. D) Mexico's GDP per capita was originally lower than China's making it harder for Mexico to encourage economic growth. E) Mexico ruling party maintained its dictatorship over the country. Answer: A Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China?

10) The growth rate of real GDP per capita in Mexico was negative in which of the following time periods? A) 1980-1989 B) 1990-1999 C) 2000-2016 D) 1980-2016 E) all of the above Answer: A Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China? 11) From 1980 to 2019, the average annual growth rate for the Mexican economy has been 0.6 percent. Based on that growth rate and using the rule of 70, the number of years it will take real GDP per capita to double in Mexico is approximately A) 7 years. B) 10 years. C) 22 years. D) 56 years. E) 117 years. Answer: E Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China? 12) The purchase or building by a corporation of a facility in a foreign country is called A) foreign direct investment. B) foreign portfolio investment. C) foreign capital depreciation. D) globally-directed investment. E) international capital acquisition. Answer: A Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

13) The purchase by an individual or firm of stock or bonds issued in another country is called A) foreign exchange arbitrage. B) foreign direct investment. C) foreign portfolio investment. D) global stock exchange. E) international capital formation. Answer: C Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 14) Developing countries with low saving rates and poor levels of health and education are likely to experience A) high levels of foreign direct investment. B) easy access to financial backing from banks. C) rapid growth in household incomes. D) low rates of growth in real GDP per capita. E) low birth rates. Answer: D Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 15) High-income countries have ________ and ________ as compared to developing countries. A) low rates of savings; high rates of growth B) low rates of savings; low rates of growth C) high rates of savings; high rates of growth D) high rates of savings; high rates of unemployment E) low rates of savings; low rates of unemployment Answer: C Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

16) Globalization refers to A) the process of establishing a common world currency. B) the willingness of individuals within a given country to share knowledge with one another. C) the process of countries becoming more open to foreign trade and investment. D) the reduction in growth rates of real GDP per capita as a result of trade with foreign countries. E) the ongoing process of national governments giving up authority to the United Nations. Answer: C Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 17) Countries that are more globalized tend to have A) lower levels of real GDP per capita. B) a higher likelihood of war or revolution. C) higher growth rates in real GDP per capita. D) lower levels of foreign direct investment. E) fewer opportunities for local businesses. Answer: C Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 18) Employees who are employed for longer periods tend to have greater skills, greater productivity and higher wages. American workers tend to retire later and have fewer spells of long unemployment. This is due to A) less generous payments for unemployment. B) fewer regulations around firms' abilities to fire workers. C) fewer restrictions around implementation of new technology. D) relatively little corruption. E) all of the above Answer: E Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

19) Foreign direct investment in Canada increased 41 percent in 2021. This means that A) people or firms in other countries increased their purchases of stocks and bonds in Canada by 41 percent in 2021. B) people or firms in Canada increased their purchases of stocks and bonds in foreign countries by 41 percent in 2021. C) people or firms in other countries increased their building or facilities of purchases of facilities in Canada by 41 percent in 2021. D) people or firms in Canada increased their building of facilities or purchases of facilities in foreign countries by 41 percent in 2021. E) 41 percent more Canadian workers took jobs in foreign countries in 2021. Answer: C Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 20) Relative to productivity growth in the United States, which of the following countries experienced the largest decline in productivity growth from 1990 to 2019? A) Canada B) Japan C) Germany D) the United Kingdom E) Spain Answer: B Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 21) Which of the following is not a reason why low-income countries do not experience rapid growth? A) failure to enforce the rule of law B) globalization C) wars and revolutions D) poor public education and health E) lot rates of saving and investment Answer: B Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

22) The opportunity cost of being unemployed tends to be the highest in which of the following countries? A) Canada B) the United States C) France D) the United Kingdom E) Sweden Answer: B Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 23) Which of the following best explains why productivity growth in the United States has been faster than in other leading industrialized nations? A) There are fewer government regulations in the United States regarding the way firms can hire and fire workers. B) The financial systems of foreign countries are generally more efficient than those in the United States. C) European countries have more flexible policies regarding the number of hours employees are permitted to work. D) Job mobility in the United States is more restricted than it is in many foreign countries. E) European countries have better infrastructure than the United States. Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 24) Productivity gains in Canada since 1990 have been ________ productivity gains in the United States. A) the same as B) lower than C) higher than D) more variable than E) less variable than Answer: B Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

25) Between 1960 and 2019, which of these leading industrial countries of the world had the highest average annual growth rate in GDP per capita? A) the United States B) the United Kingdom C) Japan D) Canada E) Germany Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 26) By offering more generous unemployment insurance programs, Canadians can expect A) to pay less in taxes than in the United States. B) workers to gain new skills quickly in response to fluctuations in the labour market. C) shorter periods of unemployment for their workers. D) longer periods of unemployment for their workers. E) more frequent periods of high unemployment. Answer: D Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 27) Which of the following is an example of the way the financial markets in Canada can encourage technological progress more efficiently than other countries? A) Even when entrepreneurs cannot secure sufficient funding for projects from banks, venture capital firms may be willing to lend money. B) The level of legal protection for investors in Canada is relatively low. C) Because the financial market in Canada is so large, the quantity of trading in corporate stocks and bonds makes those investments less liquid. D) Banks in Canada are more willing to take on risk because the government guarantees each bank cannot lose more than $100,000 on any given loan that defaults. E) The low Canadian savings rates increases the number of people willing to lend to new businesses. Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

28) The lower-income industrial countries are catching up to the higher-income industrial countries in terms of economic growth. Answer: TRUE Diff: 1 Type: TF Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 29) The developing countries have been catching up to the lower-income industrial countries in terms of economic growth. Answer: FALSE Diff: 1 Type: TF Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 30) One reason why many low-income countries experience low rates of growth is because of low rates of saving and investment in those countries. Answer: TRUE Diff: 1 Type: TF Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

31) Would you expect to see higher or lower growth rates for countries that start out with a relatively low level of real GDP per capita? Explain using the concept of "catch-up" and support your answer with a graph. Answer: The economic growth model predicts that countries that start out with a relatively low level of real GDP per capita would experience higher growth rates in real GDP per capita. Countries with a low initial level of real GDP per capita will eventually "catch up" to the level of real GDP per capita in richer countries. This is shown in the graph below. Point A corresponds to a country where the initial level of real GDP per capita is relatively low, but the growth rate of real GDP per capita in that country is relatively high. As that economy continues to grow, the country will move down the line toward point B. Point B corresponds to a country where the initial level of real GDP per capita is relatively high, but the growth rate of real GDP per capita is relatively low. If countries with a low initial level of real GDP per capita also have low saving rates, low levels of education and health, weak court systems or governments that do not enforce the laws or property rights, then growth rates might remain low.

Diff: 3 Type: ES Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

32) Draw a graph of "catch-up" that shows where you would expect to see a country with low saving rates and low levels of health and education. How would you expect real GDP per capita to grow in a country like this? Explain. Answer: Countries with low saving rates and low levels of health and education are likely to have low levels of real GDP. Normally, countries with a low initial level of GDP will experience relatively high levels of growth in real GDP per capita (as shown at point A in the graph below). However, with low saving rates, firms do not have access to funds to invest in new factories, machinery, and equipment needed for economic growth. Also, with low levels of health and education, the labour force is less productive (when they are able to work), so real GDP per capita does not rise and the country remains at a point like B in the graph b

Diff: 2 Type: ES Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

Table 7.5

Country Belgium France Canada Denmark

Real GDP per Capita in 1960 (2010 dollars) $7,778 7,824 10,383 10,988

Growth in Real GDP per Capita (2010 dollars) 5.02% 4.53% 3.88% 3.47%

33) Refer to Table 7.5. Consider the statistics in the table above in describing the industrialized countries. Are these consistent with the economic growth model? Briefly explain. Answer: These statistics for selected industrial economies are consistent with the economic growth model. The countries with the lowest levels of real GDP per capita in 1960 had the fastest growth rates between 1960 and 2010. The countries with the highest levels of real GDP per capita had the slowest growth rates. Diff: 3 Type: ES Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up 34) The economic growth model predicts that A) GDP per capita of rich countries will grow more rapidly than in poor countries. B) GDP per capita of poor countries will grow more rapidly than in rich countries. C) Governments must centrally direct the economy for growth to occur. D) GDP per capita of poor countries will never change. E) GDP per capita in rich countries grow at an accelerating rate. Answer: B Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 35) Empirical evidence from 1960 to 2019 shows that convergence in economic growth is occurring in which of the following cases? A) Low-income industrial countries are catching up to high-income industrial countries. B) Low-income developing countries are catching up to high-income industrial countries. C) Low-income agricultural countries are catching up to high-income developing countries. D) All low-income countries are catching up to all high-income countries. E) Low-income developing countries are catching up to low-income industrial countries. Answer: A Diff: 1 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity 78 Copyright © 2024 Pearson Canada Inc.

36) Which of the following countries actually experienced negative economic growth from 1960 to 2019? A) Israel B) Singapore C) Venezuela D) Malaysia E) Argentina Answer: C Diff: 1 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 37) Which of the following accurately describes the impact of the rule of law on a country's economic growth rate? A) Countries with a strong rule of law have faster economic growth. B) Countries with a weak rule of law have faster economic growth. C) Countries that enforce property rights through lawsuits have slower economic growth. D) Countries where favouritism and bribery are common have stronger rates of growth. E) Countries in which the government regularly takes control of industries have faster economic growth. Answer: A Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 38) Which of the following is not a reason why low-income countries might experience low economic growth? A) The country has endured extended periods of war. B) The country fails to enforce a rule of law. C) The country has a good education system. D) The country has a low rate of saving and investment. E) The country has poor public education. Answer: C Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

39) There has been catch-up among the ________ countries, but there has not been catch-up among ________. A) developing countries such as Niger; industrialized countries such as Japan B) industrialized countries such as Japan; all countries of the world C) developing countries such as Niger; all countries of the world D) all countries of the world together; industrialized countries such as Japan E) industrialized countries such as Canada; industrialized countries of Asia Answer: B Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity 40) ________ save a ________ of their income. This ________ capital in their economy and raises economic growth. A) Developing countries; large proportion; decreases B) Developing countries; small proportion; increases C) High-income countries; large proportion; increases D) High-income countries; small proportion; increases E) High-income countries; large proportion; decreases Answer: C Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 41) Lack of investment in strong education and health care systems A) causes a deterioration in human capital and a decline in labour productivity. B) causes a decline in physical capital and a decline in labour productivity. C) increases human capital and causes a decline in labour productivity. D) causes a deterioration in human capital and an increase in physical capital. E) cause better enforcement of the rule of law. Answer: A Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

42) Which of the following is an example of foreign portfolio investment? A) the purchase of a Canadian stock by a Canadian citizen B) the purchase of a Canadian government bond by a German citizen C) the purchase of a Canadian mutual fund by a Canadian citizen D) the purchase of a Japanese factory by a Korean citizen E) the purchase of a Canadian vacation home by a Chinese citizen Answer: B Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 43) Georg, a German citizen, just purchased 10 shares of stock in Suncor, a Canadian company. This purchase is an example of A) foreign direct investment. B) foreign public investment. C) foreign portfolio investment. D) contractual globalization. E) domestic fixed capital formation. Answer: C Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 44) Which of the following is an example of foreign direct investment? A) You purchase a plane ticket to China on WestJet. B) WestJet builds a hub in China. C) You buy a plane that was made in China. D) A stock broker from China sells you a Chinese government savings bond. E) A Chinese person buys shares in Bombardier. Answer: B Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

45) What is the difference between foreign direct investment and foreign portfolio investment? A) Foreign direct investment involves purchases of foreign stock or bonds by individuals or firms, while foreign portfolio investment involves a firm purchasing or building a facility in a foreign country. B) Individuals engage in foreign portfolio investment, but only firms can engage in foreign direct investment. C) Foreign direct investment only takes place when governments make official purchases or foreign investments, while foreign portfolio investment takes place when firms, individuals, or the government purchase foreign investments. D) Foreign direct investment cannot give a low-income country access to funds and technology it would not otherwise have, but foreign portfolio investment does expand that access. E) Foreign direct investment guarantees a future return, but foreign portfolio investment involve a high degree of risk. Answer: B Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 46) Foreign direct investment occurs when a Chinese corporation A) purchases stock issued in China. B) opens a new Chinese factory. C) purchases 1,000 shares of stock issued by a Canadian company. D) opens a new factory in France. E) exports investment goods to Canada. Answer: D Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity 47) Until recently, many developing countries A) were quite open to foreign investment. B) encouraged foreign direct investment but discouraged foreign portfolio investment. C) sealed themselves off from foreign investment. D) encouraged foreign portfolio investment but discouraged foreign direct investment. E) allowed their citizens to freely invest in other countries. Answer: C Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

48) Foreign investment can give a low-income country A) access to funds for investment and access to technology. B) the means to slow down growth. C) a path to dependency and low growth. D) no hope to break the vicious cycle of poverty. E) decreased opportunities to engage in specialization and trade. Answer: A Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 49) Globalization is positively associated with A) poverty. B) declining rates of investment. C) declining standards of living. D) economic growth. E) slower technological progress. Answer: D Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 50) Globalization is defined as the process of countries becoming more open to A) foreign trade and investment. B) economic domination. C) low saving and investment. D) a vicious cycle of poverty. E) high tariffs on foreign imports. Answer: A Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

51) The economic growth model predicts that ________ across countries will converge over time. A) income levels B) GDP per capita C) foreign direct investment rates D) growth rates E) unemployment rates Answer: B Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 52) China has experienced much higher rates of economic growth than Mexico. Which of the following is not an explanation of Mexico's lower growth rate? A) Mexico's government exercises more control of its economy than China's does. B) Mexico has already exploited the easiest ways to increase economic growth. C) Mexico suffers high levels of government corruption. D) Mexico's geographic location makes it an unappealing location for foreign direct investment. E) Mexico's banks are reluctant to make loans to business. Answer: A Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China? 53) Unemployment insurance is usually available to workers in ________ for a shorter period of time than it is in ________. A) the United States; Canada B) Canada and some Western European countries; the United States C) Canada; some Western European countries D) some Western European countries; the United States E) Western Canada; the Maritimes Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

54) By offering more generous unemployment insurance programs than the United States, Canada can expect A) citizens to pay less in taxes than citizens pay in the United States. B) workers to be very fast in gaining new skills in response to fluctuations in the labour market. C) shorter periods of unemployment for their workers. D) longer periods of unemployment for their workers. E) worse matches between employers and employees. Answer: D Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 55) The U.S. economy has seen a faster increase in productivity since the mid-1990s as compared to the economies of Canada and many Western European countries. Which of the following explains this? A) U.S. unions impose stricter work rules as compared to unions in Canada and many Western European countries. B) U.S. government regulations impose stricter work rules as compared to government regulations in Canada and Western Europe. C) The United States has a higher rate of job mobility than do Canada and many Western European countries. D) U.S. workers can obtain unemployment insurance for a longer period of time as compared to workers in Canada and most Western European countries. E) Western European countries have more regulations concerning technological improvement. Answer: C Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity 56) To what do economists attribute the rapid growth of labour productivity in the United States relative to other countries? A) the flexibility of U.S. labour markets and the efficiency of the U.S. financial system B) the strict government rules in the United States that regulate a firm's ability to hire and fire workers C) the low rate of job mobility in the United States D) the high level of unemployment benefits the United States pays relative to other countries like Canada E) the higher educational attainment of American workers relative to workers in other countries like Canada Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity

57) As predicted by the economic growth model, countries that start with lower levels of GDP per capita always grow faster than countries that start with higher levels of GDP per capita. Answer: FALSE Diff: 1 Type: TF Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 58) One reason why many low-income countries experience low rates of growth is because of poor public education and health. Answer: TRUE Diff: 1 Type: TF Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 59) The purchase of stocks and bonds issued in another country is known as foreign direct investment. Answer: FALSE Diff: 1 Type: TF Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 60) Of all industrialized nations, real GDP per capita was the highest in Canada in 2016. Answer: FALSE Diff: 1 Type: TF Topic: Why Has Productivity Growth Been Faster in the United States? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 61) Explain the meaning of the word "convergence" in the context of economic growth and standards of living. Answer: Convergence is a term that describes a prediction of the economic growth model. The prediction states that the profitability of using additional capital or better technology is generally greater in developing countries than in a high-income country. This means that poorer countries ought to grow more rapidly than rich countries and as a result, they should eventually catch up to the richer countries. This phenomenon is also called catch-up. Diff: 2 Type: SA Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

Table 7.6

Country India Bangladesh Honduras Bolivia

Real GDP per Capita in 1960 (2010 dollars) $847 1,057 1,700 2,354

Average Annual Growth in Real GDP per Capita between 1960 and 2018 (2010 dollars) 4.70% 1.45% 0.50% 0.38%

62) Refer to Table 7.6. Consider the statistics in the table above in describing the developing countries. Are these consistent with the economic growth model? Briefly explain. Answer: These statistics for developing countries are consistent with the economic growth model. The countries with the lowest levels of real GDP per capita in 1960 had the highest growth rates between 1960 and 2018. The countries with the highest levels of real GDP per capita had the lowest growth rates. Diff: 3 Type: SA Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up Table 7.7

Country India Bangladesh Honduras Bolivia Belgium France Canada Denmark

Real GDP per Capita in 1960 (2010 dollars) $847 1,057 1,700 2,353 7,778 7,824 10,383 10,988

Growth in Real GDP per Capita (2010 dollars) 4.70% 1.45% 0.50% 0.38% 5.02% 4.53% 3.88% 3.47%

63) Refer to Table 7.7. Consider the statistics in the table above in describing the following industrialized and developing countries. Are these consistent with the economic growth model? Briefly explain. Answer: These statistics combine industrialized countries with developing countries. The statistics in this table are not consistent with the predictions of the economic growth model. For example, Belgium, France, Canada, and Denmark had much higher levels of real GDP per capita in 1960 than did Bangladesh, Honduras, and Bolivia. The economic growth model predicts that Belgium, France, Canada, and Denmark should have grown more slowly than Bangladesh, Honduras, and Bolivia, but the table shows that they grew much faster. Diff: 3 Type: SA Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills 87 Copyright © 2024 Pearson Canada Inc.

64) List two ways the labour force experience is different for workers in Canada and in the United States. How do these differences influence productivity? Answer: It is harder to fire workers in Canada as compared to the United States. Firms are less likely to want to hire workers in Canada and younger workers will have a harder time finding a job. Workers stay on the job longer in Canada, even if the job is not a good match. Put differently, the lower rate of mobility makes it more likely that the Canadian workers' skills and preferences will not match well with job characteristics. This will lower their productivity relative to the U.S. worker, who tends to have a higher rate of job mobility. Workers in the United States tend to experience fewer long spells of unemployment than do Canadian workers. This is in part due to unemployment insurance. Workers in the United States receive unemployment insurance for a shorter time and the payments are less compared to their Canadian counterparts. They are employed for longer periods of time and tend to have higher skills and greater productivity as compared to Canadian workers. Diff: 2 Type: SA Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity

65) Would you expect to see higher or lower growth rates for countries that start out with a relatively low level of real GDP per capita? Explain using the concept of "catch-up" and support your answer with a graph. Answer: The economic growth model predicts that countries that start out with a relatively low level of real GDP per capita would experience higher growth rates in real GDP per capita. Countries with a low initial level of real GDP per capita will eventually "catch up" to the level of real GDP per capita in richer countries. This is shown in the graph below. Point A corresponds to a country where the initial level of real GDP per capita is relatively low, but the growth rate of real GDP per capita in that country is relatively high. As that economy continues to grow, the country will move down the line toward point B. Point B corresponds to a country where the initial level of real GDP per capita is relatively high, but the growth rate of real GDP per capita is relatively low. If countries with a low initial level of real GDP per capita also have low saving rates, low levels of education and health, weak court systems, or governments that do not enforce the laws or property rights, then growth rates might remain low.

Diff: 3 Type: SA Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytical Thinking Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

66) Draw a graph of "catch-up" that shows where you would expect to see a country with low saving rates and low levels of health and education. How would you expect real GDP per capita to grow in a country like this? Explain. Answer: Countries with low saving rates and low levels of health and education are likely to have low levels of real GDP. Normally, countries with a low initial level of GDP will experience relatively high levels of growth in real GDP per capita (as shown at point A in the graph below). However, with low saving rates, firms do not have access to funds to invest in new factories, machinery, and equipment needed for economic growth. Also, with low levels of health and education, the labor force is less productive (when they are able to work), so real GDP per capita does not rise and the country remains at a point like B in the graph below.

Diff: 2 Type: SA Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytical Thinking Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

7.5

Discuss government policies that foster economic growth

1) The term "brain drain" refers to A) highly educated individuals who leave developing countries for high-income countries. B) the diminishing returns to studying for an exam. C) the negative impact on brain function of an individual's overinvestment in human capital. D) the decreased quality of the college-educated workforce. E) the increasing difficulty people have in dealing with the information now available. Answer: A Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 2) Disease, poor nutrition, and substandard health care in developing nations can reduce growth in an economy by A) reducing physical capital. B) reducing human capital. C) increasing labour productivity. D) increasing technological change. E) increasing the incentive to save. Answer: B Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 3) Enforcing property rights in an economy will A) cause the market system to work less efficiently. B) decrease the level of foreign portfolio investment. C) encourage corruption and expand the underground economy. D) raise the level of investment. E) decrease the opportunities for trade. Answer: D Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

4) All of the following policies are ways for a country to promote long-run economic growth except A) increasing vaccinations against infectious diseases. B) undergoing political reform to decrease corruption. C) enacting stronger laws to protect property rights. D) imposing stricter regulations to limit foreign direct investment. E) subsidizing research with no immediate practical application. Answer: D Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 5) Robert Lucas, a Nobel laureate in economics, argues that there are ________ returns to human capital. A) increasing B) decreasing C) constant D) negative E) zero Answer: A Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 6) You are an economic advisor to the Prime Minister. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose? A) a reduction in sales taxes B) an investment tax credit C) a reduction in taxes on luxury yachts D) opt out for those who oppose vaccination E) all of the above Answer: B Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 7) Which of the following policies would not help promote economic growth? A) a law requiring that the funds in an individual retirement account be taxed B) a law restricting elected officials from accepting expensive gifts and trips from private individuals C) a law that funds prenatal care for all expectant mothers D) a law that subsidizes research in nanotechnology E) a law restricting foreign direct investment Answer: A Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 92 Copyright © 2024 Pearson Canada Inc.

8) A policy that offers parents a tax reduction based on how much they are saving for their children's college education should ________ the equilibrium level of loanable funds and ________ the rate of longterm growth. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase E) increase; not change Answer: D Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 9) In 1973, the Club of Rome published a book titled The Limits to Growth, which predicted that economic growth would likely end in high-income countries because of A) declining populations. B) rapid increases in government debt. C) increases in outsourcing to low-income countries. D) increasing pollution and the depletion of natural resources. E) increasing corruption. Answer: D Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 10) Some people believe that globalization has A) undermined the distinctive cultures of many countries. B) denied low-income countries access to the latest technology. C) decreased imports of food, clothing, movies, and other goods to low-income countries. D) decreased pollution and the depletion of natural resources. E) forced multinational firms to behave ethically in low-income countries. Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

11) Some of the policies used by the Chinese government result in investment being 50 percent of GDP. As a result A) China's recent growth may be at the expense of the long-term health of the economy. B) China is very well positioned to grow in the long term. C) China has sacrificed short-term economic activity for long-term growth. D) consumer spending drives economic growth. E) many state run firms that are more productive than private firms in other countries. Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States? 12) One potential problem with the Chinese government's increases in spending on capital goods is that these increases have been achieved through A) high levels of borrowing in global financial markets. B) decreases in private consumption. C) debt refinancing and tariff revenues. D) a rapid expansion of the money supply. E) a decrease in net exports. Answer: B Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States? 13) All of the following are reasons why China is unlikely to maintain high enough rates of productivity growth to catch up with the standard of living in the United States except A) the United States invests more in research and development. than does China. B) much of China's growth is likely due to the transition from a centrally-planned economy to a market economy. C) because of the low birth rate in China, the labour force will soon decline. D) the Chinese migration of rural workers to more productive urban jobs. E) private firms have difficulty getting loans from state-owned banks that they need to expand production. Answer: D Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States?

14) Foreign portfolio investment occurs when an individual or firm buys stock or bonds issued in another country. Answer: TRUE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 15) Recent rapid economic growth in India and China has reduced the amount of "brain drain" in those countries. Answer: TRUE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 16) The question of whether economic growth is desirable is a positive question, easily settled by economic analysis. Answer: FALSE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 17) Does globalization promote economic growth, and how does globalization affect the welfare of a given country's citizens? Answer: More globalized countries generally experience much higher annual growth rates in real GDP per capita than countries that are less open to foreign trade and investment. As countries become more globalized, advances in technology in those countries become more likely, and advances in technology are a key to economic growth. However, foreign influences in some countries are not always viewed as positive, as they can have a greater impact on culture than some would like. In addition, multinational firms that operate in foreign countries may also pay very low wages or fail to uphold the same safety and environmental regulations they are required to follow in their own countries. Diff: 2 Type: ES Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 18) How do government policies that enforce property rights affect economic growth? Answer: Without enforceable property rights, entrepreneurs lose the incentive to take on risk because they are not assured ownership of their resources. Economic growth suffers as a result. Failure to protect intellectual property rights has a similar impact. If the benefits of technological advances are shared with all firms, each individual firm has little incentive to invest in the costly research and development necessary for technological progress to continue. Diff: 2 Type: ES Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 95 Copyright © 2024 Pearson Canada Inc.

19) How does government support of health and education programs foster economic growth? Answer: As the health of the people in a nation improves, they become more productive. They become stronger and less susceptible to disease. For example, if the government provides vaccinations or access to clean water, people will be healthier and the economy is more likely to grow. By helping to finance education, the government can also improve economic growth. Since the benefits of an education do not accrue exclusively to the person receiving an education, the market may produce an inefficiently low level of education and training. If the government offers subsidies for education, more people will receive an education, and the increase in human capital will increase economic growth (particularly if there are increasing returns to human capital). Diff: 2 Type: ES Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 20) Corruption A) curtails economic growth. B) raises the rate of growth as bribes enhance income. C) is eliminated by foreign direct investment. D) acts as a magnet for foreign direct investment. E) is a necessary result of economic growth. Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 21) Many developing countries A) are undermined by government corruption. B) have never had a significant problem with corruption. C) have had a significant problem with corruption in the 1930s. D) rank among the least corrupt countries. E) have no dealings with nations where corruption is high. Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

22) If property rights are not enforced in a country, A) the market system will still work smoothly. B) entrepreneurs are unlikely to risk their own funds investing in such an economy. C) that country's growth rate will not be affected. D) that country will grow more rapidly because of the reduction of law suits. E) that country's growth will be high due to added incentive to innovate. Answer: B Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 23) Robert Lucas, a Nobel Laureate in economics, argues that there are increasing returns to A) knowledge capital. B) physical capital. C) financial capital. D) human capital. E) government activity. Answer: D Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 24) Which of the following policies are designed specifically to directly promote technological change in an economy? A) government subsidization of research and development B) tax incentives to promote investment in RRSP plans C) laws to strengthen property rights D) a vaccination program to combat infectious diseases E) policies to protect domestic businesses from foreign direct investment Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

25) Policies to promote growth by increasing saving and investment work through A) decreasing the supply of loanable funds, lowering the interest rate, and raising the level of investment in physical capital. B) increasing the supply of loanable funds, increasing the interest rate, and raising the level of investment in physical capital. C) increasing the supply of loanable funds, lowering the interest rate, and lowering the level of investment in physical capital. D) increasing the supply of loanable funds, lowering the interest rate, and raising the level of investment in physical capital. E) decreasing the supply of loanable funds, lowering the interest rate, and lowering the level of investment in physical capital. Answer: D Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 26) Not enforcing property rights in an economy will A) decrease bribery and corruption. B) not change the level of investment. C) lower the level of investment. D) raise the level of investment. E) increase the incentives to save and invest. Answer: C Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 27) Enforcing property rights in an economy will A) increase bribery and corruption. B) not change the level of investment. C) lower the level of investment. D) raise the level of investment. E) decrease the incentives to save and invest. Answer: D Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

28) What is "brain drain"? A) the tendency for highly educated workers in high-income countries to move to low-income countries B) increased recruiting efforts that attempt to raise the average level of education in developed nations C) foreign direct investment that flows from a developed country to a developing country D) the loss of highly educated people from a low-income country to higher-income opportunities in foreign countries E) the mental fatigue caused by the increased availability of information Answer: D Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 29) How can economic growth help a country combat "brain drain"? A) Economic growth increases the incomes of low-skilled workers relative to high-skilled workers. B) Economic growth opens up opportunities for better jobs and higher incomes for skilled workers. C) Economic growth allows highly skilled persons to earn more in a foreign country than in their native country. D) Economic growth combined with decreasing returns to human capital require workers to achieve steadily higher and higher levels of education over time. E) Economic growth results in high-skilled workers leaving their native country to higher income countries. Answer: B Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 30) Which of the following is a normative statement about economic growth? A) Economic growth is associated with higher labour productivity growth. B) Economic growth increases GDP per capita. C) Economic growth hurts developing countries. D) Foreign direct investment stimulates economic growth. E) Economic growth is lower where property rights are enforced. Answer: C Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

31) How can freedom of the press promote economic growth? A) A free press can act as a watchdog for corruption, increasing chances for economic growth. B) A free press can be more easily swayed to report only one side of any issue. C) A free press reduces the likelihood that judges will protect private property rights. D) A free press does not promote economic growth. E) A free press reduces the opportunities for profitable investment. Answer: A Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 32) The rapid growth of China's economy relative to Canada's has benefitted Canadian consumers because A) competition from China has made jobs harder to find in Canada. B) Canadian consumers can purchase more lower-priced goods made in China. C) Canada has comparative advantage in more goods than China does. D) goods made in China are always of higher quality than goods made in Canada. E) Canadian consumers no longer have access to Canadian made goods. Answer: B Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Would You Be Better Off without China? 33) Which of the following is not a reason why China is unlikely to maintain high enough rates of productivity growth to catch-up with the standard of living in the United States? A) The United States invests more in research and development than China does. B) Much of China's growth has likely been due to the transition from a centrally-planned economy to a market economy. C) Because of the low birth rate in China, the labour force will soon decline. D) There has been a migration of rural Chinese workers to more productive urban jobs. E) China integrates new foreign technology well but lacks innovation. Answer: D Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States?

34) Because of diminishing returns to capital, further increases in the quantity of capital in China would be represented as ________ the Chinese production function. A) a downward shift of B) an upward shift of C) a movement up along D) a movement down along E) a discontinuity in Answer: C Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States? 35) Political stability is not a prerequisite to economic growth. Answer: FALSE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 36) Increased foreign direct investment in India has contributed to its recent economic growth. Answer: TRUE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 37) Some researchers have been unable to find evidence of increasing returns to human capital. Answer: TRUE Diff: 2 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 38) List four types of government policies that can aid economic growth. Answer: Governments can aid economic growth through policies that enhance property rights and the rule of law, improve health and education, subsidize research and development, and provide incentives for saving and investment. Diff: 1 Type: SA Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

39) Your friend does not understand the benefits of globalization. Outline for your friend the positive economic aspects of globalization. Answer: Globalization is the process of countries becoming more open to foreign trade and investment. The increased investment either by foreign direct investment or foreign portfolio investment can give a low-income country access to funds and technology that it might not otherwise have. These funds can help the country invest in factories, machinery, and the equipment needed for economic growth. The extra capital can raise labour productivity, growth, and GDP per capita. Trade and investment can also provide the country with much-needed upgrades in technology. One of the lessons of the economic growth model is that technological change is more important for raising productivity than are increases in capital. It is an important ingredient for rapid economic growth. Technological change is an important contributor to long-term economic growth. The bottom line is that trade and investment can cause standards of living to rise. Indeed, it has been empirically shown that growth and globalization are positively related. With growth in standards of living, the country can break the vicious cycle of poverty. Incomes will grow, the people of the country will be able to save and invest, and this saving and investment will fuel growth from within. Diff: 2 Type: SA Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 40) You have been hired as an economic advisor for a developing country. You have been asked to focus on education as a means for the country's development. Explain to the prime minister how improving education and training can contribute to his country's economic growth, and why it is important for the government to take a proactive role in promoting education. Answer: Education raises the level of human capital in an economy. Human capital is the accumulated knowledge and skills that workers acquire from education and training or from their life experiences. Human capital raises a worker's productivity. The increase in productivity increases growth, per capita GDP, and standards of living. Human capital is one of the main sources of technological change. One of the lessons of the economic growth model is that technological change is more important for raising productivity than are increases in capital. It is an important ingredient for rapid economic growth. The government's role in promoting investment in human capital is important, as the market might not provide the optimal amount of investment in human capital. Nobel Laureate Robert Lucas argues that there are increasing returns to investments in human capital. These returns are not entirely captured by the individual, so if left to their own devices, the individual may not invest enough in education. Having the government invest in education will provide the country with a higher and more efficient level of education and training. Diff: 2 Type: SA Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

Macroeconomics, 4Ce (Hubbard) Chapter 8 Aggregate Expenditure and Output in the Short Run 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model 1) In March 2020, stores, restaurants, bars and offices across Canada were closed as part of public health measures intended to slow the spread of COVID-19. In many cases, this meant workers were laid off. As a result, unemployment ________ and spending ________ in the economy. A) fell; decreased B) rose; increased C) fell; increased D) rose; decreased Answer: D Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills Special Feature: Chapter Opener: Fluctuating Demand at Tim Hortons 2) As a result of a slowdown in the economy, many companies, including local Tim Hortons, cut production and employment. The total amount of spending in the economy is known as A) deficit spending. B) planned investment spending. C) aggregate expenditure. D) equilibrium spending. E) total production. Answer: C Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking Special Feature: Chapter Opener: Fluctuating Demand at Tim Hortons

3) The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant. A) total production; total income; real GDP B) total spending; real GDP; total income C) total spending; real GDP; the price level D) total income; real GDP; the price level E) total production; nominal GDP; unemployment Answer: C Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 4) The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by A) investment spending. B) export spending. C) government spending. D) the level of aggregate expenditure. E) household savings. Answer: D Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 5) Each of the following are one of the main categories of spending identified by John Maynard Keynes except A) consumption. B) net exports. C) government purchases. D) taxes. E) planned investment. Answer: D Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

6) A decrease in consumer confidence can put your job at risk if A) aggregate expenditures fall. B) consumers expect their incomes to rise in the future. C) aggregate expenditures rise. D) consumers expect firms to increase investment in the future. E) your firm produces inferior goods. Answer: A Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: When Consumer Confidence Fails, is Your Job at Risk? 7) Economists first began studying the relationship between changes in aggregate expenditures and changes in GDP A) in the 1950s. B) during the Great Depression. C) at the end of the Civil War. D) during the Industrial Revolution. E) during the Great Recession. Answer: B Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 8) Household spending on goods and services is known as A) consumption spending. B) planned investment spending. C) government purchases. D) net exports. E) household production. Answer: A Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

9) All of the following are components of aggregate expenditure except A) consumption spending. B) net export spending. C) actual investment spending. D) government spending. E) planned investment spending. Answer: C Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 10) The aggregate expenditure model focuses on the ________ relationship between real spending and ________. A) short-run; real GDP B) short-run; inflation C) long-run; real GDP D) long-run; inflation E) short-run; nominal GDP Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 11) The formula for aggregate expenditure is A) AE = C + I + G. B) AE = C + I + G - NX. C) AE = C + I + G + NX. D) AE = C + I + depreciation - NX. E) AE = C + I - depreciation + NX. Answer: C Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

12) Actual investment spending does not include A) spending on consumer durable goods. B) spending on new capital equipment. C) spending on new houses. D) changes in the number of factories. E) planned changes in inventories. Answer: A Diff: 1 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 13) Inventories refer to A) goods which have been presold before they are produced. B) goods that have been produced but not yet sold. C) goods that have been planned but not yet produced. D) goods that have been produced and sold in the same year. E) goods that have been sold but are waiting to be picked by customers. Answer: B Diff: 1 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 14) An unplanned increase in inventories results from A) an increase in planned investment. B) a decrease in planned investment. C) actual investment that is greater than planned investment. D) actual investment that is less than planned investment. E) consumers spending more than firms expected. Answer: C Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

15) If inventories decline by more than analysts predict they will decline, this implies that A) actual investment spending was greater than planned investment spending. B) actual investment spending was less than planned investment spending. C) actual investment spending was equal to than planned investment spending. D) there is no relationship between actual investment spending and planned investment spending. E) actual investment will equal planned investment only when there is a planned change in inventories. Answer: B Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 16) When planned aggregate expenditure equals GDP, A) macroeconomic equilibrium occurs. B) the federal budget is balanced. C) net exports equal zero. D) saving equals zero. E) the economy is operating at the ideal level. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 17) When planned aggregate expenditure equals GDP, A) inventories rise and employment decreases. B) inventories rise and employment increases. C) inventories fall and employment decreases. D) inventories fall and employment increases. E) inventories and employment do not change. Answer: E Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

18) Consumption is $5 billion, planned investment spending is $8 billion, government purchases are $10 billion, and net exports are equal to $2 billion. If GDP during that same time period is equal to $27 billion, what unplanned changes in inventories occurred? A) There was an unplanned increase in inventories equal to $2 billion. B) There was no unplanned change in inventories. C) There was an unplanned decrease in inventories equal to $2 billion. D) There was an unplanned decrease in inventories equal to $19 billion. E) There was an unplanned increase in inventories of $3 billion. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 19) Consumption spending is $16 billion, planned investment spending is $4 billion, unplanned investment spending is $2 billion, government purchases are $6 billion, and net export spending is $1 billion. What is aggregate expenditure? A) $22 billion B) $26 billion C) $23 billion D) $27 billion E) $29 billion Answer: D Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 20) Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP? A) $15 million B) $23 million C) $25 million D) $27 million E) $30 billion Answer: D Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

21) Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true? A) There was an unplanned increase in inventories. B) Aggregate expenditure is equal to GDP. C) Aggregate expenditure is greater than GDP. D) Aggregate expenditure is less than GDP. E) There was an unplanned decrease in inventories. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 22) At macroeconomic equilibrium, A) total investment equals total inventories. B) total spending equals total production. C) total consumption equals total production. D) total taxes equal total transfers. E) total exports equal total imports. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 23) When aggregate expenditure is more than GDP, which of the following is true? A) There was an unplanned decrease in inventories. B) Firms spent less on capital goods than they planned. C) Households bought fewer new homes than they planned. D) Consumer spending was less than expected. E) All of the above are true when aggregate expenditure is more than GDP. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

24) In a small economy in 2022, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year? A) Aggregate expenditure is always less than GDP in developed countries. B) Firm investment in inventories was less than anticipated in 2022. C) Firm investment in inventories was greater than anticipated in 2022. D) Aggregate expenditure is always less than GDP in developing countries. E) Consumer spending was greater than expected. Answer: C Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 25) Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies that A) aggregate expenditure that year was less than GDP that year. B) there was an unplanned decrease in inventories that year. C) there was a planned decrease in inventories that year. D) aggregate expenditure that year was equal to GDP that year. E) consumer spending grew faster than expected. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 26) Firms in a small economy planned that inventories would grow over the past year by $500,000. Over that year, inventories did grow by exactly $500,000. This implies that A) aggregate expenditure that year was equal to GDP that year. B) there was an unplanned increase in inventories that year. C) there was an unplanned decrease in inventories that year. D) aggregate expenditure that year was greater than GDP that year. E) government spending grew unpredictably. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

27) If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium? A) Inventories will decline, and GDP and employment will decline. B) Inventories will rise, and GDP and employment will decline. C) Inventories will decline, and GDP and employment will rise. D) Inventories will rise, and GDP and employment will rise. E) Inventories will rise, GDP will rise, and unemployment will fall. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 28) If firms find that consumers are purchasing more than expected, which of the following would you expect? A) Aggregate expenditure will likely be greater than GDP. B) Aggregate expenditure will likely be less than GDP. C) The economy will adjust to macroeconomic equilibrium as inventories rise, and production and employment fall. D) The economy will adjust to macroeconomic equilibrium as inventories fall, and production and employment fall. E) Firms will see inventories rising. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 29) If firms sell exactly what they expected to sell, all of the following will be true except A) aggregate expenditure will be greater than GDP. B) there is no unplanned change in inventories. C) inventories will not change, and GDP and employment will remain stable. D) aggregate expenditure will be equal to GDP. E) unplanned investment will be zero. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

30) If economists forecast a decrease in aggregate expenditure, which of the following is likely to occur? A) GDP will rise. B) GDP will fall. C) Wages will rise. D) Inventories will fall. E) Unemployment will fall. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 31) If planned investment is greater than actual investment, then aggregate expenditure is less than GDP. Answer: FALSE Diff: 2 Type: TF Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 32) Aggregate expenditure includes consumption spending, unplanned investment spending, government purchases, and net exports. Answer: FALSE Diff: 2 Type: TF Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 33) If aggregate expenditure is more than GDP, then inventories fall and GDP rises. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

34) Explain, in detail, how the adjustment to macroeconomic equilibrium occurs when spending is less than production. Be sure to discuss how inventories play a crucial role in the adjustment process. State what happens to GDP and employment during the adjustment process. Answer: If spending is less than production, then firms will not be selling as many goods and services as they had expected. Inventories of goods will start to build up. This sends a signal to those managing the retail firms to cut back on orders of goods from their distributors. Distributors cut back purchases from manufacturers. Manufacturers of the goods will cut back on production of the goods, and reduce purchases from their suppliers and lay off workers. The reduction in production will continue until inventories equal their desired levels, or until spending equals production. If this happens across many different industries, GDP and total employment will decline. Diff: 2 Type: ES Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking Table 8.1 Real GDP $4,000 4,500 5,000 5,500

Consumption $2,800 3,200 3,600 4,000

Planned Investment $550 550 550 550

Government Purchases $600 600 600 600

Net Exports $250 250 250 250

35) Refer to Table 8.1. Using the table above, compute aggregate expenditure and identify the macroeconomic equilibrium. Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real GDP. The value for aggregate expenditure (C + I + G + NX) for each level of real GDP is given in the table below. The value where real GDP equals aggregate expenditure is $5,000, and this is equilibrium.

Real GDP $4,000 4,500 5,000 5,500

Aggregate Expenditures $4,200 4,600 5,000 5,400

Diff: 2 Type: ES Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

36) Why do economists care about aggregate expenditures? Answer: Increases and decreases in aggregate expenditures cause the year-to-year fluctuations in GDP. Economists devote considerable time and energy to forecasting what will happen to each component of aggregate expenditure. If they forecast aggregate expenditures will decline in the future, this is equivalent to saying that GDP will decline and the economy will enter into a recession. This means fewer job opportunities, lower wages, and lower profits. Diff: 2 Type: ES Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 37) The ________ model focuses on the relationship between total spending and real GDP in the short run, assuming the price level is constant. A) supply and demand B) national income C) aggregate expenditure D) business cycle E) aggregate demand Answer: C Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 38) The key idea of the aggregate expenditure model is that in any particular year, the level of ________ is determined mainly by the level of aggregate expenditure. A) frictional unemployment B) export spending C) government spending D) GDP E) structural unemployment Answer: D Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

39) A decrease in ________ can put your job at risk if aggregate expenditures fall. A) consumer confidence B) the natural rate of unemployment C) the inflation rate D) the length of a business cycle E) income taxation Answer: A Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: When Consumer Confidence Fails, is Your Job at Risk? 40) During the Great Depression, economists first began studying the relationship between A) changes in GDP and changes in interest rates. B) changes in aggregate expenditures and changes in GDP. C) changes in nominal GDP and changes in real GDP. D) changes in stock prices and changes in price controls. E) changes in unemployment and changes in inflation. Answer: B Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking, Multicultural and Diversity 41) Consumption spending refers to ________ spending on goods and services. A) household B) business C) government D) foreign E) unplanned Answer: A Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

42) Which of the following is not a component of aggregate expenditure? A) consumption spending B) planned investment spending C) actual investment spending D) government spending E) net exports Answer: C Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 43) The aggregate expenditure model focuses on the short-run relationship between ________ and ________. A) real spending; real GDP B) unemployment; inflation C) nominal spending; nominal GDP D) planned inventories; unplanned inventories E) nominal spending; real savings Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 44) Actual investment spending includes spending by consumers on A) durable goods. B) nondurable goods. C) new houses. D) services. E) stocks and bonds. Answer: C Diff: 1 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

45) Goods that have been produced but not yet sold are referred to as A) understocks. B) inventories. C) pre-sold goods. D) capital goods. E) overhead costs. Answer: B Diff: 1 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 46) An unplanned decrease in inventories results in A) a decrease in planned investment. B) an increase in planned investment. C) actual investment that is greater than planned investment. D) actual investment that is less than planned investment. E) an increase in unemployment. Answer: D Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 47) Macroeconomic equilibrium occurs when A) aggregate expenditure = GDP. B) aggregate expenditure = C+ I + G + net transfers. C) aggregate income = planned inventories. D) aggregate expenditure = planned inventories. E) exports = imports. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

48) Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during the same time period is equal to $23 million, what unplanned changes in inventories occurred? A) There was an unplanned increase in inventories equal to $2 million. B) There was no unplanned change in inventories. C) There was an unplanned decrease in inventories equal to $2 million. D) There was an unplanned decrease in inventories equal to $19 million. E) There was an unplanned decrease in inventories equal to $3 million. Answer: C Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 49) Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is aggregate expenditure? A) $15 million B) $23 million C) $25 million D) $27 million E) $29 million Answer: C Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 50) Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is -$2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP? A) $15 million B) $23 million C) $25 million D) $27 million E) $29 million Answer: B Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

51) Consumption spending is $5 million, planned investment spending is $8 million, actual investment spending is $8 million, government purchases are $10 million, and net export spending is $2 million. Based on this information, which of the following is true? A) There was an unplanned change in inventories. B) Aggregate expenditure is equal to GDP. C) Aggregate expenditure is greater than GDP. D) Aggregate expenditure is less than GDP. E) Unemployment will rise. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 52) At macroeconomic equilibrium, total ________ equals total ________. A) spending; production B) investment; inventories C) consumption; production D) taxes; transfers E) spending; savings Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 53) When aggregate expenditure is less than GDP, which of the following is true? A) There was an unplanned increase in inventories. B) Firms spent more on capital goods than they anticipated. C) Households bought more new homes than they anticipated. D) Unemployment is likely to rise. E) All of the above must be true when aggregate expenditure is less than GDP. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

54) In a small economy in 2022, aggregate expenditure was $850 million while GDP that year was $800 million. Which of the following can explain the difference between aggregate expenditure and GDP that year? A) Aggregate expenditure is always less than GDP in developed countries. B) Firm investment in inventories was less than anticipated in 2022. C) Firm investment in inventories was greater than anticipated in 2022. D) Aggregate expenditure is always less than GDP in developing countries. E) Aggregate expenditure does not account for consumer spending. Answer: B Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 55) Firms in a small economy anticipated that inventories would grow over the past year by $500,000. Over that year, inventories actually grew by only $400,000. This implies that A) aggregate expenditure that year was greater than GDP that year. B) there was an unplanned increase in inventories that year. C) there was a planned increase in inventories that year. D) aggregate expenditure that year was equal to GDP that year. E) there was a rise in the unemployment rate. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 56) Firms in a small economy anticipated that inventories would grow over the past year by $750,000, and over that year, inventories grew by exactly $750,000. This implies that A) aggregate expenditure and GDP were equal that year. B) there was an unplanned increase in inventories that year. C) there was an unplanned decrease in inventories that year. D) aggregate expenditure was greater than GDP that year. E) there was an unanticipated rise in consumer spending. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

57) If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium? A) Inventories will decline and GDP and employment will decline. B) Inventories will rise and GDP and employment will decline. C) Inventories will decline and GDP and employment will rise. D) Inventories will rise and GDP and employment will rise. E) Inventories will rise, GDP will fall, and employment will rise. Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 58) If firms find that consumers are purchasing less than expected, which of the following would you expect? A) Aggregate expenditure will likely be greater than GDP. B) Aggregate expenditure will likely be less than GDP. C) The economy will adjust to macroeconomic equilibrium as inventories rise and production and employment rise. D) The economy will adjust to macroeconomic equilibrium as inventories fall and production and employment rise. E) The unemployment rate will fall. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 59) If firms sell what they expected to sell, which of the following will be true? A) Aggregate expenditure will be greater than GDP. B) There will be no unplanned change in inventories. C) Inventories will rise and GDP and employment will fall. D) Aggregate expenditure will be less than GDP. E) Employment will rise. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

60) If economists forecast an increase in aggregate expenditure, which of the following is likely to occur? A) GDP will rise. B) GDP will fall. C) Wages will fall. D) Inventories will rise. E) Unemployment will rise. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 61) If planned investment is equal to actual investment, then aggregate expenditure is equal to GDP. Answer: TRUE Diff: 2 Type: TF Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 62) Aggregate expenditure includes consumption spending, planned investment spending, government purchases, and net exports. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 63) If aggregate expenditure is less than GDP, then inventories rise and GDP falls. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 64) What is the main reason for changes in GDP in the short run? Answer: The main reason for changes in GDP in the short run is changes in the level of aggregate expenditure. Diff: 1 Type: SA Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

Table 8.2 Real GDP $2,000 2,500 3,000 3,500

Consumption $1,600 2,000 2,400 2,800

Planned Investment $250 250 250 250

Government Purchases $250 250 250 250

Net Exports $100 100 100 100

65) Refer to Table 8.2. Using the table above, compute aggregate expenditure and identify the macroeconomic equilibrium. Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real GDP. The value for aggregate expenditure (C + I + G + NX) for each level of real GDP is given in the table below. The value where real GDP equals aggregate expenditure is $3000, and this is equilibrium.

Real GDP $2,000 2,500 3,000 3,500

Aggregate Expenditure $2,200 2,600 3,000 3,400

Diff: 2 Type: SA Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 66) What are inventories? What usually happens to inventories at the beginning of a recession, and what usually happens to inventories at the beginning of an expansion? Answer: Inventories are goods that have been produced but not yet sold. Inventories rise at the beginning of a recession and fall at the beginning of an expansion. Diff: 1 Type: SA Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

67) Into which category of aggregate expenditure would each of the following transactions fall? a. Sandra MacMillian purchases a new Toyota Corolla made in Cambridge, Ontario. b. The city of Vancouver buys 5 new garbage trucks. c. Adrian Garcia buys a newly constructed townhome in Winnipeg. d. An airline in Latvia orders a new airplane from Bombardier. e. Magna International buys 300 new BlackBerry phones. Answer: a. consumption b. government purchases c. planned investment d. net exports e. planned investment Diff: 2 Type: SA Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save 1) Which is the largest component of aggregate expenditure? A) planned investment expenditures B) consumption expenditures C) government expenditures D) net export expenditures E) taxes Answer: B Diff: 1 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 2) Which of the following will cause a direct increase in consumption spending? A) an increase in planned investment B) an increase in government spending C) an increase in disposable income D) a decrease in net export spending E) an increase in income taxes Answer: C Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

3) The five most important variables that determine the level of consumption are A) disposable income, wealth, expected future income, price level, and interest rate. B) wealth, savings account balances, chequing account balances, stock portfolio balances, and bond portfolio balances. C) government purchases, interest rates, income, taxes, and transfers. D) government purchases, saving account balances, wealth, interest rates, portfolio balances. E) disposable income, taxation, expected interest rates, price level, and corporate retained earnings. Answer: A Diff: 2 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 4) ________ in taxes will decrease consumption spending, and ________ in transfer payments will increase consumption spending. A) An increase; an increase B) A decrease; a decrease C) An increase; a decrease D) A decrease; an unplanned decrease E) An increase; an unplanned decrease Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 5) An increase in Canada Pension Plan contributions now will cause a A) decrease consumption spending. B) decrease investment spending. C) decrease government spending. D) decrease export spending. E) decrease in future benefits. Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

6) ________ is defined as the value of a household's assets minus the value of its liabilities. A) Household income B) Household wealth C) Personal household consumption D) Planned household investment E) Household financial planning Answer: B Diff: 1 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 7) Examples of assets that are included in household wealth would be A) stocks, bonds, and savings accounts. B) stocks, loans owed, and savings accounts. C) stocks, bonds, and mortgages. D) stocks, credit cards, and savings accounts. E) stocks, bonds, and household appliances. Answer: A Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 8) A stock market boom which causes stock prices to rise should cause A) a decrease in consumption spending. B) an increase in consumption spending. C) a decrease in wealth. D) a decrease in net export spending. E) an increase in government spending. Answer: B Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

9) The Conference Board of Canada's Consumer Confidence Index measures A) consumers' expectations about the future. B) the confidence the public has in the federal government. C) the confidence consumers have in banks. D) the confidence Canadians have in their relationships. E) the confidence Canadians have in the safety of the products they consume. Answer: A Diff: 2 Type: MC Topic: Consumer Confidence Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Changes in Consumer Confidence Affect Consumption Spending? 10) Increases in consumer confidence A) decrease consumption in direct proportion to the increase in consumer confidence. B) directly increase consumption. C) tend to increase consumption spending. D) increase consumption only when the overall price level decreases in the economy. E) tend to increase household saving. Answer: C Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Changes in Consumer Confidence Affect Consumption Spending? 11) An increase in the real interest rate will A) cause consumers to spend more and save less. B) most likely lower consumers' purchases of durable goods. C) most likely lower the reward to savings. D) most likely lower the cost of borrowing. E) most likely transfer wealth from lenders to borrowers. Answer: B Diff: 2 Type: MC Topic: The Interest Rate Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

12) Decreases in the price level will A) lower consumption because goods and services are less affordable. B) raise consumption because goods and services are more affordable. C) raise consumption because real wealth increases. D) lower consumption because real wealth decreases. E) leave consumption unchanged. Answer: C Diff: 2 Type: MC Topic: The Price Level Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 13) Which of the following will raise consumer expenditures? A) an increase in interest rates B) a general decline in housing prices C) an increase in expected future income D) an increase in the price level E) an increase in the unemployment rate Answer: C Diff: 3 Type: MC Topic: Expected Future Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 14) ________ describes the relationship between consumption spending and disposable income. A) Household wealth B) The liquidity trap C) The consumption function D) The paradox of thrift E) The sales tax rate Answer: C Diff: 1 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

15) The slope of the consumption function is equal to A) the change in consumption divided by the change in disposable income. B) the change in consumption divided by the change in personal income. C) the change in disposable income divided by the change in consumption. D) the change in national income divided by the change in consumption. E) the change in saving divided by the change in disposable income. Answer: A Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 16) The marginal propensity to save is defined as A) saving divided by disposable income. B) disposable income divided by saving. C) the change in saving divided by the change in disposable income. D) the change in disposable income divided by the change in saving. E) the portion of additional income that is saved. Answer: C Diff: 1 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 17) If disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is A) 0.9. B) 0.8. C) 0.75. D) 0.6. E) 0.5. Answer: A Diff: 2 Type: MC Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save

18) If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope of the consumption function is A) 1.20. B) 0.80. C) 0.70. D) 0.20. E) 0.10. Answer: B Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 19) Disposable income is defined as A) national income - transfers + taxes. B) national income + transfers + taxes. C) national income - transfers - taxes. D) national income + transfers - taxes. E) national income + transfers - net taxes. Answer: D Diff: 1 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

Table 8.3 Consumption (dollars) $1,200 2,100 3,000

Disposable Income (dollars) $3,000 4,000 5,000

20) Refer to Table 8.3. Given the consumption schedule in the table above, the marginal propensity to consume is A) 0.1. B) 0.3. C) 0.6. D) 0.9. E) 1.0. Answer: D Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 21) Refer to Table 8.3. Given the consumption schedule in the table above, the marginal propensity to save is A) 0.1. B) 0.4. C) 0.7. D) 0.9. E) 1.0. Answer: A Diff: 2 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save

22) Assume disposable income increases by 10,000 and consumption increases by 8500. What is the value of MPC? A) 0.5 B) 0.15 C) 0.85 D) 0.95 E) 0.9 Answer: C Diff: 1 Type: MC Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Algorithmic Question 23) If the MPC is 0.5, then a $10 million increase in disposable income will increase consumption by A) $2 million. B) $5 million. C) $15 million D) $50 million. E) $150 million. Answer: B Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 24) If national income increases by $20 million and consumption increases by $5 million, the marginal propensity to consume is A) 4. B) 0.75. C) 0.5. D) 0.25. E) 0.1. Answer: D Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills

25) When we graph consumption as a function of ________ rather than as a function of disposable income, the slope of this consumption function is ________. A) national income; the MPC B) personal income; (MPC - MPS) C) national income; the MPS D) personal income; the MPS E) national savings; the MPS Answer: A Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 26) If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will A) increase consumption by $7,500. B) increase consumption by $2,500. C) decrease consumption by $7,500. D) decrease consumption by $2,500. E) decrease consumption by $10,000. Answer: C Diff: 2 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 27) MPC + MPS = A) 0. B) 0.25. C) 0.5. D) 1. E) 100%. Answer: D Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

28) If the marginal propensity to consume is 0.75, the marginal propensity to save is A) 0.25. B) 0.5. C) 0.75. D) 1. E) 3. Answer: A Diff: 1 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 29) National income = A) Consumption + Saving - Taxes. B) Consumption - Saving - Taxes. C) Consumption + Saving + Net Exports D) Consumption + Saving + Taxes. E) Consumption + Saving - Net Exports Answer: D Diff: 1 Type: MC Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 30) Investment spending ________ during a recession, and ________ during an expansion. A) declines; increases B) increases; declines C) increases; increases D) declines; remains constant E) remains constant; increases Answer: A Diff: 1 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

31) Consumer spending ________ and investment spending ________. A) is very volatile and subject to fluctuations; follows a smooth trend B) follows a smooth trend; is more volatile and subject to fluctuations C) follows a smooth trend; is the most stable component of aggregate expenditure D) is very erratic; is less erratic than consumer spending E) is very erratic; is more erratic than consumer spending Answer: B Diff: 1 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 32) If firms are more optimistic that future profits will rise and remain strong for the next few years, then A) planned investment spending will fall. B) planned investment spending will rise. C) unplanned investment spending will remain unaffected. D) planned investment spending will rise and then fall. E) unplanned investment will rise. Answer: B Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 33) Housing in Canada has clearly become less affordable relative incomes from February 2005 to February 2022. Cause of rapid increase in cost of housing across Canada was: A) Canada's population and income have grown significantly since 2005. B) borrowing cost (interest rates) during the most of this period was low which increased demand and hence prices. C) supply of housing did not keep up with the demand for housing. D) preferences for housing during COVID-19 changed which increased demand faster than ever before. E) All the above factors contributed towards rapid increase in cost of housing. Answer: D Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Housing Prices Are Just Too High!

34) Investment spending will increase when A) the interest rate rises. B) the corporate income tax increases. C) business cash flow increases. D) firms become more pessimistic about earning future profits. E) the nominal interest rate falls. Answer: C Diff: 3 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 35) During a(n) ________ many firms experience increased profits, which increases ________ and investment spending. A) expansion; government spending B) recession; cash flow C) expansion; cash flow D) recession; business confidence E) recession; interest rates Answer: C Diff: 2 Type: MC Topic: Cash Flow Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 36) From 1981-2021, net exports for Canada were mostly A) negative. B) positive. C) constant. D) zero, as exports equalled imports. E) zero, because of recessions in the United States. Answer: B Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

37) The difference between GDP and net taxes is A) personal income. B) actual investment spending. C) disposable income. D) unplanned investment spending. E) net exports. Answer: C Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 38) Canadian net export spending rises when A) the price level in Canada rises relative to the price level in other countries. B) the growth rate of Canadian GDP is faster than the growth rate of GDP in other countries. C) the value of the Canadian dollar increases relative to other currencies. D) the inflation rate is higher in Canada relative to other countries. E) the Canadian economy become more open to international trade. Answer: B Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 39) ________ usually increase(s) when the Canadian economy is in a recession and decrease(s) when the Canadian economy is expanding. A) Consumer spending B) Planned investment C) Net exports D) Taxes E) Household savings Answer: C Diff: 1 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

40) If inflation in Canada is higher than inflation in other countries, what will be the effect on net exports for Canada? A) Net exports will rise as Canadian exports increase. B) Net exports will rise as Canadian imports decrease. C) Net exports will decrease as Canadian exports decrease. D) Net exports will decrease as Canadian imports increase. E) Net exports will remain constant as Canadian imports increase. Answer: C Diff: 3 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 41) Which of the following will decrease aggregate expenditure in Canada? A) a decrease in the value of the dollar B) a decrease in the price level C) a decrease in interest rates D) a decrease in government purchases E) a decrease in income taxes Answer: D Diff: 2 Type: MC Topic: Government Purchases Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 42) Higher interest rates increase both consumption and investment spending. Answer: FALSE Diff: 2 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 43) The marginal propensity to consume is the slope of the consumption function. Answer: TRUE Diff: 2 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

44) When Jack's income increases by $1,000, he spends an additional $850 dollars. This implies that his marginal propensity to consume is 0.85. Answer: TRUE Diff: 1 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 45) When Jack's income increases by $5,000, he spends an additional $4,000 dollars. This implies that his marginal propensity to consume is 1.25. Answer: FALSE Diff: 2 Type: TF Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 46) An increase in the price level in Canada will reduce exports and increase imports. Answer: TRUE Diff: 2 Type: TF Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 47) You review a salesman's income over a 5-year period. You note it fluctuates tremendously from year to year, yet his consumption of goods and services remains consistently at the same level, year after year. Does this mean that income is not a determinant of consumption, or could something else explain his behaviour? Answer: The salesman is not making purchase decisions based on his current income. He is making his consumption decisions based on his expected future income. He is following a pattern exhibited by many people. He prefers to keep his consumption fairly stable from year to year. Yet his income fluctuates significantly. That is, current income explains consumption quite well except in this case when current income is unusually high or unusually low compared to expected future income. Diff: 2 Type: ES Topic: Expected Future Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

48) Ceteris paribus, how does a recession in the United States affect Canadian net exports? Answer: As GDP decreases in the United States due to the recession, the incomes of American households fall. Households respond by lowering their purchases of goods and services. Some of the decline in purchases includes Canadian goods and services. This essentially lowers imports. As the U.S. is Canada's largest trading partner a recession in the U.S. which reduces American demand for Canadian products reduces Canadian net exports. Diff: 1 Type: ES Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 49) Explain how a stock market crash has the potential to lead to a recession in an economy. Answer: A stock market crash is essentially a substantial decrease in the average price of stocks. Stocks are a part of real wealth. A stock market crash decreases the value of stocks which decreases real wealth. Real wealth is an important determinant of consumption spending. If real wealth declines, so does consumption spending. Therefore, a stock market crash will result in a decline in consumer expenditures. This will result in a decline in GDP. If the decrease in GDP is substantial enough, this can lead to a recession. Diff: 2 Type: ES Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

50) Given Table 8.4 below, fill in the values for saving. Assume there are no taxes. Table 8.4 National Income $7,500 8,000 8,500 9,000

Consumption $5,400 5,800 6,200 6,600

Saving

Answer: When taxes are zero, saving is the difference between national income and consumption: Saving = national income - consumption. S=Y-C Using the table: National Income $7,500 8,000 8,500 9,000

Consumption $5,400 5,800 6,200 6,600

Saving $2,100 2,200 2,300 2,400

Diff: 1 Type: ES Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills

51) Given Table 8.5 below, fill in the values for saving. Assume taxes = $800. Table 8.5 National Income $11,400 11,800 12,200 12,600

Consumption $7,500 7,800 8,100 8,400

Saving

Answer: Saving = national income - consumption - taxes. S=Y-C-T Using the table: National Income $11,400 11,800 12,200 12,600

Consumption $7,500 7,800 8,100 8,400

Saving $3,100 3,200 3,300 3,400

52) Given Table 8.6 below, fill in the values of the marginal propensity to save (MPS) and the marginal propensity to consume (MPC). Show that MPC + MPS = 1. Table 8.6 National Income $8,600 9,000 9,400 9,800

Consumption $8,000 8,300 8,600 8,900

Saving $600 700 800 900

MPC

MPS

Answer: The MPC is defined as: MPC =

= 0.75

= 0.25

The MPS is defined as: MPS =

At every level of income the MPC is 0.75 and at every level of income the MPS = 0.25. Therefore, MPC + MPS is always equal to 1. Using the table: National Income Consumption $8,600 $8,000 9,000 8,300 9,400 8,600 9,800 8,900

Saving $600 700 800 900

MPC --0.75 0.75 0.75

MPS -0.25 0.25 0.25

Diff: 2 Type: ES Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 53) Suppose Canada experiences a long period of inflation relative to other countries. How will this affect Canadian net exports? Answer: If inflation in Canada is higher than inflation in other countries, then prices of products and services produced in Canada increase more rapidly than the prices of products and services of other countries. This difference in the price levels decreases the demand for Canadian goods relative to foreign goods. Canadian exports decrease, imports increase, and Canadian net exports decline. Diff: 2 Type: ES Topic: The Price Level and Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 42 Copyright © 2024 Pearson Canada Inc.

54) Which is the smallest component of aggregate expenditure? A) planned investment expenditures B) consumption expenditures C) government expenditures D) net export expenditures E) federal government tax revenue Answer: D Diff: 1 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 55) Consumption spending will ________ when disposable income ________. A) increase; increases B) increase; decreases C) decrease; increases D) change unpredictably; decreases E) decrease; changes unpredictably Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 56) The five most important variables that determine the level of ________ are disposable income, wealth, expected future income, price level, and interest rate. A) consumption B) government purchases C) planned investment D) net exports E) public savings Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

57) An increase in taxes will ________ consumption spending, and a decrease in transfer payments will ________ consumption spending. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) decrease; not change Answer: D Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 58) An increase in transfer payments will A) increase consumption spending. B) increase investment spending. C) increase government spending. D) increase export spending. E) increase unemployment. Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 59) Household wealth is defined as the value of a household's A) assets minus the value of its liabilities. B) assets plus the value of its liabilities. C) assets. D) liabilities. E) credit rating. Answer: A Diff: 1 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

60) Examples of assets that are included in ________ would be stocks, bonds, and savings accounts. A) household wealth B) household income C) planned investment D) consumer purchases E) capital Answer: A Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 61) A stock market crash that causes stock prices to fall should cause A) a decrease in consumption spending. B) an increase in consumption spending. C) an increase in wealth. D) no change in consumption spending. E) an increase in interest rates. Answer: A Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 62) The decrease in consumer spending during the 2008-2009 recession was due in part to falling prices in the stock market. The reason for the decline in consumer spending is most closely related to which of the following variables that determine the level of consumption? A) the interest rate B) current disposable income C) household wealth D) the price level E) government transfers Answer: C Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

63) The decline in consumer spending during the 2008-2009 recession was due in part to a decrease in disposable income. The decline in consumption resulting from the decline in disposable income caused a(n) ________ the consumption function curve. A) movement up along B) movement down along C) downward shift of D) upward shift of E) non-effect Answer: B Diff: 2 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 64) Economists Andy Kwan and John Cotsomitis' work indicates the fall in consumption spending during the 2008-2009 recession would have been caused, in large part, by A) lower housing wealth. B) higher interest rates. C) lower planned investment. D) a fall in consumer confidence. E) insufficient government stimulus spending. Answer: D Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Changes in Consumer Confidence Affect Consumption Spending? 65) A decrease in the real interest rate will A) cause consumers to spend less and save more. B) most likely increase consumer purchases of durable goods. C) most likely increase the reward to savings. D) most likely increase the cost of borrowing. E) most likely transfer wealth from borrowers to lenders. Answer: B Diff: 2 Type: MC Topic: The Interest Rate Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

66) Increases in the price level will A) lower consumption because goods and services are less affordable. B) raise consumption because some goods and services are more affordable. C) raise consumption because real wealth increases. D) lower consumption because real wealth decreases. E) increase consumption because nominal interest rates will fall. Answer: D Diff: 2 Type: MC Topic: The Price Level Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 67) Which of the following will reduce consumer expenditures? A) a decrease in interest rates B) a general increase in housing prices C) a decrease in expected future income D) a decrease in the price level E) an increase in interest rates Answer: C Diff: 3 Type: MC Topic: Expected Future Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 68) The consumption function describes the relationship between A) consumption spending and national income. B) consumption spending and aggregate income. C) consumption spending and disposable income. D) consumption spending and personal income. E) consumption spending and interest rates. Answer: C Diff: 1 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

69) The change in consumption divided by the change in disposable income is equal to A) the slope of the consumption function. B) aggregate expenditure. C) household saving. D) real GDP. E) marginal propensity to save. Answer: A Diff: 1 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 70) The marginal propensity to consume is defined as A) consumption divided by disposable income. B) disposable income divided by consumption. C) the change in consumption divided by the change in disposable income. D) the change in disposable income divided by the change in consumption. E) consumption divided by gross income. Answer: C Diff: 1 Type: MC Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 71) If disposable income increases by $500 million, and consumption increases by $400 million, then the marginal propensity to consume is A) 1.25. B) 0.8. C) 0.6. D) 0.4. E) 0.2. Answer: B Diff: 2 Type: MC Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save

72) If disposable income falls by $40 billion and consumption falls by $30 billion, then the slope of the consumption function is A) 1.33. B) 0.75. C) 0.4. D) 0.3. E) 0.25. Answer: B Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 73) ________ is defined as national income + transfers - taxes. A) Gross private domestic investment B) GDP C) Personal income D) Disposable income E) Government deficit Answer: D Diff: 1 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

Table 8.7 Consumption (dollars) $600 900 1,200

Disposable Income (dollars) $1,000 1,500 2,000

74) Refer to Table 8.7. Given the consumption schedule in the table above, the marginal propensity to consume is A) 0.4. B) 0.5. C) 0.6. D) 0.75. E) 0.8. Answer: C Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 75) Refer to Table 8.7. Given the consumption schedule in the table above, the marginal propensity to save is A) 0.3. B) 0.4. C) 0.5. D) 0.6. E) 0.8. Answer: B Diff: 2 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save

76) If the MPC is 0.95, then a $10 million increase in disposable income will A) increase consumption by $200 million. B) increase consumption by $9.5 million. C) decrease consumption by $105 million. D) increase consumption by $950 million. E) increase consumption by 0.5 million. Answer: B Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 77) If national income increases by $75 million and consumption increases by $15 million, the marginal propensity to consume is A) 5. B) 0.80. C) 0.75. D) 0.20. E) 0.15. Answer: D Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 78) When we graph consumption as a function of national income rather than as a function of ________, the slope of this consumption function is the ________. A) disposable income; MPC B) personal income; MPC C) disposable income; MPS D) personal income; MPS E) aggregate expenditure; AE Answer: A Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

79) If the marginal propensity to save is 0.1, then a $10 million decrease in disposable income will A) increase consumption by $9 million. B) increase consumption by $1 million. C) decrease consumption by $9 million. D) decrease consumption by $1 million. E) leave consumption unchanged. Answer: C Diff: 2 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 80) The sum of the marginal propensity to consume and the marginal propensity to save is always equal to A) zero. B) 0.5. C) 0.75. D) 1. E) 100%. Answer: D Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 81) If the marginal propensity to consume is 0.6, the marginal propensity to save is A) 0.4. B) 0.6. C) 1. D) 1.5. E) 0.8. Answer: A Diff: 1 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills

82) Which of the following is true? A) National income = Consumption + Savings - Taxes B) National income = Consumption - Savings - Taxes C) National income = Consumption + Savings + Taxes D) National income = Consumption - Savings - Net Exports E) National income = Consumption - Savings + Net Exports Answer: C Diff: 1 Type: MC Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 83) Investment spending increases during ________, and decreases during ________. A) an expansion; a recession B) a recession; an expansion C) a recession; a depression D) a deflation; an inflation E) an expansion; an inflation Answer: A Diff: 1 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 84) ________ spending follows a smooth trend whereas, ________ spending is more volatile and subject to fluctuations. A) Consumer; government B) Consumer; investment C) Investment; consumer D) Government; consumer E) Investment; government Answer: B Diff: 1 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

85) If firms are more pessimistic and believe that future profits will fall and remain weak for the next few years, then A) investment spending will fall. B) investment spending will rise. C) investment spending will remain unaffected. D) investment spending will rise and then fall. E) investment spending growth smoothly. Answer: A Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 86) Housing affordability relative to income in Canada, A) increased significantly between 2005 and 2021. B) decreased significantly between 2005 and 2021. C) stayed the same between 2005 and 2021. D) moved up and down frequently between 2005 and 2021. E) is unaffected by changes in economic conditions. Answer: B Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Housing Prices Are Just Too High! 87) Which of the following is most likely to decrease due to a recession? A) households' purchases of housing B) households' purchases of winter clothing C) firms' purchases of printer paper D) government purchases of computer equipment E) military spending Answer: A Diff: 2 Type: MC Topic: Aggregate Expenditures and Recession Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Housing Prices Are Just Too High!

88) Investment spending will decrease when A) the interest rate falls. B) the corporate income tax decreases. C) business cash flow decreases. D) firms become more optimistic about earning future profits. E) governments reduce compliance costs. Answer: C Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 89) During a(n) ________, many firms experience reduced profits, which reduces ________ and investment spending. A) recession; cash flow B) expansion; cash flow C) expansion; business confidence D) recession; government spending E) expansion; net exports Answer: A Diff: 2 Type: MC Topic: Cash Flow Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 90) From 2010 to 2018, ________ for Canada were negative. A) planned inventories B) net exports C) unplanned inventories D) transfer payments E) interest rates Answer: B Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

91) The difference between GDP and disposable income is A) national income. B) actual investment spending. C) net taxes. D) unplanned investment spending. E) net exports. Answer: C Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 92) Canadian net export spending falls when A) the price level in Canada falls relative to the price level in other countries. B) the growth rate of Canadian GDP is slower than the growth rate of GDP in other countries. C) the value of the Canadian dollar decreases relative to other currencies. D) the inflation rate is lower in Canada relative to other countries. E) the Canadian economy becomes more open to international trade. Answer: B Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 93) Net exports usually ________ when the Canadian economy is in a recession and ________ when the Canadian economy is expanding, all else equal. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) decrease; remain constant Answer: C Diff: 1 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

94) If inflation in Canada is lower than inflation in other countries, what will be the effect on net exports for Canada? A) Net exports will rise as Canadian exports increase. B) Net exports will rise as Canadian imports increase. C) Net exports will decrease as Canadian exports decrease. D) Net exports will decrease as Canadian imports decrease. E) Net exports will remain unchanged. Answer: A Diff: 3 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 95) Which of the following will increase aggregate expenditure in Canada? A) an increase in the value of the dollar B) an increase in the price level C) an increase in interest rates D) an increase in government purchases E) a rise in interest rates Answer: D Diff: 2 Type: MC Topic: Government Purchases Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 96) Lower interest rates increase both consumption and investment spending. Answer: TRUE Diff: 2 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 97) The marginal propensity to consume measures the average amount of wealth that a consumer spends in a given period of time. Answer: FALSE Diff: 1 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

98) When Javier's income increases by $5,000, he spends an additional $3,750 dollars. This implies that his marginal propensity to consume is 0.75. Answer: TRUE Diff: 1 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 99) When Jack's income increases by $1,000, he spends an additional $850 dollars. This implies that his marginal propensity to save is 0.85. Answer: FALSE Diff: 2 Type: TF Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 100) An increase in the price level in Canada will reduce imports and increase exports. Answer: FALSE Diff: 2 Type: TF Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 101) What are the four categories of aggregate expenditure? Answer: The four categories are consumption spending, planned investment spending, government purchases, and net exports. Diff: 1 Type: SA Topic: The Aggregate Expenditure Model Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 102) Ceteris paribus, how does an expansion in Canada affect Canadian net exports? Answer: As GDP increases in Canada due to the expansion, the household incomes rise. Households respond by increasing their purchases of goods and services. Some of the increase in purchases includes domestic goods and services; some of the increase includes foreign-produced goods and services. This essentially raises imports. Assuming that exports do not change, net exports will fall. Diff: 1 Type: SA Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

103) What are the five main determinants of consumption spending? Which of these is the most important? Answer: The five main determinants of consumption spending are current disposable income, household wealth, expected future income, the price level, and the interest rate. The most important determinant is current disposable income. Diff: 2 Type: SA Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 104) Given Table 8.8 below, fill in the values for saving. Assume there are no taxes. Table 8.8 National Income $2,000 3,000 4,000 5,000

Consumption $1,700 2,500 3,300 4,100

Saving

Answer: When taxes are zero, saving is the difference between national income and consumption: saving = national income - consumption. S=Y-C Using the table: National Income $2,000 3,000 4,000 5,000

Consumption $1,700 2,500 3,300 4,100

Saving $300 500 700 900

Diff: 1 Type: SA Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills

105) Given Table 8.9 below, fill in the values of the marginal propensity to save (MPS) and the marginal propensity to consume (MPC). Show that MPC + MPS = 1. Table 8.9 National Income $2,000 3,000 4,000 5,000

Consumption $1,900 2,700 3,500 4,300

Saving $100 300 500 700

MPC

MPS

Answer: The MPC is defined as: MPC =

= 0.8

= 0.2

The MPS is defined as: MPS =

At every level of income the MPC is 0.8 and at every level of income the MPS = 0.2. Therefore, MPC + MPS is always equal to 1. Using the table: National Income $2,000 3,000 4,000 5,000

Consumption $1,900 2,700 3,500 4,300

Saving $100 300 500 700

MPC --0.8 0.8 0.8

MPS -0.2 0.2 0.2

Diff: 2 Type: SA Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 106) Suppose Canada experiences a long period of relatively stable prices while other countries experience long periods of inflation. How will this affect Canadian net exports? Answer: If inflation in Canada is lower than inflation in other countries, then prices of products and services produced in Canada increase at a slower pace than the prices of products and services of other countries. This difference in the price levels will increase the demand for Canadian goods relative to foreign goods. Canadian exports will increase, imports will decrease, and Canadian net exports will rise. Diff: 2 Type: SA Topic: The Price Level and Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 60 Copyright © 2024 Pearson Canada Inc.

8.3

Use a 45°-line diagram to illustrate macroeconomic equilibrium

1) On the 45-degree line diagram, the 45-degree line shows points where A) real income equals real GDP. B) real aggregate expenditure equals C + I. C) real aggregate expenditure equals real GDP. D) real aggregate output equals the quantity produced. E) real aggregate expenditure equals real aggregate consumption. Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 2) On the 45-degree line diagram, for points that lie below the 45-degree line, A) planned aggregate expenditure is greater than GDP. B) planned aggregate expenditure is less than GDP. C) planned aggregate expenditure is equal to GDP. D) planned aggregate expenditure is less than aggregate income. E) planned investment is less than unplanned investment. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 3) If planned aggregate expenditure is less than total production, A) actual inventories will equal planned inventories. B) firms will experience an unplanned increase in inventories. C) GDP will increase. D) the economy is in equilibrium. E) governments will run budget surpluses. Answer: B Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

4) If planned aggregate expenditure is less than total production, A) actual inventories will equal planned inventories. B) firms will experience an unplanned decrease in inventories. C) GDP will decrease. D) the economy is in equilibrium. E) government spending will fall. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 5) If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP? A) an increase in wealth B) an increase in interest rates C) a decrease in business confidence D) an increase in the value of the dollar relative to other currencies E) a decrease in government spending Answer: A Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

Figure 8.1

6) Refer to Figure 8.1. According to the figure above, at what point is aggregate expenditure greater than GDP? A) J B) K C) L D) all of the above E) none of the above Answer: A Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 7) Refer to Figure 8.1. At point L in the figure above, which of the following is true? A) Aggregate expenditure is greater than GDP. B) The economy has achieved macroeconomic equilibrium. C) Actual inventories are greater than planned inventories. D) GDP will be increasing. E) Government spending will decrease. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

8) Refer to Figure 8.1. If the economy is at point L, what will happen? A) Inventories have fallen below their desired level, and firms decrease production. B) Inventories have fallen below their desired level, and firms increase production. C) Inventories have risen above their desired level, and firms decrease production. D) Inventories have risen above their desired level, and firms increase unplanned inventory investment. E) Inventories have fallen below their desired level, and firms decrease unplanned inventory investment. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 9) Refer to Figure 8.1. If the economy is at a level of aggregate expenditure given by point K, A) the economy is in equilibrium. B) production is greater than spending. C) production is less than spending. D) inventories will increase above their desired level. E) firms will have an incentive to increase production. Answer: A Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 10) Which of the following leads to an increase real GDP? A) a decrease in government spending B) a decrease in the inflation rate in other countries, relative to the inflation in the United States C) a decrease in interest rates D) households have increasingly pessimistic expectations about future income E) an increase in imports Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 11) If planned aggregate expenditure is below potential GDP and planned aggregate expenditure equals GDP, then A) actual inventory investment will be less than planned inventory investment. B) actual inventory investment will be greater than planned inventory investment. C) the economy is in a recession. D) the economy is at full employment. E) the economy is in an expansion. Answer: C Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 64 Copyright © 2024 Pearson Canada Inc.

12) Assume that inventories declined by more than analysts predicted. This implies that A) planned aggregate expenditure was greater than real GDP. B) planned aggregate expenditure was equal to real GDP. C) planned aggregate expenditure was less than real GDP. D) planned aggregate expenditure is unrelated to real GDP. E) planned aggregate expenditure is likely to increase. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 13) Following recession, slow economic growth, and increasing gas prices, Tim Hortons sales were lower than expected. If a decrease in restaurant sales decreases aggregate expenditure, then A) unplanned investment will increase. B) planned investment will increase. C) planned aggregate expenditure will be greater than real GDP. D) real GDP will be more than nominal GDP. E) government deficits will fall. Answer: A Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 14) How does a decrease in government spending affect the aggregate expenditure line? A) It shifts the aggregate expenditure line upward. B) It shifts the aggregate expenditure line downward. C) It increases the slope of the aggregate expenditure line. D) It decreases the slope of the aggregate expenditure line. E) It has no effect on the aggregate expenditure line. Answer: B Diff: 2 Type: MC Topic: Government Purchases Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

Figure 8.2

15) Refer to Figure 8.2. If the Canadian economy is currently at point N, which of the following could cause it to move to point K? A) Households expect future income to decline. B) Household wealth rises. C) The firm's cash flow rises as profits rise. D) Government expenditures increase. E) Canadians begin importing more goods. Answer: A Diff: 2 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 16) Refer to Figure 8.2. If the Canadian economy is currently at point K, which of the following could cause it to move to point N? A) The price level in Canada rises relative to the price level in other countries. B) Parliament passes investment tax incentives. C) The interest rate rises. D) Household wealth declines. E) The Canadian economy grows more quickly than in other countries. Answer: B Diff: 2 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

17) Refer to Figure 8.2. Suppose that the level of GDP associated with point N is potential GDP. If the Canadian economy is currently at point K, A) firms are operating above capacity. B) the economy is at full employment. C) the economy is in recession. D) the level of unemployment is equal to the natural rate. E) firms will experience rising inventories. Answer: C Diff: 3 Type: MC Topic: Showing a Recession on the 45 Degree Line Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 18) Planned aggregate expenditure is equal to A) consumption spending only. B) consumption spending plus planned investment spending. C) planned investment spending only. D) consumption spending plus planned investment spending plus government purchases plus net exports. E) consumption spending plus planned investment spending plus government purchases minus taxes. Answer: D Diff: 1 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 19) Assume you are given the following information about an economy. C = 622

NX = 163

G = 422

I = 127

What is the equilibrium value of real GDP? A) 1334 B) 1171 C) 1980 D) 1780 E) 912 Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills Special Feature: Algorithmic Question

20) Assume you are given the following information about an economy. C = 1700

NX = -20

G = 150

I = 150

What is the equilibrium value of real GDP? A) 1334 B) 1171 C) 1980 D) 1780 E) 912 Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills Special Feature: Algorithmic Question 21) Assume you are given the following information about an economy. C = 1500

NX = -20

G = 150

I = 150

What is the equilibrium value of real GDP? A) 1432 B) 1392 C) 1980 D) 1780 E) 1020 Answer: D Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills Special Feature: Algorithmic Question 22) When net exports equal zero, the economy is in macroeconomic equilibrium. Answer: FALSE Diff: 2 Type: TF Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 23) Macroeconomic equilibrium can occur at any point on the 45-degree line. Answer: TRUE Diff: 2 Type: TF Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

24) For all points below the 45-degree line, planned aggregate expenditure will be less than GDP. Answer: TRUE Diff: 1 Type: TF Topic: Showing a Recession on the 45 Degree Line Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 25) What is the difference between aggregate expenditure and consumption spending? Answer: Aggregate expenditure represents the total spending in the economy. Consumption spending is just one component of aggregate expenditure. The other components of aggregate expenditure are: planned investment, government purchases, and net exports. Diff: 2 Type: ES Topic: Consumption Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 26) Use a 45-degree diagram to illustrate macroeconomic equilibrium. Make sure your diagram shows the aggregate expenditure function. Include in your diagram a point where aggregate expenditure is greater than GDP and a point where aggregate expenditure is less than GDP. Answer:

Macroeconomic equilibrium occurs at point K, where Y = AE. At point J, aggregate expenditure is greater than GDP. At point L, aggregate expenditure is less than GDP. Diff: 3 Type: ES Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

Table 8.10 Real GDP $2,000 2,500 3,000 3,500

Consumption $1,600 2,000 2,400 2,800

Planned Investment $250 250 250 250

Government Purchases $250 250 250 250

Net Exports $100 100 100 100

27) Refer to Table 8.10. Using the table above, calculate the unplanned change in inventories for each level of GDP, and explain what will happen to GDP? Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. The unplanned change in inventories is the difference between aggregate expenditure and real GDP. If there is an unplanned decrease in inventories, firms are selling goods faster than they planned, and this is a signal for firms to increase production. If there is an unplanned increase in inventories, firms are selling goods more slowly than they expected, and this is a signal for firms to decrease production.

Real GDP $2,400 2,500

Aggregate Expenditure $2,200 2,600

Unplanned Change in Inventories -$400 -100

3,000 3,500

3,000 3,400

0 100

Real GDP Will... increase increase be in equilibrium decrease

Diff: 3 Type: ES Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 28) On the 45-degree line diagram, the 45-degree line shows points where real aggregate expenditure equals A) unplanned investment. B) planned investment. C) real GDP. D) nominal GDP. E) potential GDP. Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

29) On the 45-degree line diagram, for points that lie above the 45-degree line, A) planned aggregate expenditure is greater than GDP. B) planned aggregate expenditure is less than GDP. C) planned aggregate expenditure is equal to GDP. D) planned aggregate expenditure is less than aggregate income. E) planned aggregate expenditure is greater than potential GDP. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 30) If planned aggregate expenditure is greater than total production, A) actual inventories will equal planned inventories. B) firms will experience an unplanned decrease in inventories. C) GDP will decrease. D) the economy is in equilibrium. E) firms are likely to cut back on production. Answer: B Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 31) If planned aggregate expenditure is greater than total production, A) actual inventories will equal planned inventories. B) firms will experience an unplanned increase in inventories. C) GDP will increase. D) the economy is in equilibrium. E) governments are likely to experience growing budget deficits. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 32) If the economy is currently in equilibrium at a level of GDP that is above potential GDP, which of the following would move the economy back to potential GDP? A) a decrease in wealth B) a decrease in interest rates C) an increase in business confidence D) a decrease in the value of the dollar relative to other currencies E) an increase in government spending Answer: A Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 71 Copyright © 2024 Pearson Canada Inc.

Figure 8.3

33) Refer to Figure 8.3. According to the figure above, at what point is aggregate expenditure less than GDP? A) J B) K C) L D) none of the above E) all of the above Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 34) Refer to Figure 8.3. At point J in the figure above, which of the following is true? A) Aggregate expenditure is less than GDP. B) The economy has achieved macroeconomic equilibrium. C) Actual inventories are less than planned inventories. D) GDP will be decreasing. E) Unemployment will be rising. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

35) Refer to Figure 8.3. At point J in the figure above, which of the following is true? A) Unemployment will fall. B) The economy has achieved macroeconomic equilibrium. C) Actual inventories are greater than planned inventories. D) GDP will be decreasing. E) Aggregate expenditure is less than GDP. Answer: A Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 36) Refer to Figure 8.3. If the economy is at point J, what will happen? A) Inventories have fallen below their desired level, so firms will decrease production. B) Inventories have fallen below their desired level, so firms will increase production. C) Inventories have risen above their desired level, so firms will decrease production. D) Inventories have risen above their desired level, so firms will increase unplanned inventory investment. E) Inventories have fallen below their desired level, so firms will decrease unplanned inventory investment. Answer: B Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 37) Refer to Figure 8.3. If the economy is in equilibrium, it is at a level of aggregate expenditure given by point A) J. B) K. C) L. D) Points J and K both represent equilibrium. E) Points J and L both represent equilibrium. Answer: B Diff: 1 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

38) Which of the following leads to a decrease in real GDP? A) an increase in government spending B) an increase in the inflation rate in other countries, relative to inflation in Canada C) an increase in interest rates D) households having increasingly optimistic expectations about future income E) an increase in imports Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 39) If planned aggregate expenditure is above potential GDP and planned aggregate expenditure equals GDP, then A) actual inventory investment will be less than planned inventory investment. B) actual inventory investment will be greater than planned inventory investment. C) the economy is in an expansion. D) the economy is at full employment. E) the economy is in a recession. Answer: C Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 40) How does an increase in government spending affect the aggregate expenditure line? A) It shifts the aggregate expenditure line upward. B) It shifts the aggregate expenditure line downward. C) It increases the slope of the aggregate expenditure line. D) It decreases the slope of the aggregate expenditure line. E) It shifts the aggregate expenditure line upward and increases its slope. Answer: A Diff: 2 Type: MC Topic: Government Purchases Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

Figure 8.4

41) Refer to Figure 8.4. If the Canadian economy is currently at point N, which of the following could cause it to move to point K? A) Households expect future income to rise. B) Household wealth falls. C) The firm's cash flow rises as profits rise. D) Government expenditures increase. E) Interest rates rise. Answer: B Diff: 2 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 42) Refer to Figure 8.4. If the Canadian economy is currently at point K, which of the following could cause it to move to point N? A) The price level in Canada falls relative to the price level in other countries. B) The federal government abolishes investment tax incentives. C) The interest rate rises. D) Household wealth declines. E) Government spending falls. Answer: A Diff: 2 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

43) Refer to Figure 8.4. Suppose that the level of GDP associated with point K is potential GDP. If the Canadian economy is currently at point N, A) firms are operating below capacity. B) the economy is at full employment. C) the economy is in an expansion. D) the level of unemployment is above the natural rate. E) the economy is in a recession. Answer: C Diff: 3 Type: MC Topic: Showing a Recession on the 45 Degree Line Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 44) ________ is equal to consumption spending plus planned investment spending plus government purchases plus net exports. A) Full employment GDP B) Short-run aggregate supply C) Planned inventory investment D) Planned aggregate expenditure E) Equilibrium GDP Answer: D Diff: 1 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 45) If planned aggregate expenditure equals GDP, the economy is in macroeconomic equilibrium. Answer: TRUE Diff: 1 Type: TF Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 46) For all points above the 45-degree line, planned aggregate expenditure will be less than GDP. Answer: FALSE Diff: 1 Type: TF Topic: Showing a Recession on the 45 Degree Line Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 47) If planned aggregate expenditure is less than real GDP, some firms will experience unplanned increases in inventories. Answer: TRUE Diff: 1 Type: TF Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

48) What is the macroeconomic consequence if firms accumulate large amounts of unplanned inventory at the beginning of a recession? Answer: Firms will decrease production until they sell unintended inventories. Diff: 1 Type: SA Topic: Aggregate Expenditures and Recession Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 49) At each of the three points in the following graph, indicate whether planned aggregate expenditure is greater than, equal to, or less than GDP?

Answer: At point J, planned aggregate expenditure is greater than GDP. At point K, planned aggregate expenditure is equal to GDP. At point L, planned aggregate expenditure is less than GDP. Diff: 2 Type: SA Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

Table 8.11 Real GDP $5,000 6,000 7,000 8,000

Consumption $4,500 5,300 6,100 6,900

Planned Investment $350 350 350 350

Government Purchases $300 300 300 300

Net Exports $50 50 50 50

50) Refer to Table 8.11. Using the table above, calculate the unplanned change in inventories for each level of GDP, and explain what will happen to GDP. Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. The unplanned change in inventories is the difference between aggregate expenditure and real GDP. If there is an unplanned decrease in inventories, firms are selling goods faster than they planned, and this is a signal for firms to increase production. If there is an unplanned increase in inventories, firms are selling goods more slowly than they expected, and this is a signal for firms to decrease production.

Real GDP $5,000

Aggregate Expenditure $5,200

Unplanned Change in Inventories -$200

6,000 7,000 8,000

6,000 6,800 7,600

0 200 400

Real GDP will... increase be in equilibrium decrease decrease

Diff: 3 Type: SA Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP Figure 8.5

1) Refer to Figure 8.5. Suppose that investment spending increases by $10 billion, shifting up the aggregate expenditure line and GDP increases from GDP1 to GDP2. If the MPC is 0.9, then what is the change in GDP? A) $9 billion B) $10 billion C) $90 billion D) $100 billion E) $150 billion Answer: D Diff: 2 Type: MC Topic: Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

2) Refer to Figure 8.5. Suppose that government spending increases, shifting up the aggregate expenditure line. GDP increases from GDP1 to GDP2, and this amount is $400 billion. If the MPC is 0.75, then what is the distance between N and L or by how much did government spending change? A) $10 billion B) $50 billion C) $100 billion D) $200 billion E) $300 billion Answer: C Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula Figure 8.6

3) Refer to Figure 8.6. Potential GDP equals $100 billion. The economy is currently producing GDP1 which is equal to $90 billion. If the MPC is 0.8, then how much must autonomous spending change for the economy to move to potential GDP? A) -$18 billion B) -$2 billion C) $2 billion D) $10 billion E) $18 billion Answer: C Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 80 Copyright © 2024 Pearson Canada Inc.

4) In the aggregate expenditure model, ________ has both an autonomous component and an induced component. A) planned investment spending B) consumption spending C) government spending D) net export spending E) unplanned investment spending Answer: B Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 5) The ratio of the increase in ________ to the increase in ________ is called the multiplier. A) equilibrium nominal GDP; autonomous expenditure B) equilibrium real GDP; autonomous expenditure C) autonomous expenditure; equilibrium real GDP D) induced expenditure; equilibrium real GDP E) planned investment; consumer spending Answer: B Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 6) If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then A) the multiplier is 0.125. B) the multiplier is 3.5. C) the multiplier is 8. D) the multiplier is 14.3. E) the multiplier is 50. Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

7) If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then A) the MPC is 0.2. B) the MPC is 0.5. C) the MPC is 0.75. D) the MPC is 0.8. E) the MPC is 0.9. Answer: D Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 8) ________ consumption is consumption that does not depend upon the level of GDP. A) Autonomous B) Induced C) Voluntary D) Disposable E) Household Answer: A Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 9) The multiplier is calculated as the A) change in real GDP / change in autonomous expenditure. B) change in autonomous expenditure / change in real GDP. C) change in nominal GDP / change in autonomous expenditure. D) change in real GDP / change in induced spending. E) change in consumption/change in disposable income. Answer: A Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking

10) A general formula for the multiplier is A)

D) E)

. .

Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 11) Which of the following is a true statement about the multiplier? A) The multiplier rises as the MPC rises. B) The smaller the MPC, the larger the multiplier. C) The multiplier is a value between zero and one. D) The multiplier effect does not occur when autonomous expenditure decreases. E) The multiplier only applies to government spending. Answer: A Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 12) All of the following are true statements about the multiplier except A) The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate. B) The larger the MPC, the larger the multiplier. C) The multiplier is the ratio of the change in real GDP to the change in autonomous expenditure. D) The multiplier makes the economy less sensitive to changes in autonomous expenditure. E) The multiplier applies to all changes in autonomous expenditure. Answer: D Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking

13) Tariffs and trade wars cause net exports to ________ and real GDP to ________. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) decrease; remain constant Answer: D Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise the Multiplier 14) John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending, A) this may benefit the economy in the short run, but not in the long run. B) the economy will benefit in the short run and benefit by an even greater amount in the long run. C) this will have a major negative impact on the economy in both the short run and in the long run. D) this may benefit the economy in the long run, but could be counterproductive in the short run. E) there will be absolutely no impact on the economy in the short run or the long run. Answer: D Diff: 2 Type: MC Topic: The Paradox of Thrift Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 15) Many American and European politicians argue that limiting international trade will improve GDP. A reason such protectionism is likely to fail is A) such policies will reduce exports by as much or more than imports. B) such policies fail to address the government budget deficit. C) protectionism does not prevent immigration. D) protectionism increases foreign direct investment and technological transfer. E) such policies require all countries to coordinate their activities to be effective. Answer: A Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise the Multiplier

16) The formula for the multiplier is (1 - MPC). Answer: FALSE Diff: 1 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 17) The larger the MPC, the smaller the value of the multiplier. Answer: FALSE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 18) If the marginal propensity to save is 0.4, the multiplier is 2.5. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 19) If the multiplier is 5, the marginal propensity to consume must be 0.8. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

20) Discuss the leading causes of the Great Depression. Use the 45-degree line diagram to show how they caused a decline in GDP. Answer: Several events lowered aggregate expenditure in the economy. Drought on the Prairies played a major role. Combined with the dramatic decline in American demand for Canadian exports, the Canadian (and global) economy contracted significantly. Graphically, this is shown by a downward shift of the aggregate expenditure line. The U.S. Smoot-Hawley Tariff Act was passed in June of 1930 and this sparked a trade war. As a result, net exports declined and this was another factor lowering aggregate expenditure.

The aggregate expenditure line shifts down due to the decline in consumption spending and net export spending. The decline in these forms of spending led firms to cut back on production and lay off workers. Income subsequently declined and this induced further declines in income and spending and led to a downward spiral. As a result, GDP declined from GDP2 to GDP1. Diff: 2 Type: ES Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise the Multiplier

21) Economists think that the marginal propensity to consume for the Canadian economy is somewhere around 0.9. Based on our simple multiplier formula, this would imply that the multiplier for Canada should be around 10. However, economists agree that the government spending multiplier is less than 2. What might explain this supposed anomaly? Answer: The formula for the multiplier, M =

, is a simplification. It points out the relationship

between the marginal propensity to consume and the multiplier, but it does leave out many other real world effects such as inflation, income taxes, and imports. When we consider these effects, they reduce the size of the multiplier. Diff: 3 Type: ES Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

Table 8.12 Real GDP $4,000 5,000 6,000 7,000

Consumption $3,500 4,300 5,100 5,900

Planned Investment $350 350 350 350

Government Purchases $450 450 450 450

Net Exports -$100 -100 -100 -100

22) Refer to Table 8.12. Using the table above, answer the following questions. The numbers in the table are in billions of dollars. a. What is the equilibrium level of real GDP? b. What is the MPC? c. If potential GDP is $7,000 billion, is the economy at full employment? If not, what is the condition of the economy? d. If the economy is not at full employment, by how much should government spending increase so that the economy can move to the full employment level of GDP? Answer: a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. They are found by adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is $5,000 billion, and this is equilibrium. Real GDP $4,000 5,000 6,000 7,000

Aggregate Expenditure $4,200 5,000 5,800 6,600

b. The MPC is found by the formula

. In this case, △C = $800 billion and ΔY = $1,000 billion, so the

MPC = $800 billion / $1,000 billion or 0.8. c. The economy is not at full employment. Equilibrium GDP is $5,000 billion, which is less than potential GDP. The economy is in recession. d. GDP must rise to $7,000 billion to be at full employment. This means that GDP must increase by $2,000 billion. To find the right change in government spending, use the multiplier formula: ΔGDP = M × ΔG. We know the △GDP we want to achieve is $2,000 billion. We can find the multiplier since we know the MPC: Multiplier = 1 / (1-0.8) = 1 / 0.2 = 5. Substituting this into the above equation: $2,000 billion = 5 × ΔG = $2,000 billion / 5 = ΔG = $400 billion. Therefore, government spending must increase by $400 billion to move the economy to full employment. Diff: 3 Type: ES Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula 88 Copyright © 2024 Pearson Canada Inc.

Table 8.13 Real GDP $500 600 700 800

Consumption $400 450 500 550

Planned Investment $100 100 100 100

Government Purchases $150 150 150 150

Net Exports -$50 -50 -50 -50

23) Refer to Table 8.13. Using the table above, answer the following questions. The numbers in the table are in billions of dollars. a. What is the equilibrium level of real GDP? b. What is the MPC? c. If investment spending declines by $50 billion, what will happen to equilibrium GDP? Answer: a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. They are found by adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is $700 billion, and this is equilibrium. Real GDP $500 600 700 800

Aggregate Expenditure $600 650 700 750

b. The MPC is found by the formula

. In this case, ΔC = $50 billion and ΔY = $100 billion, so the MPC

= $50 billion / $100 billion, or 0.5. c. We must use the multiplier formula to calculate the new equilibrium level of GDP. First we calculate the multiplier which is: Multiplier =

= 2.

The change in equilibrium GDP = change in expenditure × multiplier = -$50 billion × 2 = -$100 billion. New equilibrium GDP = old equilibrium GDP + change in equilibrium GDP = $700 billion - $100 billion = $600 billion. Diff: 3 Type: ES Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula

Figure 8.5

24) Refer to Figure 8.5. Suppose that investment spending decreases by $5 million, decreasing aggregate expenditure and decreasing real GDP from GDP2 to GDP1. If the MPC is 0.8, then what is the change in GDP? A) -$4 million B) -$5 million C) -$25 million D) -$40 million E) -$50 million Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 25) Refer to Figure 8.5. Suppose that government spending increases, shifting up the aggregate expenditure line. GDP increases from GDP1 to GDP2, and this amount is $200 billion. If the MPC is 0.8, then what is the distance between N and L, or by how much did government spending change? A) $16 billion B) $40 billion C) $160 billion D) $200 billion E) $1,000 billion Answer: B Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 90 Copyright © 2024 Pearson Canada Inc.

Figure 8.6

26) Refer to Figure 8.6. Potential GDP equals $500 billion. The economy is currently producing GDP1, which is equal to $450 billion. If the MPC is 0.8, then how much must autonomous spending change for the economy to move to potential GDP? A) -$40 billion B) -$10 billion C) $10 billion D) $40 billion E) $50 billion Answer: C Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 27) Autonomous expenditure is a type of expenditure that does not depend on A) wealth. B) expectations. C) interest rates. D) GDP. E) price level. Answer: D Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 91 Copyright © 2024 Pearson Canada Inc.

28) The ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure is called the A) MPC. B) multiplier. C) MPS. D) consumption function. E) macroeconomic equilibrium. Answer: B Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 29) If an increase in investment spending of $20 million results in a $200 million increase in equilibrium real GDP, then A) the multiplier is 0.1. B) the multiplier is 1. C) the multiplier is 10. D) the multiplier is 100. E) the multiplier is 180. Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 30) If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP, then A) the MPC is 0.25. B) the MPC is 0.75. C) the MPC is 0.8. D) the MPC is 0.9. E) the MPC is 2.5. Answer: B Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

31) ________ consumption is consumption that depends upon the level of GDP, and ________ consumption is consumption that does not depend upon the level of GDP. A) Autonomous; induced B) Induced; autonomous C) Voluntary; autonomous D) Autonomous; voluntary E) Planned; unplanned Answer: B Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 32) The multiplier is calculated as the change in ________ / change in ________. A) real GDP; autonomous expenditure B) autonomous expenditure; real GDP C) nominal GDP; autonomous expenditure D) real GDP; induced spending E) consumption spending; disposable income Answer: A Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 33) A general formula for the multiplier is A) B)

. .

Answer: C Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking

34) All of the following are true statements about the multiplier, except A) the multiplier rises as the MPC rises. B) the smaller the MPS, the larger the multiplier. C) the multiplier is a value between zero and one. D) the multiplier effect occurs when autonomous expenditure changes. E) the multiplier effect is caused by induced consumption. Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 35) Which of the following is a true statement about the multiplier? A) The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation, and the interest rate. B) The larger the MPC, the smaller the multiplier. C) The multiplier is the ratio of the change in spending to the change in GDP. D) The multiplier makes the economy less sensitive to changes in autonomous expenditure. E) The multiplier only applies to changes in government spending. Answer: A Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 36) Assume proponents of public funding for a new stadium argue that every dollar spent building the sports and entertainment facility will generate a total of $2.05 in spending in the economy. This indicates that the spending multiplier for the construction industry is equal to A) 0.5. B) 1.21. C) 1.70. D) 2.05. E) 4.25. Answer: D Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking

37) In 2007-2008, exports from Canada to the United States fell dramatically. Based on the multiplier effect, we would expect A) the economy to shrink by less than the drop in exports. B) the economy to grow by less than the drop in exports. C) the economy to grow by more than the drop in exports. D) the economy to shrink by more than the drop in exports. E) the economy to be unaffected due to a corresponding drop in imports. Answer: D Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise the Multiplier 38) John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending, A) this will increase investment spending in the short run and expand the economy in the long run. B) the economy will benefit in the short run but the effect will not last into the long run. C) this will have a major negative impact on the economy in both the short run and in the long run. D) they may make themselves worse off by causing aggregate expenditure to fall, thereby pushing the economy into a recession. E) they will improve the economy in both the short and long run. Answer: D Diff: 2 Type: MC Topic: The Paradox of Thrift Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 39) If the marginal propensity to save is 0.35, the multiplier is 2.86. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 40) If the multiplier is 10, the marginal propensity to consume must be 0.1. Answer: FALSE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

41) The larger the MPC, the larger the value of the multiplier. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 42) What is the formula for the multiplier? Explain why this formula is considered to be too simple. Answer: Multiplier =

The formula ignores the effect that GDP increasing (or decreasing) can have on imports, the price level, and interest rates. Ignoring these factors causes the multiplier formula to overstate the size of the realworld multiplier. Diff: 2 Type: SA Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 43) Would a larger multiplier lead to longer and more severe recessions or shorter and less severe recessions? Briefly explain. Answer: A larger multiplier would be likely to lead to longer and more severe recessions because it would magnify the impact on the economy of changes in autonomous expenditures. Diff: 2 Type: SA Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

Table 8.14 Real GDP $1,000 2,000 3,000 4,000

Consumption $1,000 1,900 2,800 3,700

Planned Investment $100 100 100 100

Government Purchases $150 150 150 150

Net Exports -$50 -50 -50 -50

44) Refer to Table 8.14. Using the table above, answer the following questions. The numbers in the table are in billions of dollars. a. What is the equilibrium level of real GDP? b. What is the MPC? c. If potential GDP is $4,000 billion, is the economy at full employment? If not, what is the condition of the economy? d. If the economy is not at full employment, by how much should government spending increase so that the economy can move to the full employment level of GDP?

Answer: a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. They are found by adding together C + I + G +NX. The value where real GDP equals aggregate expenditure is $3,000 billion, and this is equilibrium.

Real GDP $1,000 2,000 3,000 4,000

Aggregate Expenditure $1,200 2,100 3,000 3,900

b. The MPC is found using the formula

. In this case, △C = $900 billion and ΔY = $1,000 billion, so

the MPC = $900 billion / $1,000 billion or 0.9. c. The economy is not at full employment. Equilibrium GDP is $3,000 billion, which is less than potential GDP. The economy is in recession. d. GDP must rise to $4,000 billion to be at full employment. This means that GDP must increase by $1,000 billion. To find the right change in government spending, use the multiplier formula: ΔGDP = M × ΔG. We know the △GDP we want to achieve is $1,000 billion. We can find the multiplier since we know the MPC: Multiplier = 1 / (1-0.9) = 1 / 0.1 = 10. Substituting this into the above equation: $1,000 billion = 10 × ΔG = $1,000 billion / 10 = ΔG = $100 billion. Therefore, government spending must increase by $100 billion to move the economy to full employment. Diff: 3 Type: SA Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula

Table 8.15 Real GDP $250 300 350 400

Consumption $200 240 280 320

Planned Investment $40 40 40 40

Government Purchases $60 60 60 60

Net Exports -$20 -20 -20 -20

45) Refer to Table 8.15. Using the table above, answer the following questions. The numbers in the table are in billions of dollars. a. What is the equilibrium level of real GDP? b. What is the MPC? c. If investment spending declines by $10 billion, what will happen to equilibrium GDP? Answer: a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. They are found by adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is $400 billion, and this is equilibrium.

Real GDP $250 300 350 400

Aggregate Expenditure $280 320 360 400

b. The MPC is found by the formula

. In this case, ΔC = $40 billion and ΔY = $50 billion, so the MPC

= $40 billion / $50 billion, or 0.8. c. We must use the multiplier formula to calculate the new equilibrium level of GDP. First we calculate the multiplier which is: Multiplier =

= 5.

The change in equilibrium GDP = change in expenditure × multiplier = -$10 billion × 5 = -$50 billion. New equilibrium GDP = old equilibrium GDP + change in equilibrium GDP = $400 billion - $50 billion = $350 billion. Diff: 3 Type: SA Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula

8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure 1) The aggregate demand curve illustrates the relationship between ________ and the ________, holding constant all other factors that affect aggregate expenditure. A) the price level; quantity of planned aggregate expenditure B) the inflation rate; quantity of planned aggregate expenditure C) the price level; quantity of planned investment expenditure D) the price level; quantity of consumption expenditure E) the price level; government expenditure Answer: A Diff: 1 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 2) Which of the following is a reason why decreases in the price level result in a rise in aggregate expenditure? A) Price level decreases cause firms and consumers to hold less money, which lowers the interest rate. Lower interest rates raise consumption and planned investment expenditures, which raises aggregate expenditure. B) Price level decreases reduce real wealth, which causes consumption spending and aggregate expenditure to rise. C) As the price level falls, government spending rises, which raises aggregate expenditure. D) Price level decreases in the United States relative to other countries lower net exports, which raises aggregate expenditure. E) As the price level falls, households become more optimistic about the future. Answer: A Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

3) Which of the following correctly describes how an increase in the price level affects consumption spending? A) An increase in the price level raises real wealth, which causes consumption to increase. B) An increase in the price level decreases the amount of money a household needs to buy goods and raises the interest rate, which causes consumption to increase. C) An increase in the price level increases the amount of money a household needs to buy goods and raises the interest rate, which causes consumption to increase. D) An increase in the price level lowers real wealth, which causes consumption to decrease. E) An increase in the price level, lowers the nominal interest rate which increases purchases of consumer durables. Answer: D Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 4) An increase in the price level results in a(n) ________ in household consumption spending and causes investment spending to ________. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase E) decrease; remain constant Answer: C Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 5) What impact does a decrease in the price level in Canada have on net exports and why? A) A decrease in the price level increases net exports because lower prices increase the value of the dollar. B) A decrease in the price level increases net exports by reducing the relative cost of Canadian goods. C) A decrease in the price level reduces net exports because lower prices raise the value of the dollar. D) A decrease in the price level reduces net exports because lower prices increase American spending on imports. E) A decrease in the price level reduces net exports because lower prices reduce the value of the Canadian dollar making exports more costly. Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

6) A decrease in the price level in Canada will have what effect on the aggregate expenditure line? A) Aggregate expenditure will shift downward. B) Aggregate expenditure will become steeper. C) Aggregate expenditure will shift upward. D) Aggregate expenditure will shift upward and become less steep. E) Aggregate expenditure will not be affected by an increase in the price level. Answer: C Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 7) An increase in the price level in Canada will shift the aggregate expenditure line upward. Answer: FALSE Diff: 2 Type: TF Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 8) The aggregate demand curve shows the relationship between the price level and the level of planned aggregate expenditure in the economy. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 9) What impact does a lower price level have on interest rates, wealth, and investment spending? Answer: A lower price level increases the purchasing power of wealth, decreases interest rates, and increases investment spending. Diff: 2 Type: ES Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

10) Why is the aggregate demand curve downward sloping while the aggregate expenditure line is upward sloping? Answer: A downward sloping aggregate demand curve reflects the inverse relationship between the price level and the level of planned aggregate expenditure, while an upward-sloping aggregate expenditure line reflects the positive relationship between real GDP and aggregate expenditure. Diff: 2 Type: ES Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 11) The ________ illustrates the relationship between the price level and the quantity of planned aggregate expenditure, holding constant all other factors that affect aggregate expenditure. A) aggregate demand curve B) savings line C) 45-degree line D) consumption function E) law of supply Answer: A Diff: 1 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 12) Which of the following is a reason why increases in the price level result in a decline in aggregate expenditure? A) Price level increases raise real wealth, which causes consumption spending and aggregate expenditure to decline. B) Price level increases cause firms and consumers to hold more money, which raises the interest rate. Higher interest rates lower consumption and planned investment expenditures, which lowers aggregate expenditure. C) Price level increases in Canada relative to other countries raise net exports, which lowers aggregate expenditure. D) As the price level rises, government spending falls, which lowers aggregate expenditure. E) As the price level rises, real interest rates fall making consumers feel less wealthy. Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

13) An increase in the price level ________ real wealth, which causes consumption to ________. A) lowers; increase B) lowers; decrease C) raises; increase D) raises; decrease E) raises; remain constant Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 14) A decrease in the price level results in a(n) ________ in household consumption spending and causes investment spending to ________. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase E) decrease; remain constant Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 15) What impact does an increase in the price level in Canada have on net exports and why? A) An increase in the price level decreases net exports because higher prices decrease the value of the dollar. B) An increase in the price level decreases net exports by increasing the relative cost of Canadian goods. C) An increase in the price level increases net exports because higher prices lower the value of the dollar. D) An increase in the price level increases net exports because higher prices decrease Canadian spending on imports. E) An increase in the price level decreases net exports by reducing Canadians' nominal income. Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

16) An increase in the price level in Canada will have what effect on the aggregate expenditure line? A) Aggregate expenditure will shift downward. B) Aggregate expenditure will become steeper. C) Aggregate expenditure will shift upward. D) Aggregate expenditure will shift downward and become less steep. E) Aggregate expenditure will not be affected by an increase in the price level. Answer: A Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 17) A rising price level decreases consumption by decreasing the real value of household wealth. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 18) A decrease in the price level in Canada will shift the aggregate expenditure line downward. Answer: FALSE Diff: 2 Type: TF Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 19) What is the difference between aggregate expenditure and aggregate demand? Answer: Aggregate expenditure is the total amount of spending in the economy and aggregate demand is the relationship between the price level and the level of planned aggregate expenditure. Diff: 2 Type: SA Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 20) What impact does a higher price level have on interest rates, wealth, and investment spending? Answer: A higher price level reduces the purchasing power of wealth, increases interest rates, and reduces investment spending. Diff: 2 Type: SA Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

8.6

Apply the algebra of macroeconomic equilibrium

1) Equilibrium GDP is equal to A) autonomous expenditure times the marginal propensity to consume. B) autonomous expenditure times the marginal propensity to save. C) autonomous expenditure times the multiplier. D) autonomous expenditure. E) autonomous expenditure times the saves rate. Answer: C Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Reflective Thinking 2) Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP? C = 2,000 + 0.9Y I = 2,500 G = 3,000 NX = 400 A) $4,333 B) $7,100 C) $8,778 D) $79,000 E) $85,000 Answer: D Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

3) Given the equations for C, I, G, and NX below, what is the marginal propensity to consume? C = 2,000 + 0.9Y I = 2,500 G = 3,000 NX = 400 A) -0.1 B) 0.1 C) 0.2 D) 0.9 E) 2,000 Answer: D Diff: 1 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 4) If the consumption function is defined as C = 5,500 + 0.9Y, what is the autonomous level of consumption expenditure? A) 550 B) $4,950 C) $5,500 D) $6,050 E) $6,111 Answer: C Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 5) If the consumption function is defined as C = 5,500 + 0.9Y, what is the value of the multiplier? A) 0.1 B) 0.9 C) 2 D) 9 E) 10 Answer: E Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

6) If the consumption function is defined as C = 7,250 + 0.8Y, what is the marginal propensity to save? A) 0.2 B) 0.25 C) 0.8 D) 5.8 E) 9.1 Answer: A Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 7) If the consumption function is defined as C = 7,250 + 0.8Y, what is the value of the multiplier? A) 0.2 B) 0.8 C) 1.25 D) 5 E) 10 Answer: D Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 8) If the consumption function is defined as C = 5,500 + 0.9Y, what is the multiplier? A) 0.l B) 0.9 C) 5 D) 6.1 E) 10 Answer: E Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

9) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $32,000, what is the marginal propensity to consume? C = 5,000 + (MPC)Y I = 1,500 G = 2,000 NX = -500 A) 0.6 B) 0.67 C) 0.75 D) 0.8 E) 0.9 Answer: C Diff: 3 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 10) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $32,000, what will the new equilibrium level of GDP be if government spending increases to 2,000? C = 5,000 + (MPC)Y I = 1,500 G = 2,000 NX = -500 A) $32,500 B) $34,000 C) $38,000 D) $42,000 E) Not enough information is given to answer the question. Answer: B Diff: 3 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 11) If consumption is defined as C = 2,000 + 0.8Y, then the marginal propensity to save is 0.8. Answer: FALSE Diff: 2 Type: TF Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

12) If consumption is defined as C = 1,350 + 0.6Y, then the marginal propensity to consume is 0.6. Answer: TRUE Diff: 2 Type: TF Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 13) C = 4,000 + 0.5Y I = 1,500 G = 2,250 NX = -150 Given the equations for C, I, G, and NX above, what is the equilibrium level of GDP (Y)? Answer: Y = C + I + G + NX Y = 4,000 + 0.5Y + 1,500 + 2,250 + (-150) Y = 7,600 + 0.5Y 0.5Y = 7,600 Y = 15,200 Diff: 3 Type: ES Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 14) C = 2,550 + (MPC)Y I = 800 G = 1,100 NX = 50 If the equilibrium level of GDP is $11,250, using the equations for C, I, G, and NX shown above, find the value of the marginal propensity to consume. Answer: Y = C + I + G + NX 11,250 = 2,550 + (MPC)11,250 + 800 + 1,100 + 50 11,250 = 4,500 + (MPC)11,250 6,750 = (MPC)11,250 0.6 = MPC Diff: 3 Type: ES Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

15) Autonomous expenditure times the multiplier equals A) autonomous saving. B) autonomous consumption. C) equilibrium GDP. D) planned autonomous investment. E) government budget deficit. Answer: C Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Reflective Thinking 16) Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP? C = 1,000 + 0.8Y I = 1,500 G = 1,250 NX = 100 A) $3,080 B) $3,850 C) $6,930 D) $19,250 E) $38,500 Answer: D Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 17) Given the equations for C, I, G, and NX below, what is the marginal propensity to consume? C = 1,000 + 0.8Y I = 1,500 G = 1,250 NX = 100 A) 0.2 B) 0.8 C) 0.9 D) 1.8 E) 10 Answer: B Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

18) Given the equations for C, I, G, and NX below, what is the marginal propensity to save? C = 1,000 + 0.8Y I = 1,500 G = 1,250 NX = 100 A) 0.1 B) 0.2 C) 0.8 D) 1.8 E) 10 Answer: B Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 19) If the consumption function is defined as C = 7,250 + 0.8Y, what is the autonomous level of consumption expenditure? A) $1,425 B) $5,800 C) $7,250 D) $9,062.50 E) $9,700 Answer: C Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 20) If the consumption function is defined as C = 7,250 + 0.8Y, what is the marginal propensity to save? A) 0.2 B) 0.8 C) 5.8 D) 7.25 E) $1,425 Answer: A Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

21) If the consumption function is defined as C = 7,250 + 0.8Y, what is the multiplier? A) 0.2 B) 0.8 C) 1.25 D) 5 E) 10 Answer: D Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 22) If the consumption function is defined as C = 5,500 + 0.9Y, what is the marginal propensity to consume? A) 0.1 B) 0.9 C) 5.5 D) 6.1 E) $5,500 Answer: B Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 23) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $21,500, what is the marginal propensity to consume? C = 1,500 + (MPC)Y I = 1,000 G = 2,000 NX = -200 A) 0.67 B) 0.75 C) 0.8 D) 0.9 E) 1.0 Answer: C Diff: 3 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

24) If consumption is defined as C = 2,400 + 0.9Y, then the marginal propensity to consume is 0.9. Answer: TRUE Diff: 2 Type: TF Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 25) If consumption is defined as C = 4,500 + 0.75Y, then the marginal propensity to save is 0.25. Answer: TRUE Diff: 2 Type: TF Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 26) C = 2,800 + 0.9Y I = 750 G = 1,200 NX = 150 Given the equations for C, I, G, and NX above, what is the equilibrium level of GDP (Y)? Answer: Y = C + I + G + NX Y = 2,800 + 0.9Y + 750 + 1,200 +150 Y = 4,900 + 0.9Y 0.1Y = 4,900 Y = 49,000 Diff: 3 Type: SA Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 27) C = 3,600 + (MPC)Y I = 1,200 G = 1,400 NX = -200 If the equilibrium level of GDP is $30,000, using the equations for C, I, G, and NX shown above, find the value of the marginal propensity to consume. Answer: Y = C + I + G + NX 30,000 = 3,600 + (MPC)30,000 + 1,200 + 1,400 - 200 30,000 = 6,000 + (MPC)30,000 24,000 = (MPC)30,000 0.8 = MPC Diff: 3 Type: SA Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 9 Aggregate Demand and Aggregate Supply Analysis 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve 1) The basic aggregate demand and aggregate supply curve model helps explain A) short-term fluctuations in real GDP and the price level. B) long-term growth. C) price fluctuations in an individual market. D) output fluctuations in an individual market. E) which workers will lose their jobs during a recession. Answer: A Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 2) Canadian National Railways (CN) plays such a large role in moving goods around the country that there is usually a close relationship between fluctuations in CN's business and fluctuations in GDP. When CN sees an increase in demand for its services, we can likely expect A) a decrease in GDP. B) an increase in GDP. C) a drop in the exchange rate. D) an increase in unemployment. E) a decrease in the price level. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle

3) When the economy enters into a recession, your employer is ________ to reduce your wages because ________. A) unlikely; output and input prices generally fall during recession B) unlikely; lower wages reduce productivity and morale C) likely; output prices always fall during recession D) likely; aggregate demand is vertical in the long run E) likely; labour demand increases during recessions Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Is an Employer Likely to Cut Your Pay During a Recession? 4) The ________ shows the relationship between the price level and quantity of real GDP demanded. A) consumer price index B) aggregate expenditure line C) 45-degree line D) aggregate demand curve E) consumption function Answer: D Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 5) Because of the slope of the aggregate demand curve, we can say that A) a decrease in the price level leads to a lower level of real GDP demanded. B) an increase in the price level leads to no change in the level of real GDP demanded. C) a decrease in the price level leads to a higher level of real GDP demanded. D) an increase in the price level leads to a higher level of real GDP demanded. E) an increase in the price level increases household wealth. Answer: C Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

6) All of the following would be considered a positive addition to household wealth except A) the equity in one's home. B) 500 shares of Google stock. C) the balance in your savings account. D) a credit card balance. E) a decrease in the price level. Answer: D Diff: 1 Type: MC Topic: Household Wealth Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 7) Which of the following best describes the "wealth effect"? A) When the price level falls, the real value of household wealth falls. B) When the price level falls, the nominal value of household wealth falls. C) When the price level falls, the nominal value of household wealth rises. D) When the price level falls, the real value of household wealth rises. E) When the price level falls, the value of stocks rise. Answer: D Diff: 2 Type: MC Topic: Wealth Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 8) The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off A) government spending. B) government spending and unplanned investment. C) investment and consumption spending. D) net exports. E) household savings. Answer: C Diff: 2 Type: MC Topic: Interest Rate Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

9) An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________. A) decrease; a higher price level reduces consumption, investment, and net exports B) increase; a higher price level reduces consumption, investment, and net exports C) decrease; a higher price level increases consumption, investment, and net exports D) increase; a higher price level increases consumption, investment, and net exports E) increase; a higher price level reduces consumption, investment, and government spending Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 10) When the price level in Canada falls relative to the price level of other countries, ________ will fall, ________ will rise, and ________ will rise. A) imports; exports; net exports B) exports; imports; net exports C) net exports; exports; imports D) net exports; imports; exports E) net exports; incomes; exports Answer: A Diff: 2 Type: MC Topic: International Trade Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 11) The international trade effect states that A) an increase in the price level will raise net exports. B) an increase in the price level will lower net exports. C) an increase in the price level will raise exports. D) an increase in the price level will lower imports. E) an increase in the price level will rise domestic GDP. Answer: B Diff: 1 Type: MC Topic: International Trade Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

12) Which of the following is one explanation as to why the aggregate demand curve slopes downward? A) Decreases in the price level raise the interest rate and increase consumption spending. B) Decreases in the price level raise the interest rate and increase investment spending. C) Decreases in the Canada price level relative to the price level in other countries lower net exports. D) Decreases in the price level raise real wealth and increase consumption spending. E) Decreases in the price level raise the value of the multiplier. Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why the Aggregate Demand Curve is Downward Sloping 13) An increase in the price level will A) shift the aggregate demand curve to the left. B) shift the aggregate demand curve to the right. C) move the economy up along a stationary aggregate demand curve. D) move the economy down along a stationary aggregate demand curve. E) shift the aggregate supply curve to the right. Answer: C Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 14) A falling price level will A) increase aggregate demand. B) increase the quantity of real GDP demanded. C) decrease aggregate demand. D) decrease the quantity of real GDP demanded. E) have no impact on the quantity of real GDP demanded. Answer: B Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve

15) Spending on the peace keeping missions is essentially categorized as government purchases. How do increases in spending on peace keeping affect the aggregate demand curve? A) They will move the economy up along a stationary aggregate demand curve. B) They will move the economy down along a stationary aggregate demand curve. C) They will shift the aggregate demand curve to the left. D) They will shift the aggregate demand curve to the right. E) This form of government spending will have no impact on the economy. Answer: D Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 16) If a recession makes many firms pessimistic about the future profitability of investments. How does this increased pessimism affect the aggregate demand curve? A) This will move the economy up along a stationary aggregate demand curve. B) This will move the economy down along a stationary aggregate demand curve. C) This will shift the aggregate demand curve to the left. D) This will shift the aggregate demand curve to the right. E) This will shift the aggregate supply curve to the right. Answer: C Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 17) Higher personal income taxes A) increase aggregate demand. B) increase disposable income. C) decrease aggregate demand. D) increase aggregate supply. E) decrease aggregate supply. Answer: C Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

18) Which of the following will shift the aggregate demand curve to the right, ceteris paribus? A) an increase in interest rates B) a decrease in disposable income C) a decrease in expected profits for firms D) an increase in net exports E) a decrease in government spending Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 19) Sales of large pickup trucks built in Ontario usually decrease during an economic slowdown. How would this decrease affect Ontario's aggregate demand curve? A) Ontario's aggregate demand curve would have shifted to the right. B) Ontario's aggregate demand curve would not have shifted, but there would have been a movement up Ontario's aggregate demand curve. C) Ontario's aggregate demand curve would not have shifted, but there would have been a movement down Ontario's aggregate demand curve. D) Ontario's aggregate demand curve would have shifted to the left. E) Ontario's aggregate demand curve would have shifted to the right and there would have been a movement up Ontario's aggregate demand curve. Answer: D Diff: 3 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Predicting Shifts of the Aggregate Demand Curve 20) If the Canadian dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve? A) This will move the economy up along a stationary aggregate demand curve. B) This will move the economy down along a stationary aggregate demand curve. C) This will shift the aggregate demand curve to the left. D) This will shift the aggregate demand curve to the right. E) This will not affect the Canadian economy. Answer: D Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

21) Last week, six Swedish kronor could purchase one Canadian dollar. This week, it takes eight Swedish kronor to purchase one Canadian dollar. This change in the value of the dollar will ________ exports from Canada to Sweden and ________ Canadian aggregate demand. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase E) decrease; not impact Answer: B Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 22) Suppose Canadian GDP growth rate is faster relative to other countries' GDP growth rates. This will A) move the economy up along a stationary aggregate demand curve. B) move the economy down along a stationary aggregate demand curve. C) shift the aggregate demand curve to the left. D) shift the aggregate demand curve to the right. E) have no impact on Canada's aggregate demand curve. Answer: C Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 23) If aggregate demand just increased, which of the following may have caused the increase? A) an increase in government purchases B) an increase in the interest rate C) an increase in the price level D) an increase in imports E) an increase in taxes Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

24) How do lower income taxes affect aggregate demand? A) They increase disposable income, consumption, and aggregate demand. B) They reduce disposable income, consumption, and aggregate demand. C) They increase corporate investment and aggregate demand. D) They increase aggregate supply and thus increase aggregate demand as well. E) They reduce the price level relative to other countries, thus reducing aggregate demand. Answer: A Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 25) The 2020 recession that Canada experienced was most likely caused by A) a drop in investment spending. B) a drop in consumption spending. C) a drop in government spending. D) a drop in net exports. E) a drop in aggregate supply. Answer: B Diff: 1 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Which Components of Aggregate Demand Changed the Most during the 2020 Recession? 26) If you noticed that fashion models were wearing longer skirts, the local store was sold out of lipstick, and skinny ties were all you saw for sale, it might be reasonable to assume A) the aggregate demand curve was shifting left. B) the aggregate demand curve was shifting right. C) the federal government was in control of fashion. D) the aggregate demand had a positive slope. E) the aggregate supply curve was shifting left. Answer: A Diff: 1 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Predicting Shifts of the Aggregate Demand Curve

Figure 9.1

27) Refer to Figure 9.1. Ceteris paribus, an increase in the price level would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: D Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 28) Refer to Figure 9.1. Ceteris paribus, an increase in interest rates would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

29) Refer to Figure 9.1. Ceteris paribus, an increase in personal income taxes would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 30) Refer to Figure 9.1. Ceteris paribus, a decrease in government spending would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 31) Refer to Figure 9.1. Ceteris paribus, an increase in households' expectations of their future income would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

32) Refer to Figure 9.1. Ceteris paribus, a decrease in firms' expectations of the future profitability of investment spending would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 33) Refer to Figure 9.1. Ceteris paribus, a decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 34) Refer to Figure 9.1. Ceteris paribus, an increase in the value of the domestic currency relative to foreign currencies would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

35) An increase in imports increases aggregate demand. Answer: FALSE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 36) A decrease in disposable income will shift the aggregate demand curve to the left. Answer: TRUE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 37) An increase in the price level shifts the aggregate demand curve to the left. Answer: FALSE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 38) The Liberal government raised income taxes for individuals earning very high incomes. Explain how these higher income taxes will affect the aggregate demand curve. Answer: Raising the income tax decreases the amount of disposable income available to those households. Lower disposable income decreases consumption at every price level. The result is a shift in the aggregate demand curve to the left. Diff: 2 Type: ES Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 39) In 2020, the Bank of Canada dramatically reduced interest rates in response to COVID-19. Explain how lower interest rates affect the aggregate demand curve. Answer: Reducing the interest rate lowers the cost of borrowing to firms and to households. As a result, both firms and households will increase expenditures. This increase in expenditures will shift the aggregate demand curve to the right. Diff: 2 Type: ES Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

40) Using an aggregate demand graph, illustrate the impact of an increase in the price level on aggregate demand. Answer:

This illustrates an increase in the price level on the aggregate demand curve. The actual movement is shown by moving from point B to point A. The price level moves up from P1 to P2, and the quantity of real GDP demanded declines from Y1 to Y2. Diff: 2 Type: ES Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve

41) Using an aggregate demand graph, illustrate the impact of an increase in the interest rate. Answer:

The increase in the interest rate will cause consumption expenditures and investment expenditures to decline. This will result in a parallel leftward shift in the aggregate demand curve. We start on the curve AD1 and the increase in the interest rate will move us to AD2. At the price level P1, the demand for real GDP declines from Y1 to Y2. Diff: 1 Type: ES Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve 42) The basic aggregate demand and aggregate supply curve model helps explain ________ fluctuations in real GDP and the price level. A) short-term B) long-term C) both short-term and long-term D) unrelated E) government-caused Answer: A Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 15 Copyright © 2024 Pearson Canada Inc.

43) Why is the business cycle so important to Canadian National Railway? A) Canadian National Railway plays a key role in setting the price level. B) Fewer goods are shipped by rail now than in the past. C) Consumer spending rises and falls with the business cycle, which causes demand for shipping services to rise and fall. D) The business cycle causes consumers to permanently increase their consumption of services, permanently reducing the demand for shipping by rail. E) The business cycle causes the federal government to invest more in upgrading the railway system. Answer: C Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle 44) The aggregate demand curve shows the relationship between the ________ and ________. A) inflation rate; quantity of real GDP demanded B) real interest rate; quantity of real GDP supplied C) nominal interest rate; quantity of real GDP demanded D) price level; quantity of real GDP demanded E) inflation rate; unemployment Answer: D Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 45) Because of the slope(s) of the ________, we can say that a decrease in the price level leads to a higher level of real GDP demanded. A) aggregate demand curve B) short-run aggregate supply curve C) long-run aggregate supply curve D) short-run and long-run aggregate supply curves E) consumption function Answer: A Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

46) Which of the following would not be considered a positive addition to household wealth? A) the equity in one's home B) 1000 shares of Bank of Montreal stock C) a credit card balance D) the balance in your chequing account E) a drop in the price level Answer: C Diff: 1 Type: MC Topic: Household Wealth Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 47) According to the "wealth effect," when the ________ falls, the ________ rises. A) inflation rate; nominal value of household assets B) unemployment rate; average level of household income C) price level; the nominal value of household wealth D) price level; the real value of household wealth E) the return of savings; the nominal value of household savings Answer: D Diff: 2 Type: MC Topic: Wealth Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 48) Which of the following best describes the "interest rate effect"? A) An increase in the price level raises the interest rate and chokes off government spending. B) An increase in the price level lowers the interest rate and chokes off government spending. C) An increase in the price level raises the interest rate and chokes off investment and consumption spending. D) An increase in the price level lowers the interest rate and chokes off investment and consumption spending. E) An increase in the price level raises the unemployment rate and chokes off interest in participating in the labour market. Answer: C Diff: 2 Type: MC Topic: Interest Rate Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

49) A decrease in the price level results in a(n) ________ in the quantity of real GDP demanded because a lower price level causes consumption, investment, and net exports to ________ A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease E) increase; remain constant Answer: B Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 50) When the price level in Canada rises relative to the price level of other countries, ________ will rise, ________ will fall, and ________ will fall. A) imports; exports; net exports B) exports; imports; net exports C) net exports; exports; imports D) net exports; imports; exports E) exports; net exports; imports Answer: A Diff: 2 Type: MC Topic: International Trade Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 51) The international trade effect states that a(n) ________ in the price level will ________ net exports. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase E) decrease; not affect Answer: B Diff: 1 Type: MC Topic: International Trade Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

52) Canada suffered a mild recession in the first half of 2020 due to A) falling consumer confidence. B) falling government spending. C) the rising value of the Canadian dollar. D) falling consumer spending due to COVID-19 pandemic. E) rising imports from China. Answer: D Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Predicting Shifts of the Aggregate Demand Curve 53) Which of the following is one explanation as to why the aggregate demand curve slopes downward? A) Increases in the price level lower the interest rate and decrease consumption spending. B) Increases in the price level lower the interest rate and decrease investment spending. C) Increases in the Canadian price level relative to the price level in other countries lower net exports. D) Increases in the price level raise real wealth and lower consumption spending. E) Increasing prices reduce nominal interest rates and spur additional government spending. Answer: C Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why the Aggregate Demand Curve is Downward Sloping 54) A decrease in the price level will A) shift the aggregate demand curve to the left. B) shift the aggregate demand curve to the right. C) move the economy up along a stationary aggregate demand curve. D) move the economy down along a stationary aggregate demand curve. E) have no impact on the economy. Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

55) Inflation will A) increase aggregate demand. B) increase the quantity of real GDP demanded. C) decrease aggregate demand. D) decrease the quantity of real GDP demanded. E) increase aggregate supply. Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve 56) Spending on the military is essentially categorized as government purchases. How do increases in spending on a military campaign affect the aggregate demand curve? A) They will move the economy down along a stationary aggregate demand curve. B) They will move the economy up along a stationary aggregate demand curve. C) They will shift the aggregate demand curve to the right. D) They will shift the aggregate demand curve to the left. E) As military personnel are not considered part of the labour force, a military campaign will have no impact on the economy. Answer: C Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 57) Falling oil prices made consumers in Alberta very pessimistic about their future incomes. How will this increased pessimism affect the aggregate demand curve? A) It will move the economy up along a stationary aggregate demand curve. B) It will move the economy down along a stationary aggregate demand curve. C) It will shift the aggregate demand curve to the left. D) It will shift the aggregate demand curve to the right. E) It will shift aggregate supply to the left. Answer: C Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

58) Lower personal income taxes A) increase aggregate demand. B) decrease disposable income. C) decrease aggregate demand. D) increase transfer payments. E) reduce household wealth. Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 59) Which of the following will shift the aggregate demand curve to the left, ceteris paribus? A) an increase in interest rates B) an increase in disposable income C) an increase in expected profits for firms D) an increase in net exports E) an increase in the price level Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 60) Which of the following is the most likely explanation for Canada's recession in 2020? A) Ontario car makers became more optimistic about export opportunities in the United States. B) Economy was mostly shut down due to fear of the spread of COVID-19. C) The government was rapidly cutting spending in attempt to balance the budget. D) Falling oil prices made new oil rigs and processing facilities less attractive investments. E) Canada entered into a trade war with Europe. Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking, Multicultural and Diversity

61) If the Canadian dollar increases in value relative to other currencies, how does this affect the aggregate demand curve? A) This will move the economy up along a stationary aggregate demand curve. B) This will move the economy down along a stationary aggregate demand curve. C) This will shift the aggregate demand curve to the left. D) This will shift the aggregate demand curve to the right. E) This will shift the aggregate supply curve to the left as the result of foreign direct investment. Answer: C Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 62) Last week, 16 Mexican pesos could purchase one Canadian dollar. This week, it takes 14 Mexican pesos to purchase one Canadian dollar. This change in the value of the dollar will ________ exports from Canada to Mexico and cause Canadian aggregate demand to ________. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase E) decrease; remain constant Answer: A Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 63) Suppose the Canadian GDP growth rate is slower relative to other countries' GDP growth rates. This will A) move the economy up along a stationary aggregate demand curve. B) move the economy down along a stationary aggregate demand curve. C) shift the aggregate demand curve to the left. D) shift the aggregate demand curve to the right. E) have no impact on aggregate demand. Answer: D Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

64) If aggregate demand just decreased, which of the following may have caused the decrease? A) a decrease in exports B) a decrease in the interest rate C) a decrease in the price level D) a decrease in imports E) a decrease in the income tax rate Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 65) How do changes in income tax policies affect aggregate demand? A) Higher taxes increase disposable income, consumption, and aggregate demand. B) Higher taxes reduce disposable income, consumption, and aggregate demand. C) Higher taxes increase corporate investment and aggregate demand. D) Higher taxes increase aggregate supply and thus increase aggregate demand as well. E) Higher taxes increase government revenue, which makes consumers more confident in the future, which increases aggregate demand. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 66) During the COVID-19 recession, from the fourth quarter of 2019 to the fourth quarter of 2020, consumer spending on residential construction ________ and consumer spending on services ________. A) declined by 25 percent; declined by 40 percent B) declined by 20 percent; increased by 20 percent C) increased by 20 percent; declined by 5 percent D) increased by 5 percent; increased by 10 percent Answer: C Diff: 2 Type: MC Topic: Business Cycle Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Which Components of Aggregate Demand Changed the Most during the 2020 Recession?

67) An increase in exports decreases aggregate demand. Answer: FALSE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 68) An increase in disposable income will shift the aggregate demand curve to the right. Answer: TRUE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 69) An increase in the price level causes a movement down the aggregate demand curve. Answer: FALSE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 70) Explain how lower income taxes affect the aggregate demand curve. Answer: Lowering the income tax increases the amount of disposable income available to households. Higher disposable income increases consumption at every price level. The result is a shift in the aggregate demand curve to the right. Diff: 2 Type: SA Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 71) Explain the three reasons the aggregate demand curve slopes downward. Answer: The three reasons are the wealth effect, the interest-rate effect, and the international-trade effect. In the wealth effect, an increase in the price level decreases the real value of household wealth, which decreases consumption. In the interest-rate effect, an increase in the price level raises interest rates, which decreases investment spending and consumption spending, particularly on durable goods. In the international-trade effect, an increase in the price level makes Canadian exports more expensive and foreign imports less expensive, which decreases net exports. Diff: 2 Type: SA Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

72) Explain how each of the following events would affect the aggregate demand curve. a. lower interest rates b. a decrease in net exports c. a decrease in the price level d. slower income growth in other countries e. a decrease in imports Answer: a. Lower interest rates would increase investment spending and consumer spending, particularly on durable goods, which would cause the aggregate demand curve to shift to the right. b. A decrease in net exports would cause the aggregate demand curve to shift to the left. c. A decrease in the price level would cause a movement along the aggregate demand curve. d. Slower income growth in other countries would decrease Canadian exports, which would cause the aggregate demand curve to shift to the left. e. A decrease in imports would cause net exports to be greater, causing the aggregate demand curve to shift to the right. Diff: 2 Type: SA Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve

73) Using an aggregate demand graph, illustrate the impact of an increase in the growth rate of Canadian GDP relative to the growth rate of foreign GDP. Answer:

The increase in the growth rate of Canadian GDP relative to the growth rate of foreign GDP will cause Canadian imports to increase faster than Canadian exports, and net exports will fall. This will result in a parallel leftward shift in the aggregate demand curve. We start on the curve AD1, and the increase in the growth rate of Canadian GDP relative to the growth rate of foreign GDP will move us to AD2. At the price level P1, the quantity of real GDP demanded declines from Y1 to Y2. Diff: 1 Type: SA Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve

9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve 1) The level of aggregate supply in the long run is not affected by A) changes in technology. B) changes in the capital stock. C) changes in the price level. D) changes in the number of workers. E) changes in the availability of natural resources. Answer: C Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 2) Potential GDP refers to the level of A) real GDP in the long run. B) nominal GDP in the long run. C) real GDP in the short run. D) nominal GDP in the short run. E) the maximum real GDP possible. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 3) The long-run aggregate supply curve A) has a negative slope. B) has a steep but positive slope. C) is horizontal. D) is vertical. E) has a steep but negative slope. Answer: D Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

4) If stricter immigration laws are imposed and many foreign workers in Canada are forced to go back to their home countries, A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) we will move up along the long-run aggregate supply curve. D) we will move down along the long-run aggregate supply curve. E) the short-run aggregate supply curve will shift to the right. Answer: B Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 5) What is potential GDP? A) It is the level of real GDP in the long run. B) It is the difference between current GDP and maximum GDP. C) It is the level of real GDP in the short run. D) It is the level of GDP at which inflation is constant. E) It is the maximum output possible in a period of time. Answer: A Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 6) Full-employment GDP is also known as A) realized GDP. B) potential GDP. C) politico-economic GDP. D) balanced-budget GDP. E) zero unemployment GDP. Answer: B Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

7) The long-run aggregate supply curve shows the relationship between the ________ and ________. A) inflation rate; quantity of real GDP demanded B) real interest rate; quantity of real GDP supplied C) nominal interest rate; quantity of real GDP supplied D) price level; quantity of real GDP supplied E) inflation rate; labour supply Answer: D Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 8) On the long-run aggregate supply curve, A) a decrease in the price level decreases the level of potential GDP. B) a decrease in the price level increases the aggregate quantity of GDP supplied. C) a decrease in the price level decreases the aggregate quantity of GDP supplied. D) a decrease in the price level has no effect on the aggregate quantity of GDP supplied. E) a decrease in the price level increases the level of aggregate supply only at very high levels of output. Answer: D Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 9) Changes in the price level A) increase the level of aggregate supply in the long run. B) decrease the level of aggregate supply in the long run. C) do not affect the level of aggregate supply in the long run. D) increase the level of aggregate supply in the long run only at very high levels of output. E) increase the level of aggregate supply in the long run only at very low levels of output. Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

10) The long-run aggregate supply curve will shift to the right if A) the economy experiences technological change. B) the economy has a decrease in population. C) the economy experiences high levels of inflation. D) net exports decrease. E) the resources fall in price. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 11) Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) the economy will move up along the long-run aggregate supply curve. D) the economy will move down along the long-run aggregate supply curve. E) the short-run aggregate supply curve will shift to the left. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 12) Which aggregate supply curve has a positive slope? A) long run only B) short run only C) neither long run nor short run D) neither, both long run and short run are perfectly vertical E) neither, both long run and short run are perfectly horizontal Answer: B Diff: 1 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

13) The short-run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly. A) positive; final goods and services; inputs B) infinite; final goods and services; inputs C) positive; inputs; final goods and services D) infinite; inputs; final goods and services E) zero; final goods; inputs Answer: A Diff: 1 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 14) All of the following are reasons why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services except A) unions are successful in pushing up wages. B) firms are often slow to adjust wages. C) contracts make prices "sticky." D) menu costs make some prices "sticky." E) contracts make wages "sticky." Answer: A Diff: 2 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 15) An increase in the price level will A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) shift the long run aggregate supply curve to the right. Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

16) If, due to a recession, workers begin to leave Canada to search for temporary work in other countries until the recession has ended, this will A) shift the short-run aggregate supply curve of the other country to the left. B) shift the short-run aggregate supply curve of the other country to the right. C) move the other country's economy up along a stationary short-run aggregate supply curve. D) move the other country's economy down along a stationary short-run aggregate supply curve. E) shift the other country's long-run aggregate supply to the left. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 17) The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation. What did this technological change do the short-run supply curve? A) It shifted the short-run aggregate supply curve to the left. B) It shifted the short-run aggregate supply curve to the right. C) It moved the economy up along a stationary short-run aggregate supply curve. D) It moved the economy down along a stationary short-run aggregate supply curve. E) It gave the short-run aggregate supply curve a negative slope. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 18) Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) shift the aggregate demand curve to the right. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

19) When the price level rises from 110 to 115, the aggregate level of GDP supplied rises from $80 billion to $120 billion. This ________ relationship represents the ________ relationship between the quantity of real GDP firms are willing to supply and the price level. A) negative; short-run B) positive; short-run C) negative; long-run D) positive; long-run E) positive; negative Answer: B Diff: 2 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 20) If full-employment GDP is equal to $1.9 trillion and the current price level is 130, what does the longrun aggregate supply curve look like? A) It is a horizontal line at 130 of real GDP. B) It is a vertical line at a level of real GDP below $1.9 trillion. C) It is a vertical line at $1.9 trillion of real GDP. D) It is a vertical line at a price level of 130. E) It is a horizontal line at a price level of 130. Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 21) Workers expect inflation to rise from 3% to 5% next year. As a result, this should A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) shift the long-run aggregate supply curve to the right. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

22) Workers and firms both expect that prices will be 2.5% higher next year than they are this year. As a result A) workers will be willing to take lower wages next year, but not lower than a 2.5 percent decrease. B) the purchasing power of wages will rise if wages increase by 2.5%. C) the short-run aggregate supply curve will shift to the left as wages increase. D) aggregate demand will increase by 2.5%. E) long-run aggregate supply will shift to the right by 2.5%. Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 23) Which of the following would cause the short-run aggregate supply curve to shift to the right? A) an increase in the price level B) a decrease in inflation expectations C) a technological advance D) an increase in interest rates E) an increase in the price of natural resources Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

Figure 9.3

24) Refer to Figure 9.3. Ceteris paribus, an increase in the labour force would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 25) Refer to Figure 9.3. Ceteris paribus, a decrease in the capital stock would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

26) Refer to Figure 9.3. Ceteris paribus, an increase in productivity would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 27) Refer to Figure 9.3. Ceteris paribus, an increase in the price level would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 28) Refer to Figure 9.3. Ceteris paribus, an increase in the expected future price level would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

29) Refer to Figure 9.3. Ceteris paribus, an increase in workers and firms adjusting to having previously overestimated the price level would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 30) Refer to Figure 9.3. Ceteris paribus, an increase in the expected price of an important natural resource would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 31) The long-run aggregate supply curve is vertical. Answer: TRUE Diff: 1 Type: TF Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 32) When potential GDP increases, long-run aggregate supply also increases. Answer: TRUE Diff: 2 Type: TF Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

33) Explain why the long-run aggregate supply curve is vertical. Answer: The long-run aggregate supply curve is vertical because in the long run, changes in the price level do not affect the number of workers, the capital stock, or technology, which are the factors that determine potential GDP. Diff: 2 Type: ES Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 34) What variables cause the short-run aggregate supply curve to shift? For each variable, identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. Answer: The variables that will cause the short-run aggregate supply to shift are: the size of the labour force, the size of the capital stock, productivity, the expected future price level, workers and firms adjusting to having previously underestimated the price level, and the expected price of an important natural resource. Increases in the labour force, the capital stock, or productivity will cause the short-run aggregate supply curve to shift to the right. Increases in the expected future price level, increases in the price of an important natural resource, and workers and firms adjusting to having previously underestimated the price level will cause the short-run aggregate supply curve to shift to the left. Diff: 2 Type: ES Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 35) Explain how "menu costs" affect the slope of the short-run aggregate supply curve. Answer: Menu costs make some prices sticky. As the price level rises, some firms will be reluctant to raise their prices. Sales at those firms will increase, and their output will increase. This creates the possibility that an increase in the price level will increase output. More menu costs can make the shortrun aggregate supply curve flatter. Diff: 2 Type: ES Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

36) The level of long-run aggregate supply is affected by all of the following, except A) changes in the price level. B) changes in technology. C) changes in capital stock. D) changes in the number of workers. E) changes in the availability of natural resources. Answer: A Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 37) The level of real GDP in the long run is called A) potential GDP. B) short-run GDP. C) frictional GDP. D) low-capacity GDP. E) zero unemployment GDP. Answer: A Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 38) The ________ curve is vertical. A) short-run aggregate supply B) short-run aggregate demand C) long-run aggregate supply D) long-run aggregate demand E) long-run consumption Answer: C Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

39) If the economy receives an influx of new workers from immigration, A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) we will move up along the long-run aggregate supply curve. D) we will move down along the long-run aggregate supply curve. E) the aggregate demand curve will shift to the left. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 40) The level of real GDP in the long run is A) potential GDP. B) affected by changes in the price level. C) determined solely by aggregate demand. D) the same as the level of nominal GDP in the long run. E) the maximum possible GDP in any given period. Answer: A Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 41) Potential GDP is also referred to as A) realized GDP. B) full-employment GDP. C) political-economic GDP. D) balanced-budget GDP. E) maximum GDP. Answer: B Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

42) The long-run aggregate supply curve shows the relationship between A) short-run aggregate supply and short-run aggregate demand. B) the price level and quantity of real GDP supplied. C) the real interest rate and the nominal interest rate. D) the quantity of real GDP supplied and the quantity of nominal GDP supplied. E) the supply of labour and the price level. Answer: B Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 43) On the long-run aggregate supply curve, A) an increase in the price level increases the aggregate quantity of GDP supplied. B) an increase in the price level reduces the aggregate quantity of GDP supplied. C) an increase in the price level has no effect on the aggregate quantity of GDP supplied. D) an increase in the price level increases the level of potential GDP. E) an increase in the price level increases the aggregate quantity GDP demanded. Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 44) Changes in ________ do not affect the level of aggregate supply in the long run. A) technology B) the number of workers in the economy C) the price level D) the amount of accumulated capital equipment E) the availability of natural resources Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

45) If technological change occurs in the economy, A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) we will move up along the long-run aggregate supply curve. D) we will move down along the long-run aggregate supply curve. E) the long-run aggregate supply curve will become steeper. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking, Use of Information Technology 46) Suppose a developing country experiences a reduction in machinery and capital equipment as foreign entrepreneurs decrease the amount of investment in the economy. As a result, A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) the economy will move up along the long-run aggregate supply curve. D) the economy will move down along the long-run aggregate supply curve. E) long-run aggregate supply will become more sensitive to price. Answer: B Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 47) The short-run aggregate supply curve has a(n) A) negative slope. B) positive slope. C) slope equal to infinity. D) slope equal to zero. E) indeterminate slope. Answer: B Diff: 1 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

48) The ________ curve has a positive slope because as prices of final goods and services rise, prices of inputs rise more slowly. A) short-run aggregate supply B) long-run aggregate supply C) short-run aggregate demand D) long-run aggregate demand E) short-run labour supply Answer: A Diff: 1 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 49) Which of the following is not a reason why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services? A) Contracts make prices "sticky." B) Firms are often slow to adjust wages. C) Menu costs make some prices "sticky." D) Unions are successful in pushing up wages. E) Contracts make wages "sticky." Answer: D Diff: 2 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 50) A decrease in the price level will A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) make the short-run aggregate supply function steeper. Answer: D Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

51) If workers leave a country to seek out better opportunities in another country, then this will A) shift the short-run aggregate supply curve of the original country to the left. B) shift the short-run aggregate supply curve of the original country to the right. C) move the original economy up along a stationary short-run aggregate supply curve. D) move the original economy down along a stationary short-run aggregate supply curve. E) move the original economy down along a stationary aggregate demand curve. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 52) The invention of the integrated circuit by Jack Kilby of Texas Instruments gave rise to the information age. What did this technological change do to the short-run supply curve? A) It shifted the short-run aggregate supply curve to the left. B) It shifted the short-run aggregate supply curve to the right. C) It moved the economy up along a stationary short-run aggregate supply curve. D) It moved the economy down along a stationary short-run aggregate supply curve. E) It made the short-run aggregate supply curve flatter. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking, Use of Information Technology 53) During 2020, most business were shut down to reduce the spread of COVID-19 pandemic. The result of this massive shut down was A) a shift of the short-run aggregate supply curve to the left. B) a shift of the short-run aggregate supply curve to the right. C) movement of the economy up along a stationary short-run aggregate supply curve. D) movement of the economy down along a stationary short-run aggregate supply curve. E) the short-run aggregate supply curve became steeper. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

54) When the price level falls from 135 to 120, the aggregate level of GDP supplied falls from $140 billion to $125 billion. This ________ relationship represents the ________ relationship between GDP and the price level. A) negative; short-run B) positive; short-run C) negative; long-run D) positive; long-run E) negative; medium-run Answer: B Diff: 2 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 55) If potential GDP is equal to $600 billion, what does the long-run aggregate supply curve look like? A) It is a horizontal line at $600 billion of GDP. B) It is a vertical line at a level of GDP below $600 billion. C) It is a vertical line at $600 billion of GDP. D) It is a vertical line at a level of GDP above $600 billion. E) It is a positively sloped line beginning at the origin and passing through a GDP of $600 billion. Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 56) Workers expect inflation to fall from 4% to 1% next year. As a result, this should A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) make the short-run aggregate supply curve steeper. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

57) Workers and firms both expect that prices will be 3% higher next year than they are this year. As a result, A) workers will be willing to take lower wages next year. B) the purchasing power of wages will rise if wages increase by 3%. C) the short-run aggregate supply curve will shift to the left as wages increase. D) aggregate demand will increase by 3%. E) the long-run aggregate supply curve will shift to the right by 3%. Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 58) Which of the following would cause the short-run aggregate supply curve to shift to the left? A) an increase in the price level B) an increase in inflation expectations C) a technological advance D) a decrease in interest rates E) the arrival of thousands of refugees Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 59) The short-run aggregate supply curve is vertical. Answer: FALSE Diff: 2 Type: TF Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 60) When potential GDP increases, short-run aggregate supply also increases, but long-run aggregate supply does not change. Answer: FALSE Diff: 2 Type: TF Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

61) What are sticky prices and how can contracts make them "sticky"? Answer: Prices or wages are said to be "sticky" when they do not respond quickly to changes in demand or supply. Contracts are legal agreements between the firm and another party that establishes a particular price to be paid over a period of time. For example, a union contract is a legal agreement between the firm and the union that workers are to be paid a certain wage. If conditions change over the contract period, the firm still must pay the wage agreed upon in the contract. This can make this firm's wages sticky. Firms also buy raw materials on contract. This fixes the price at which the firm buys the raw material over the contract period, so it also becomes a sticky price. Diff: 2 Type: SA Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 62) Why does the short-run aggregate supply curve slope upward? Answer: The short-run aggregate supply curve slopes upward because as the prices of final goods and services rise, the prices of inputs rise more slowly. The higher price level increases profits and the willingness of firms to supply more goods and services. A secondary reason the SRAS slopes upward is that, as the price level rises, some firms are slow to adjust their prices. A firm that raises its prices slowly when the price level increases may find that its sales increase and therefore it will increase production. Diff: 2 Type: SA Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 63) Explain how each of the following events would affect the long-run aggregate supply curve. a. a lower price level b. a decrease in the labour force c. a decrease in the quantity of capital goods d. technological change Answer: a. A lower price level would cause a movement along the long-run aggregate supply curve. b. A decrease in the labour force would cause the long-run aggregate supply curve to shift to the left. c. A decrease in the quantity of capital goods would cause the long-run aggregate supply curve to shift to the left. d. Technological change would cause the long-run aggregate supply curve to shift to the right. Diff: 2 Type: SA Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

64) Explain how each of the following events would affect the short-run aggregate supply curve. a. a decrease in the price level b. a decrease in what the price level is expected to be in the future c. a price level that is currently lower than expected d. an unexpected decrease in the price of an important raw material e. a decrease in the labour force Answer: a. A lower price level would cause a movement along the short-run aggregate supply curve. b. A decrease in what the price level is expected to be in the future would cause the short-run aggregate supply curve to shift to the right. c. A price level currently lower than expected would lead firms to decrease prices, causing the short-run aggregate supply curve to shift to the right. d. An unexpected decrease in the price of an important raw material would cause the short-run aggregate supply curve to shift to the right. e. decrease in the labour force would cause the short-run aggregate supply curve to shift to the left. Diff: 2 Type: SA Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium 1) Long-run macroeconomic equilibrium occurs when A) aggregate demand equals short-run aggregate supply. B) aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run supply curve. C) structural and frictional unemployment equals zero. D) output is above potential GDP. E) there is no pressure on the price level to change. Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 2) An increase in aggregate demand results in a(n) ________ in the ________. A) recession; long run B) expansion; long run C) expansion; short run D) recession; short run E) stagnation; short run Answer: C Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 3) Suppose there has been an increase in government spending. As a result, real GDP will ________ in the short run, and ________ in the long run. A) increase; increase further B) increase; decrease to its initial value C) decrease; decrease further D) decrease; increase to its initial level E) decrease; remain at this lower level Answer: B Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

4) A decrease in investment causes the price level to ________ in the short run and ________ in the long run. A) increase; increase further B) increase; decrease C) decrease; decrease further D) decrease; increase E) increase; remain at this higher level Answer: C Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 5) An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run. A) the price level; real GDP B) nominal GDP; real GDP C) the price level; the price level D) real GDP; the price level E) nominal GDP; the price level Answer: D Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 6) Governments often attempt to fight a recession by A) increasing spending and cutting taxes, which shifts the aggregate demand curve to the right. B) increasing spending and cutting taxes, which shifts the aggregate demand curve to the left. C) increasing taxes to increase the supply of loanable funds. D) discouraging private investment. E) closing the economy to competition from foreign firms. Answer: A Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Special Feature: Apply the Concept: Was the 2020 COVID-19 Recession a Supply Shock or a Demand Shock?

7) When the aggregate demand curve and the short-run aggregate supply curve intersect, A) the long-run aggregate supply curve must also intersect at the same point. B) inflation must be increasing. C) structural and frictional unemployment equal zero. D) the economy is in short-run macroeconomic equilibrium. E) the economy likely to experience higher than normal unemployment. Answer: D Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 8) Assume interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run? A) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise. B) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise. C) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall. D) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall. E) Aggregate demand will rise; the equilibrium price level will rise, and potential GDP will fall. Answer: A Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 9) A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run? A) The price level will fall, and the level of GDP will be unaffected. B) The price level will fall, and the level of GDP will fall. C) The price level will rise, and the level of GDP will fall. D) The price level will rise, and the level of GDP will be unaffected. E) The price level will fall, and the long-run level of GDP will become more sensitive to changes in the price level. Answer: A Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

10) If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium, A) GDP will be below potential GDP. B) aggregate demand will increase. C) GDP will be above potential GDP. D) GDP will be equal to potential GDP. E) unemployment will fall. Answer: A Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 11) The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as A) monetary policy. B) an automatic mechanism. C) "releasing sticky prices." D) fiscal policy. E) government neutrality. Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 12) Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run? A) Output will decline. B) Prices will decline. C) Unemployment will decline. D) The aggregate demand curve will shift to the left. E) The short-run aggregate supply curve will shift to the right. Answer: C Diff: 2 Type: MC Topic: Expansion in the Short Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

13) Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? A) Output will decrease. B) Prices will increase. C) Unemployment will rise. D) Short-run aggregate supply will shift to the right. E) Aggregate demand will shift to the right. Answer: D Diff: 3 Type: MC Topic: Expansion in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 14) Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand? A) Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices. B) Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices. C) Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices. D) Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices. E) Workers and firms adjust their expectations of output and price levels upward and they thus accept lower output as normal. Answer: A Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 15) The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________. A) raises; recession; lowers; expansion B) raises; expansion; raises; recession C) lowers; expansion; lowers; recession D) lowers; recession; raises; expansion E) lowers; a peak; lowers; a trough Answer: D Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

Figure 9.5

16) Refer to Figure 9.5. Which of the points in the above graph are possible long-run equilibria? A) A and B B) A and C C) A and D D) B and D E) C and D Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 17) Refer to Figure 9.5. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y1 represents potential GDP. A) A and B B) A and C C) B and C D) C and D E) B and D Answer: E Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 54 Copyright © 2024 Pearson Canada Inc.

18) Refer to Figure 9.5. Suppose the economy is at point A. If consumer spending increases in the economy, where will the eventual long-run equilibrium be? A) A B) B C) C D) D E) None of these points are long-run equilibria. Answer: C Diff: 2 Type: MC Topic: Expansion in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 19) Refer to Figure 9.5. Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be? A) A B) B C) C D) D E) None of these points are long-run equilibria. Answer: A Diff: 2 Type: MC Topic: Recession in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 20) Refer to Figure 9.5. Suppose the economy is at point A. If the economy experiences a supply shock, where will the eventual short-run equilibrium be? A) A B) B C) C D) D E) None of these points are consistent with a short-run equilibrium following a supply shock. Answer: B Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

21) ________ of unemployment during ________ make it easier for workers to ________ wages. A) High levels; a recession; negotiate higher B) Low levels; an expansion; negotiate higher C) Low levels; a recession; accept lower D) High levels; an expansion; accept lower E) High levels; an expansion; negotiate higher Answer: B Diff: 2 Type: MC Topic: Expansion and Automatic Adjustment Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 22) A negative supply shock in the short run causes A) the aggregate supply curve to shift to the left. B) the price level to fall. C) unemployment to fall. D) equilibrium real GDP to rise. E) potential GDP to rise. Answer: A Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 23) Which of the following is considered a negative supply shock? A) increasing immigration in the economy causes the labour supply to rise B) an improvement in technology C) an increase in unemployment D) an unexpected decrease in the refining capacity for oil E) an increase in the capital stock Answer: D Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

24) The long-run adjustment to a negative supply shock results in A) the short-run aggregate supply curve shifting to the right. B) the price level rising. C) unemployment rising. D) workers being willing to accept higher wages. E) aggregate demand shifting to the left. Answer: A Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 25) In the long run, A) GDP > potential GDP. B) unemployment is at its natural rate. C) LRAS and SRAS lie on the same line. D) the inflation rate is zero. E) the aggregate demand curve becomes flat. Answer: B Diff: 1 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 26) When the price of oil rises unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run. A) rises; falls B) rises; rises C) falls; falls D) falls; rises E) falls; remains constant Answer: B Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

27) After an unexpected increase in the price of oil, the long-run adjustment ________ the price level and causes the unemployment rate to ________ as they return to their original levels. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease E) decreases; remain constant Answer: B Diff: 3 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 28) Stagflation occurs when A) inflation rises and nominal GDP rises. B) inflation falls and real GDP rises. C) inflation rises and real GDP falls. D) inflation falls and real GDP falls. E) inflation falls and nominal GDP falls. Answer: C Diff: 1 Type: MC Topic: Stagflation Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 29) Stagflation usually results from A) a supply shock. B) a decrease in aggregate demand. C) an increase in aggregate supply. D) an increase in aggregate demand. E) an increase in the capital stock. Answer: A Diff: 1 Type: MC Topic: Stagflation Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

30) An economy is likely to recover from a recession quickly (without government intervention) when A) it is caused by a negative supply shock and wages are fixed. B) it is caused by a leftward shift in aggregate demand and wages are fixed. C) it is caused by a leftward shift in aggregate demand and wages are flexible. D) it is caused by a financial crisis. E) it is caused by a leftward shift in aggregate supply and output prices are fixed. Answer: C Diff: 1 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Special Feature: Apply the Concept: Does Government Intervention Help Fight a Recession? 31) At a short-run macroeconomic equilibrium, real GDP is always equal to potential GDP. Answer: FALSE Diff: 1 Type: TF Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 32) Stagflation occurs when aggregate supply and aggregate demand both increase. Answer: FALSE Diff: 1 Type: TF Topic: Short-Run Aggregate Supply Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 33) A decrease in government spending will result in a decrease in the price level and a decrease in real GDP in the long run. Answer: FALSE Diff: 2 Type: TF Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

34) Using aggregate demand and aggregate supply, explain what happens in the short run if the Bank of Canada lowers interest rates in the economy. Be sure to detail what happens to aggregate demand, the price level, the level of GDP, and unemployment. Assume that the economy is at full employment before the interest rate decrease. Answer: A decrease in the interest rate will cause aggregate demand to increase. Interest costs are part of the cost of borrowing and as they fall, both firms and households will increase spending. This shifts the aggregate demand curve to the right. This raises equilibrium GDP above potential GDP. As production increases for many firms, they begin to hire more workers, and unemployment falls. The increasing demand also raises the price level. The economy is expanding. Diff: 2 Type: ES Topic: Recession in the Short Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 35) Explain how the economy moves back to full employment from recession. Be sure to detail what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price level. Answer: When an economy enters a recession, sales fall and unemployment rises via the automatic adjustment mechanism. The unemployment resulting from the recession makes workers more willing to accept lower wages. The slack demand will make firms willing to accept lower prices for their goods. In addition, the decline in the price level that occurs when the economy went into recession also makes workers willing to accept lower wages, and firms accept lower prices. This shifts the short-run aggregate supply curve to the right and moves the economy back toward potential GDP. Unemployment falls back to the natural level, and the price level falls. Diff: 2 Type: ES Topic: Recession in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

36) Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth. Answer:

Before the decline in demand, the economy begins at point C with GDP at Y1. The decline in wealth shifts the aggregate demand curve to the left from AD1 to AD2. As a result, prices fall and output declines. Unemployment also rises as the economy falls below potential GDP (point B). The slowing economy causes workers and firms to adjust their expectations about wages and prices downward. Eventually this will cause them to accept lower wages and prices, which will shift the short-run aggregate supply curve to the right. Eventually, the economy moves to point A, with real GDP restored back to potential GDP at Y1 and prices even lower. The unemployment rate goes back to the natural level. Diff: 3 Type: ES Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

37) Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a negative supply shock. Answer:

The economy is at point A with the price level equal to P1 and the amount of real GDP at Y1. Y1 is also the level of potential output. A negative supply shock, such as an unexpected increase in the price of oil, will shift the SRAS curve to the left, so that the economy ends up at point B. This will increase the price level from P1 to P2. Unemployment rises as real GDP falls to Y2 which is below potential GDP. Diff: 2 Type: ES Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

38) Using the aggregate supply and demand model, illustrate what happens in the long run when the economy suffers a supply shock. Begin your analysis by assuming the economy has suffered the supply shock in the short run, but has not yet adjusted to it in the long run. Answer:

The economy is at point B with the price level equal to P2 and the amount of real GDP at Y2. The economy is at short-run equilibrium after a supply shock. Rising unemployment and falling output result in workers being willing to accept lower wages and firms being willing to accept lower prices. This will shift the SRAS curve to the right as their expectations change. This lowers the price level from P2 to P1 and raises real GDP from Y2 to Y1. Unemployment falls as real GDP rises back to potential GDP at Y1. Diff: 2 Type: ES Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 39) Long-run macroeconomic equilibrium occurs when aggregate demand ________ short-run aggregate supply and they ________ the long-run supply curve. A) equals; intersect at a point to the right of B) equals; intersect at a point on C) is greater than; intersect at a point to the left of D) is less than; intersect at a point to the right of E) equals; intersect at a point to the left of Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

40) A decrease in aggregate demand results in a(n) ________ in the ________. A) recession; long run B) expansion; long run C) expansion; short run D) recession; short run E) recovery; long run Answer: D Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 41) There has been a decrease in investment. As a result, real GDP will ________ in the short run, and ________ in the long run. A) increase; increase further B) increase; decrease to its initial value C) decrease; decrease further D) decrease; increase to its initial level E) increase; grow more quickly Answer: D Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 42) An increase in investment causes the price level to ________ in the short run and ________ in the long run. A) increase; increase further B) increase; decrease C) decrease; decrease further D) decrease; increase E) increase; remain constant Answer: A Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

43) A decrease in aggregate demand causes a decrease in ________ only in the short run, but causes a decrease in ________ in both the short run and the long run. A) the price level; real GDP B) real GDP; real GDP C) the price level; the price level D) real GDP; the price level E) unemployment; real GDP Answer: D Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 44) Short-run macroeconomic equilibrium occurs when A) aggregate demand and short-run aggregate supply intersect. B) the equilibrium lies on the long-run aggregate supply curve. C) structural unemployment equal zero. D) cyclical unemployment is equal to zero. E) frictional unemployment equal zero. Answer: A Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 45) Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run? A) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall. B) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall. C) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise. D) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise. E) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will fall. Answer: A Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

46) In July 2020, the Canadian economy started to recover from recession. One important reason of the recovery was A) prices of natural resources and raw materials did not fall during the recession. B) Canada's trade partners were experiencing rapid inflation after the recession. C) Canadian banks cut lending during the recession. D) increases in private spending and investment. E) increases in government spending and reduced taxation. Answer: D Diff: 1 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Special Feature: Apply the Concept: Was the 2020 COVID-19 Recession a Supply Shock or a Demand Shock? 47) An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run? A) The price level will fall and the level of GDP will rise. B) The price level will fall and the level of GDP will fall. C) The price level will rise and the level of GDP will fall. D) The price level will rise and the level of GDP will be unaffected. E) The price level will be unaffected and the level of GDP will rise. Answer: D Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 48) Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium? A) the leftward shift of the short-run aggregate supply curve that occurs after a recession B) the rightward shift of the short-run aggregate supply curve that occurs after a recession C) the leftward shift of the aggregate demand curve that occurs after a recession D) the rightward shift of the aggregate demand curve that occurs after a recession E) the rightward shift of the long-run aggregate supply curve that occurs after a recession Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

49) Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run? A) Output will rise. B) Prices will rise. C) Unemployment will rise. D) The aggregate demand curve will shift to the right. E) Net exports will rise. Answer: C Diff: 2 Type: MC Topic: Expansion in the Short Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 50) Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? A) Output will increase. B) Prices will decline. C) Unemployment will decline. D) Wages will rise. E) The exchange rate will rise. Answer: D Diff: 3 Type: MC Topic: Expansion in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 51) Why does the short-run aggregate supply curve shift to the left in the long run, following an increase in aggregate demand? A) Workers and firms adjust their expectations of wages and prices downward, and they accept lower wages and prices. B) Workers and firms adjust their expectations of wages and prices downward, and they push for higher wages and prices. C) Workers and firms adjust their expectations of wages and prices upward, and they push for higher wages and prices. D) Workers and firms adjust their expectations of wages and prices upward, and they accept lower wages and prices. E) Workers and firms adjust their expectations of output downward, firms accept lower profits, and workers accept lower wages. Answer: C Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

52) The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________. A) raises; recession; lowers; expansion B) lowers; expansion; lowers; recession C) raises; expansion; raises; recession D) lowers; recession; raises; expansion E) lowers; expansion; lower; recession Answer: D Diff: 3 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Figure 9.5

53) Refer to Figure 9.5. Which of the points in the above graph are possible short-run equilibria? A) A and B B) A and C C) A and D D) B and C E) A, B, C, and D Answer: E Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 68 Copyright © 2024 Pearson Canada Inc.

54) Refer to Figure 9.5. Which of the points in the above graph are possible long-run equilibria? A) A and B B) A and C C) B and D D) B and C E) C and D Answer: B Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 55) Refer to Figure 9.5. Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long-run equilibrium be? A) A B) B C) C D) D E) The resulting long-run equilibrium is not shown in the figure. Answer: A Diff: 2 Type: MC Topic: Expansion in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 56) Refer to Figure 9.5. Suppose the economy is at point A. If government spending increases in the economy, where will the eventual long-run equilibrium be? A) A B) B C) C D) D E) The resulting long-run equilibrium is not shown in the figure. Answer: C Diff: 2 Type: MC Topic: Recession in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

57) ________ of unemployment during ________ make it more likely that workers will ________ wages. A) High levels; a recession; accept lower B) Low levels; an expansion; accept lower C) Low levels; a recession; negotiate higher D) High levels; an expansion; negotiate higher E) Low levels; a recession; accept lower Answer: A Diff: 2 Type: MC Topic: Expansion and Automatic Adjustment Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 58) Ceteris paribus, in the long run, a negative supply shock causes A) the long-run aggregate supply curve to shift to the left. B) the price level to rise initially, and then return to its lower level. C) unemployment to fall below its short-run level. D) equilibrium real GDP to fall. E) higher labour force participation. Answer: B Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 59) Which of the following is considered a negative supply shock? A) increasing investment in the economy causes the capital stock to rise B) an unexpected increase in the price of natural gas C) a decline in wages D) an improvement in technology E) a drop in investment spending Answer: B Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

60) In the long run, A) total unemployment = frictional unemployment + structural unemployment. B) total unemployment = frictional unemployment + cyclical unemployment. C) total unemployment = structural unemployment + cyclical unemployment. D) total unemployment = structural unemployment + seasonal unemployment. E) total unemployment = seasonal unemployment + cyclical unemployment. Answer: A Diff: 1 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 61) When the price of oil falls unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run. A) rises; falls B) rises; rises C) falls; falls D) falls; rises E) remains constant; falls Answer: C Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 62) After an unexpected increase in the price of oil, the long-run adjustment ________ the price level and ________ the unemployment rate as they return to their original levels. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) remains constant; increases Answer: D Diff: 3 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

63) A rapid increase in the price of oil will tend to A) shift short-run aggregate supply to the left. B) shift long-run aggregate supply to the left. C) shift long-run aggregate supply to the right. D) shift aggregate demand to the right. E) shift short-run aggregate supply to the right. Answer: A Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 64) If rapid increases in oil prices caused price levels to increase and real GDP to decrease in the short run, the economy would experience A) stagflation. B) long-run economic decline. C) hyperinflation. D) an increase in the natural rate of unemployment. E) a depression. Answer: A Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 65) Stagflation occurs when inflation ________ and GDP ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls E) remains unchanged; rises Answer: B Diff: 1 Type: MC Topic: Stagflation Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

66) Stagflation is often a result of A) a negative supply shock. B) a decrease in aggregate demand. C) an increase in aggregate demand. D) an increase in aggregate supply. E) an increase in the long-run growth rate. Answer: A Diff: 1 Type: MC Topic: Stagflation Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 67) The COVID-19 pandemic caused A) an aggregate supply shock, but no aggregate demand shock. B) an aggregate demand shock, but no aggregate supply shock. C) both an aggregate supply shock and an aggregate demand shock. D) neither an aggregate supply shock nor an aggregate demand shock. E) workers to accept much lower wages. Answer: C Diff: 1 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Special Feature: Apply the Concept: Was the 2020 COVID-19 Recession a Supply Shock or a Demand Shock? 68) At a long-run macroeconomic equilibrium, real GDP is always equal to potential GDP. Answer: TRUE Diff: 1 Type: TF Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 69) Stagflation occurs when short-run aggregate supply decreases. Answer: TRUE Diff: 1 Type: TF Topic: Short-Run Aggregate Supply Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

70) An increase in government spending will result in an increase in the price level and an increase in real GDP in the long run. Answer: FALSE Diff: 2 Type: TF Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 71) What is the relationship among the AD, SRAS, and LRAS curves when the economy is in macroeconomic equilibrium? Answer: When the economy is in long-run equilibrium, the short-run aggregate supply curve and the aggregate demand curve intersect at a point on the long-run aggregate supply curve. Diff: 1 Type: SA Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 72) Using aggregate demand and aggregate supply, explain what happens in the short run if the Bank of Canada raises interest rates in the economy. Be sure to detail what happens to aggregate demand, the price level, the level of GDP, and unemployment. Assume that the economy is at full employment before the interest rate increase. Answer: An increase in the interest rate will cause aggregate demand to decline. Interest costs are part of the cost of borrowing and as they rise, both firms and households will cut back on spending. This shifts the aggregate demand curve to the left. This lowers equilibrium GDP below potential GDP. As production falls for many firms, they begin to lay off workers and unemployment rises. The declining demand also lowers the price level. The economy is in recession. Diff: 2 Type: SA Topic: Recession in the Short Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 73) What is a supply shock, and why might a supply shock lead to stagflation? Answer: A supply shock is an unexpected event that causes a shift in short-run aggregate supply. An adverse supply shock causes the short-run aggregate supply curve to shift to the left, causing an increase in the price level and a decrease in real GDP. An increase in the price level occurring at the same time as a decrease in real GDP is known as stagflation. Diff: 2 Type: SA Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

74) Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is an increase in wealth. Answer:

Before the increase in demand, the economy begins at point A with GDP at Y1. The increase in wealth shifts the aggregate demand curve to the right from AD2 to AD1. As a result, prices rise and output increases. Unemployment also falls as the economy rises above potential GDP (point D). The growing economy causes workers and firms to adjust their expectations about wages and prices upward. As wages and prices rise, this will shift the short-run aggregate supply curve to the left. Eventually, the economy moves to point C, with real GDP restored back to potential GDP at Y1 and prices are even higher. The unemployment rate goes back to the natural level. Diff: 3 Type: SA Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 75) Why are the long-run effects of an increase in aggregate demand on price and output different from the short-run effects? Answer: The long-run effects differ from the short-run effects of an increase in aggregate demand because the long-run and the short-run aggregate supply curves differ. With a vertical LRAS, changes in AD only affect the price level, not real GDP. With an upward sloping SRAS, changes in AD impact both the price level and real GDP. Diff: 2 Type: SA Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 75 Copyright © 2024 Pearson Canada Inc.

9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions 1) Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply? A) Potential real GDP increases continuously. B) The aggregate demand curve shifts to the right during most periods. C) The short-run aggregate supply curve shifts to the right except during periods when workers and firms expect higher wages. D) Aggregate demand and potential real GDP decrease continuously. E) Potential GDP does not depend on the price level. Answer: D Diff: 1 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 2) Which of the following is one reason for the decline in aggregate demand that led to the recession of 2008-2009? A) falling oil prices B) increases in housing prices C) the U.S. financial crisis D) a decline in government spending E) a shrinking Canadian labour force Answer: C Diff: 1 Type: MC Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

Figure 9.7

3) Refer to Figure 9.7. In the figure above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1, while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2? A) 2% B) 8% C) 9.1% D) 10% E) 12% Answer: D Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 4) Refer to Figure 9.7. Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2? A) 0.9% B) 1.8% C) 2.7% D) 3.0% E) 10% Answer: B Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 77 Copyright © 2024 Pearson Canada Inc.

5) Refer to Figure 9.7. In the figure above, AD1, LRAS1 and SRAS1 denote AD, LRAS and SRAS in year 1, while AD2, LRAS2 and SRAS2 denote AD, LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2? A) 2.5% B) 7.3% C) 8.0% D) 10.0% E) 12.1% Answer: B Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 6) Refer to Figure 9.7. Given the economy is at point A in year 1, what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2? A) 0.3% B) 1.1% C) 2.7% D) 3.7% E) 7.3% Answer: C Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 7) Refer to Figure 9.7. Given the economy is at point A in year 1, what will happen to the unemployment rate in year 2? A) It will rise. B) It will fall. C) It will remain constant. D) Only structural unemployment will fall. E) There is not enough information to answer the question. Answer: A Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills

8) When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, ________ occurred. A) stagflation B) an automatic destabilizer C) a housing bubble D) a supply shock E) a decrease in household debt Answer: C Diff: 2 Type: MC Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 9) At the beginning of the recession of 2008-2009, real GDP in Canada was ________ potential GDP, and in mid-2010, real GDP was ________ potential GDP. A) below; above B) below; below C) above; below D) above; above E) equal to; below Answer: C Diff: 2 Type: MC Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 10) In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS, A) inflation occurs. B) deflation occurs. C) stagflation occurs. D) disinflation occurs. E) unemployment rises. Answer: A Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

11) Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise? A) SRAS shifted to the right by more than LRAS. B) AD shifted to the right by more than SRAS. C) AD shifted to the right by less than SRAS. D) SRAS and AD do not shift. E) The shift in LRAS was caused by a rise in investment. Answer: D Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Special Feature: Solved Problem: Showing the Millennium Economic Boom on a Dynamic Aggregate Demand and Aggregate Supply Graph 12) In Canada, because shipping plays such an important role in the economy, declines in cargo volumes reflect A) increases in short-run aggregate supply. B) increases in inflation. C) declines in aggregate demand. D) decreases in long-run aggregate supply. E) a leftward shift in short-run aggregate supply. Answer: C Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 13) The dynamic aggregate demand and aggregate supply model assumes that potential GDP increases over time. Answer: TRUE Diff: 2 Type: TF Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 14) Inflation is generally the result of total spending growing faster than total production. Answer: TRUE Diff: 2 Type: TF Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

15) One factor which brought on the recession of 2008-2009 was the collapse of the U.S. housing bubble. Answer: TRUE Diff: 1 Type: TF Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 16) In the dynamic aggregate demand and aggregate supply model, what is the result of aggregate demand increasing slower than potential real GDP? Answer: Aggregate demand increasing slower than potential real GDP results in recession. Diff: 2 Type: ES Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 17) Explain how the aggregate demand and aggregate supply model can be made more dynamic. Answer: We can make the aggregate demand and aggregate supply model dynamic rather than static by making three changes to the basic model. First, potential real GDP increases continually because the long-run aggregate supply curve continually shifts to the right. This is because workers are continually entering the labour force, technological change occurs, and the economy accumulates machinery and tools. Second, aggregate demand increases during most years. This is because population and income increases over time. Finally, the short-run aggregate supply curve shifts to the right, except for periods of time when workers and firms expect high rates of inflation. Diff: 2 Type: ES Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

18) Explain how the static aggregate demand and aggregate supply model gives us misleading results about the price level, particularly with respect to decreases in aggregate demand. Describe how the aggregate demand curve is different in the dynamic model as compared to the static model. Describe how potential GDP is different in the dynamic model as compared to the static model. Answer: The static model incorrectly predicts that a recession caused by a shift to the left in the aggregate demand curve will cause the price level to fall. This has not happened for an entire year since the 1930s. The misleading results stem from one assumption of the static model: the economy does not experience continuing inflation. The dynamic model changes this by assuming instead that the aggregate demand curve will shift to the right during most years. Even if demand growth slows, the price level rises. Also in the dynamic model, potential GDP is constantly growing. If the aggregate demand curve shifts to the right by less than the shift in the long-run aggregate supply curve, then equilibrium GDP falls below potential GDP, but the price level is still rising. Diff: 3 Type: ES Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

19) Use the dynamic model of aggregate demand and supply to illustrate a situation where the economy is growing but experiencing inflation in the long run. Answer:

If the aggregate demand curve shifts to the right faster than the short-run aggregate supply curve, this can cause inflation. Beginning at point A, AD1 shifts to the right, say because of an increase in government spending due to the war in Iraq. LRAS1 shifts to the right because of the long-run growth in the economy. However, it shifts by less than the aggregate demand curve. The graph also shows the short-run aggregate supply curve shifting to the right by a horizontal distance that is a relatively smaller amount than the aggregate demand curve shift. As a result, the economy ends up at a final equilibrium at point B. The price level has increased. Diff: 2 Type: ES Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 20) Which of the following is an assumption of the dynamic aggregate demand-aggregate supply model? A) Aggregate demand and short-run aggregate supply shift to the right in most years. B) Potential GDP is constant. C) Actual GDP is determined by the intersection of aggregate demand and long-run aggregate supply. D) The short-run aggregate supply shifts continuously to the left. E) Potential GDP is a function of the price level. Answer: A Diff: 1 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 83 Copyright © 2024 Pearson Canada Inc.

21) Which of the following is one reason for the decline in aggregate demand that led to the recession of 2008-2009? A) high oil prices B) an increase in investment C) a drop in net exports D) a decline in government spending E) a decline consumer spending Answer: C Diff: 1 Type: MC Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Figure 9.8

22) Refer to Figure 9.8. In the figure above, AD1, LRAS1, and SRAS1 denote AD, LRAS, and SRAS in year 1, while AD2, LRAS2, and SRAS2 denote AD, LRAS, and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2? A) 1.6% B) 2.5% C) 3.1% D) 5.25% E) 6.5% Answer: B Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills

23) Refer to Figure 9.8. Given the economy is at point A in year 1, what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2? A) 0.05% B) 0.625% C) 2.5% D) 3.125% E) 5% Answer: B Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 24) Refer to Figure 9.8. Given the economy is at point A in year 1, the unemployment rate will ________ and the price level will ________ in year 2. A) rise; rise B) rise; fall C) fall; rise D) fall; fall E) fall; remain the same Answer: A Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 25) Because of the COVID-19 pandemic, in the second quarter of 2020 the new short-run equilibrium occurred where GDP had ________ and the price level had ________. A) risen; increased B) risen; declined C) fallen; increased D) fallen; declined E) fallen; unchanged Answer: D Diff: 2 Type: MC Topic: What Is the Cause of Inflation? Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

26) Which of the following was not a cause for the Canadian recession of 2008-2009? A) the recession in the U.S. B) the collapse of the Canadian housing market C) the global financial crisis D) the rapid drop in commodity prices E) a decline in global interbank lending Answer: B Diff: 1 Type: MC Topic: Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 27) In the dynamic aggregate demand and aggregate supply model, inflation occurs if A) AD shifts faster than SRAS. B) AD shifts slower than SRAS. C) SRAS shifts faster than AD. D) LRAS shifts faster than AD. E) LRAS shifts faster than SRAS. Answer: A Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 28) Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP falls? A) SRAS shifted to the right by more than LRAS. B) AD shifted to the right by more than SRAS. C) AD shifted to the right by less than SRAS. D) AD did not shift and SRAS shifted to the left. E) LRAS shifted leftward and AD shifted rightward. Answer: D Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Special Feature: Solved Problem: Showing the Millennium Economic Boom on a Dynamic Aggregate Demand and Aggregate Supply Graph

29) Economists and industry analysts pay close attention to the volume of rail cargo shipments because changes in rail shipments have historically been good indicators of A) future oil prices. B) future exchange rate changes. C) future economic activity. D) past decreases in marginal tax rates. E) potential GDP. Answer: C Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle 30) The dynamic aggregate demand and aggregate supply model assumes that potential GDP is constant across time. Answer: FALSE Diff: 2 Type: TF Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 31) Inflation is generally the result of total spending growing slower than total production. Answer: FALSE Diff: 2 Type: TF Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 32) One factor that brought on the recession of 2008-2009 was a financial crisis. Answer: TRUE Diff: 1 Type: TF Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 33) In the dynamic aggregate demand and aggregate supply model, what is the result of aggregate demand increasing faster than potential real GDP? Answer: Aggregate demand increasing faster than potential real GDP results in inflation. Diff: 2 Type: SA Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 87 Copyright © 2024 Pearson Canada Inc.

34) In the dynamic aggregate demand and aggregate supply model, what is the result of aggregate demand increasing slower than potential real GDP? Answer: Aggregate demand increasing slower than potential real GDP results in recession. Diff: 2 Type: SA Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 35) Explain whether Canadian National Railway's sales are likely to fluctuate more or less than the sales of each of the following firms as the economy moves from recession to expansion and back to recession. -Whirlpool Corporation (appliance manufacturer) -Taco Bell -Bombardier (aircraft manufacturer) -EB Games (video game sales) Answer: Canadian National Railway's sales are likely to fluctuate during the business cycle less than the sales of Whirlpool and Bombardier, but more than the sales of Taco Bell and EB Games. Appliances and aircraft are expensive durable goods that are sensitive to changes in economic conditions. On the other hand, fast food and video games are relatively inexpensive consumer goods that are relatively less sensitive to changes in economic conditions. Diff: 2 Type: SA Topic: The Business Cycle Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle

36) Use the dynamic model of aggregate demand and supply to illustrate a situation where aggregate demand and short-run aggregate supply are both increasing from year 1 to year 2, resulting in a higher price level and higher level of real GDP at macroeconomic equilibrium in year 2. Answer:

AD1, SRAS1, and LRAS1 all represent year 1. AD2, SRAS2, and LRAS2 all represent year 2. Beginning at point A, AD1 shifts to the right by more than SRAS1 shifts to the right. LRAS1 shifts to the right because of the long-run growth in the economy. However, it shifts by less than the aggregate demand curve. The graph also shows the short-run aggregate supply curve shifting to the right by a horizontal distance that is a relatively smaller amount than the aggregate demand curve shift. As a result, the economy ends up at a final equilibrium at point B, with a higher price level (P2) and a higher level of real GDP (Y2). Diff: 2 Type: SA Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills

37) The winter of 2015 saw ridiculous levels of snowfall in the Maritimes and parts of eastern Canada. As a result, there were unexpected closures of business and government offices. Suppose that this caused an increase in the price level and a decline in real GDP in 2015. Also assume that potential real GDP continued to grow due to other factors. You can assume the aggregate demand curve did not change. Show the macroeconomic equilibrium for 2014 and 2015 using the dynamic aggregate supply and aggregate demand model. Answer:

The economy began at the point (Y1, P1) on the aggregate demand curve in 2014. The severe weather events were supply shocks, which shifted the SRAS curve to the left. The economy ended up at the shortrun equilibrium in 2015 with the price level rising from P1 to P2 and real GDP falling from Y1 to Y2. The economy ended up at a real GDP level Y2, which was below the potential level of GDP for 2015 which was at Y3. Unemployment rose in the economy as a result. Diff: 3 Type: SA Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills

9.5

Understand macroeconomic schools of thought

1) Which of the following models relies on emphasizing the importance of sticky wages and prices? A) the monetarist model B) the new classical model C) the real business cycle model D) the new Keynesian model E) the Austrian model Answer: D Diff: 1 Type: MC Topic: New Keynesians Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 2) The new classical model has as its central idea that A) wage and price stickiness explain fluctuations in real GDP. B) workers and firms have rational expectations. C) the Federal Reserve should adopt a monetary growth rule. D) shifts in aggregate demand have no impact on real GDP. E) excessive growth in bank credit explains fluctuations in real GDP. Answer: B Diff: 1 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 3) Which of the following models advocate that the quantity of money should be increased at a constant rate? A) the monetarist model B) the new classical model C) the real business cycle model D) the new Keynesian model E) the Austrian model Answer: A Diff: 1 Type: MC Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

4) The real business cycle model focuses on how A) wage and price stickiness explains fluctuations in real GDP. B) the labour theory of value is the best measure of value of a good or service. C) the Federal Reserve should adopt a monetary growth rule. D) productivity shocks explain fluctuations in real GDP. E) excessive growth in bank credit explain fluctuations in real GDP. Answer: D Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 5) Proponents of the real business cycle model argue that the short-run aggregate supply curve is A) flat. B) positively sloped. C) vertical. D) negatively sloped. E) horizontal Answer: C Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 6) According to the real business cycle model, ________ in aggregate demand ________. A) increases; decrease real GDP B) increases; increase real GDP C) increases; do not affect real GDP D) decreases; increase potential GDP E) decreases; decrease potential GDP Answer: C Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 7) If workers and firms have rational expectations, they form their expectations using A) all the information available to them. B) only information from the past. C) only information provided to them by the government. D) only information gathered from random sources. E) only forecasts of information. Answer: A Diff: 2 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

8) The proponents of ________ and ________ think that the Federal Reserve should adopt a constant monetary growth rule. A) new Keynesianism; the new classical model B) the real business cycle model; Marxism C) rational expectations; monetarism D) the monetarist model; the Keynesian model E) Marxism; the new classical model Answer: C Diff: 2 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 9) According to Marx, which of the following factors of production did not contribute anything of value to production? A) labour B) capital C) natural resources D) entrepreneurship E) land Answer: D Diff: 1 Type: MC Topic: Marxism Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills Special Feature: Apply the Concept: Karl Marx: Capitalism's Severest Critic 10) Monetarism is a school of thought put forth by ________, who argued that the economy would ordinarily be at potential GDP. A) Karl Marx B) Milton Friedman C) Finn Kydland and Edward Prescott D) Robert Lucas and Thomas Sargent E) David Ricardo Answer: B Diff: 2 Type: MC Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

11) The new Keynesians emphasize the importance of A) rational expectations. B) the monetary growth rule. C) real causes of the business cycle. D) sticky wages and prices. E) labour productivity. Answer: D Diff: 1 Type: MC Topic: New Keynesians Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 12) Which of the following models has as its central idea that workers and firms have rational expectations? A) the monetarist model B) the new classical model C) the real business cycle model D) the new Keynesian model E) the Austrian model Answer: B Diff: 1 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 13) The main belief of the monetarist model is that A) workers and firms have rational expectations. B) the quantity of money should be increased at a constant rate. C) productivity shocks explain fluctuations in real GDP. D) the economy is slow to adjust to sticky wages and prices. E) excessive growth in bank credit explain fluctuations in real GDP. Answer: B Diff: 1 Type: MC Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 14) Which of the following models focuses on how productivity shocks explain fluctuations in real GDP? A) the monetarist model B) the new classical model C) the real business cycle model D) the new Keynesian model E) the Austrian model Answer: C Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 94 Copyright © 2024 Pearson Canada Inc.

15) Proponents of the ________ model argue that the short-run supply curve is vertical. A) monetarist B) new classical C) real business cycle D) new Keynesian E) Austrian Answer: C Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 16) According to the real business cycle model, A) increases in aggregate demand raise GDP. B) increases in aggregate demand lower GDP. C) increases in aggregate demand do not affect GDP. D) increases in aggregate demand lower the price level. E) decreases in aggregate demand raise the price level. Answer: C Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 17) The monetary growth rule is a plan for increasing the quantity of money A) at a fixed rate that does not respond to changes in the economic condition. B) at a rate which increases as the economy grows. C) at a rate which decreases as the economy declines. D) at a rate which increases during recessions. E) at a rate which decreases during expansions. Answer: A Diff: 2 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 18) The proponents of rational expectations and monetarism think that the Federal Reserve should adopt A) an inflation target. B) a monetary aggregate target. C) a constant monetary growth rule. D) an interest rate target. E) a real GDP target. Answer: C Diff: 2 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

19) According to ________, entrepreneurship does not contribute anything of value to production. A) Robert Lucas and Thomas Sargent B) Milton Friedman C) John Maynard Keynes D) Karl Marx E) Friedrich Hayek Answer: D Diff: 1 Type: MC Topic: Marxism Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills Special Feature: Apply the Concept: Karl Marx: Capitalism's Severest Critic 20) The new classical macroeconomists believe that the economy normally will A) be below potential real GDP. B) be above potential real GDP. C) be at potential real GDP. D) be unstable because of intervention. E) be monopolized by capitalists. Answer: C Diff: 2 Type: MC Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 21) New classical macroeconomic theory emphasizes the role of "sticky" prices in the economy. Answer: FALSE Diff: 2 Type: TF Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 22) Monetarists believe that the quantity of money should be increased at an increasing rate. Answer: FALSE Diff: 1 Type: TF Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 23) New Keynesian macroeconomic theory emphasizes the role of "sticky" prices in the economy. Answer: TRUE Diff: 2 Type: TF Topic: New Keynesians Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

24) What does the phrase "Keynesian revolution" refer to? Answer: The Keynesian revolution is the name given to the widespread acceptance during the 1930s and 1940s of John Maynard Keynes's macroeconomic model. Diff: 1 Type: SA Topic: New Keynesians Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 25) Briefly describe monetarism and the monetary growth rule. Answer: Monetarism refers to the macroeconomic theories of Milton Friedman and his followers, particularly the idea that the quantity of money should be increased at a constant rate. The monetary growth rule is a rule adhered to by monetarists. It is a plan for increasing the quantity of money at a fixed rate that does not respond to changes in economic conditions. Diff: 2 Type: SA Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 10 Money, Banks, and the Bank of Canada 10.1

Define money and discuss the four functions of money

1) Wealthsimple Cash is an example of a peer-to-peer payment system, where funds are transferred A) from the user's bank to pay credit card balances. B) from a user to his or her bank. C) directly from one user to another. D) between commercial banks for short-term loans. E) for overseas payments only. Answer: C Diff: 1 Type: MC Topic: Hyperinflation Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Analytical Thinking Special Feature: Chapter Opener: Are Smartphone Apps the End of Money? 2) Your roommate argues that he can think of no better situation than living in a deflationary economy because prices of goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse off because A) the purchasing power of people's incomes would increase. B) the purchasing power of the currency would decrease. C) the value of the real interest rate will drop below the nominal interest rate. D) borrowers will have to pay increasing amounts in real terms over time. E) the value of taxes collected by government will fall. Answer: D Diff: 2 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash? 3) All of the following could be considered benefits for a business not accepting cash except A) a reduction in the risk of robberies. B) faster processing of orders. C) the fees paid for the use of credit cards. D) losing customers who don't have a credit card. E) all of the above. Answer: C Diff: 1 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Analytic Skills Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash?

4) In economics, money is defined as A) the total value of one's assets in current prices. B) the total value of one's assets minus the total value of one's debts, in current prices. C) the total amount of salary, interest, and rental income earned during a year. D) any asset people generally accept in exchange for goods and services. E) the total of physical currency held by banks. Answer: D Diff: 1 Type: MC Topic: What Is Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 5) Economies where goods and services are traded directly for other goods and services are called ________ economies. A) trade B) barter C) direct D) seigniorage E) market Answer: B Diff: 1 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 6) The major shortcoming of a barter economy is A) the requirement of a double coincidence of wants. B) the requirement of specialization and exchange. C) that goods and services are not traded. D) that money loses value from inflation. E) the difficulty in transporting goods for exchange. Answer: A Diff: 2 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 7) Commodity money A) has value independent of its use as money. B) has little to no value independent of its use as money. C) is backed by a valuable commodity such as gold. D) can be used to purchase commodities, but not services. E) diminishes the long-term value of money. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 2 Copyright © 2024 Pearson Canada Inc.

8) Silver is an example of a A) commodity money. B) barter money. C) fiat money. D) representative money. E) perfect store of value. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 9) Soldiers in a World War II prisoner-of-war camp A) used gold as a fiat money. B) used cowrie shells as money. C) used cigarettes as money. D) used U.S. dollars as a commodity money. E) did not make use of money at all. Answer: C Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 10) Which of the following is one of the most important benefits of money in an economy? A) Money allows for the exchange of goods and services. B) Money allows for the accumulation of wealth. C) Money makes exchange easier, leading to more specialization and higher productivity. D) Money encourages people to produce all of their own goods (self-sufficiency) and therefore increases economic stability. E) Money allows higher levels of government intervention in the economy. Answer: C Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 11) In an economy with ________, there are more prices than in an economy with ________. A) barter; money B) money; barter C) fiat money; commodity money D) fiat money; barter E) commodity money; fiat money Answer: A Diff: 2 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 3 Copyright © 2024 Pearson Canada Inc.

12) The statement, "My iPhone is worth $300" represents money's function as A) a medium of exchange. B) a unit of account. C) a store of value. D) a standard of deferred payment. E) a promoter of specialization. Answer: B Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 13) Which of the following functions of money would be violated if inflation were high? A) unit of account B) store of value C) certificate of gold D) medium of exchange E) standard of deferred payment Answer: B Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 14) Which of the following assets is most liquid? A) money B) bond C) savings account D) stock E) an IOU from a university professor Answer: A Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 15) If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy? A) unit of account B) store of value C) certificate of gold D) medium of exchange E) divisibility Answer: B Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 4 Copyright © 2024 Pearson Canada Inc.

16) People hold money as opposed to financial assets because money A) earns interest. B) is highly liquid. C) earns no interest. D) earns a higher return than other financial assets. E) is easier to carry. Answer: B Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 17) Fiat money A) has little to no intrinsic value but is backed by the quantity of gold held by the central bank. B) has little to no intrinsic value and is authorized by the central bank or governmental body. C) has value, because it can be redeemed for gold by the central bank. D) has a great intrinsic value that is independent of its use as money. E) is less useful than commodity money. Answer: B Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 18) Which of the following information about fiat money is false? Fiat money A) is backed by gold. B) serves as a medium of exchange. C) has little to no value except as money. D) is authorized by a central bank or governmental body. E) is a generally accepted means of payment. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 19) Which of the following statements regarding the use of gold as money is false? A) It has standardized quality. B) It is durable. C) It has value other than money. D) It is acceptable to traders. E) It is easily divisible. Answer: A Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

20) Dollar coins (loonies) in the modern economy serve as money because A) they are backed by the gold stored in Ottawa. B) they can be redeemed for gold by the Bank of Canada. C) they have value as a commodity independent of their use as money. D) people have confidence that others will accept them as money. E) they are made of gold. Answer: D Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 21) Canadian $5 bills all have "This note is legal tender" printed on them. What does this phrase actually mean? A) All stores must accept $5 bills as payment for goods and services. B) It is illegal to sign a contract using any means of payment other than Canadian currency in Canada. C) Creditors must accept $5 bills as payments of debts when offered. D) The amount of goods a $5 bill can purchase is set by law. E) It is illegal for workers to refuse payment in $5 bills if offered. Answer: C Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking Special Feature: Apply the Concept: Your Money Is No Good Here! 22) Economies cannot function without money. Answer: FALSE Diff: 1 Type: TF Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 23) If gold is used as money in an economy, the money supply is easy to control. Answer: FALSE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 24) Money will fail to serve as a medium of exchange if it ceases to be a store of value. Answer: TRUE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

25) Would the invention of money, as opposed to barter, increase the growth rate of real GDP in a country over time? Why or why not? Answer: Yes, because money makes exchanges easier and increases specialization. Greater specialization raises productivity, which increases the growth rate of real GDP. Diff: 2 Type: ES Topic: What Is Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 26) What are the four functions of money? Can something be considered money if it does not fulfill all four functions? Answer: The four functions are medium of exchange, unit of account, store of value, and standard of deferred payment. In the long run, something will not serve as money if it does not fulfill all four functions. Diff: 2 Type: ES Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 27) Although gold is highly valued by most people, it is difficult to use as a medium of exchange. Explain. Answer: Gold is an example of commodity money. The problem with commodity money is that its value depends upon the quality of the commodity. The higher the quality, the higher the value. It violates one of the 5 criteria that make a commodity suitable to use as a medium of exchange. If someone wanted to cheat another in a trade involving gold, the person could mix impure metals with precious metals. The purity would have to be checked at each trade. Gold is also heavy. For large transactions transport of the metal required might be difficult. Diff: 2 Type: ES Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 28) If banks closed and ATMs limited withdrawals to 3 a week and no more than $100 per withdrawal, what would be the most likely result? A) A rapid growth in the economy as people began to trade more directly with each other. B) Governments would start to refuse payment of taxes in cash. C) Consumers would lose all incentive to hold cash. D) Businesses would start to demand payment in cash. E) Importers would make expanded use of credit. Answer: D Diff: 1 Type: MC Topic: Hyperinflation Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

29) Money is A) an asset that people are willing to accept in exchange for goods and services. B) a liability that people are willing to accept in exchange for goods and services. C) the income one earns over a period of time. D) one's assets net of one's liabilities at any point in time. E) the bills and coins held by households. Answer: A Diff: 1 Type: MC Topic: What Is Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 30) A barter economy is an economy where A) goods and services are exchanged for money. B) money is exchanged for goods and services. C) goods and services are exchanged for other goods and services. D) goods and services are exchanged for liabilities. E) all exchanges are decreed by a central authority. Answer: C Diff: 1 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 31) A major source of inefficiency in barter economies is that they require A) a standard of deferred payment to make trade possible. B) a double coincidence of wants in exchange. C) more liquid stores of value than do monetary economies. D) sufficient supplies of money to finance all transactions. E) All of the above are correct. Answer: B Diff: 1 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 32) Commodity money is a good A) used as money that has no secondary use. B) that is designated as money by law. C) used as money that also has value independent of its use as money. D) used as money that has no intrinsic value. E) used only in market economies. Answer: C Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

33) By making exchange ________, money allows for ________ and higher ________. A) harder; specialization; costs B) easier; specialization; productivity C) harder; generalization; productivity D) easier; specialization; costs E) harder; specialization; government oversight Answer: B Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 34) Which of the following is a function that money serves? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment E) All of the above are correct. Answer: E Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 35) During World War II, prisoners of war used ________ as money. A) bullets B) cowrie shells C) chocolate D) cigarettes E) nothing Answer: D Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 36) When a grocery store accepts your $5 bill in exchange for bread and milk, the $5 bill serves as a A) medium of exchange. B) unit of account. C) store of value. D) standard of deferred payment. E) unit of barter. Answer: A Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

37) The statement "this Harry Rosen tie costs $120" illustrates which function of money? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment E) incentive for specialization Answer: B Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 38) A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment E) exploitation of labour Answer: C Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 39) Which of the following is the most liquid asset? A) a Renoir painting B) bonds C) a car D) money E) inventories of crude oil Answer: D Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 40) Liquidity is defined as A) the ease with which a given asset can be converted to a store of value. B) the ease with which a given asset can be converted to a unit of account. C) the ease with which a given asset can be converted to a medium of exchange. D) the ease with which a given asset can be converted to a standard of deferred payment. E) the ease with which a given asset can be transferred from one owner to another. Answer: C Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 10 Copyright © 2024 Pearson Canada Inc.

41) Among potential stores of value, money A) offers the highest rate of return. B) increases in value during periods of inflation. C) has the advantage of being the most liquid asset. D) provides more services than the other assets. E) provides the greatest security. Answer: C Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 42) A car dealer sells you a car today in exchange for money in the future. This illustrates which function of money? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment E) liquidity Answer: D Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 43) Which is not one of the criteria necessary for a commodity to make a suitable medium of exchange? A) It should be durable. B) It should be of standardized quality. C) It should be valuable relative to its weight. D) It should have intrinsic value. E) It should be generally accepted in exchange. Answer: D Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 44) Gold is an example of A) commodity money. B) fiat money. C) barter money. D) vault money. E) legal money. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 11 Copyright © 2024 Pearson Canada Inc.

45) Which of the following qualities would make gold a poor medium of exchange? A) Its value depends on its purity, and its purity is not easy to visibly identify. B) It is durable, so its value is not lost by spoilage. C) Its value is relative to its weight, and amounts large enough to be useful in trade can be easily transported. D) It is divisible, so can be used to pay for goods of different values. E) Its supply is easily controlled. Answer: A Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 46) Paper currency is A) commodity money. B) fiat money. C) barter money. D) a bond. E) a chequing account. Answer: B Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 47) Fiat money A) has no or very little value except as money. B) is rarely used in modern economies. C) functions well only if can be redeemed for gold or other precious metals. D) serves well as a medium of exchange, but not as a store of value. E) is hard to exchange for other forms of money. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 48) Fiat money is generally issued by A) private banks. B) central banks. C) brokerage firms. D) major multinational corporations. E) local/municipal governments. Answer: B Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 12 Copyright © 2024 Pearson Canada Inc.

49) A good can serve as money only if A) government mandates that the good must be accepted in payment of debts. B) it is declared by authorities to be legal tender. C) it has intrinsic value or if it is backed by precious metals. D) citizens accept the good as a means of payment for transactions and debts. E) the good is actually consumed by everyone. Answer: D Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 50) Because Canadian dollars (paper currency) are legal tender, A) Canadian workers must accept them as payment for labour services. B) Canadian creditors must accept them in payment of debts. C) Canadian firms must accept them as payment for goods and services. D) All Canadian enforced contracts must be signed in Canadian dollars. E) All of the above are correct. Answer: B Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking Special Feature: Apply the Concept: Your Money Is No Good Here! 51) Becoming a cashless society accelerated in 2020 during COVID-19 pandemic because many people preferred "contactless purchases" as a precaution against the spread of virus. This will A) eliminate all currency from the economy. B) increase the size of the underground economy. C) reduce corruption. D) allow businesses to offer faster service. E) reduce the cost of printing banknotes. Answer: D Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Analytic Skills Special Feature: Apply the Concept: Your Money Is No Good Here! 52) An economy without money would have no exchanges of goods and services. Answer: FALSE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

53) In an economy with money, as opposed to barter, people are more likely to specialize in the production of goods and services. Answer: TRUE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 54) The supply of money is easier to control with commodity money than it is with fiat money. Answer: FALSE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 55) Using the five criteria in the text, explain how Canadian currency is suitable to use as a medium of exchange. Answer: 1. Dollars are acceptable to most traders, either in exchange for goods and services or as payment of debts. 2. Coins and bill in circulation are of standardized quality. Bills of the same denomination are identical in appearance. 3. Coins and currency in circulation are durable: their value is not altered by spoilage. 4. Bills are light in weight so that they are very valuable relative to their weight and they are easily transported. 5. Finally, dollars are divisible. Diff: 2 Type: SA Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 56) Money cannot serve as a medium of exchange unless it also serves as a store of value. Is this statement true or false? Explain. Answer: This statement is true. If money does not hold its value over time, it will not be accepted in exchange for goods and services. People must be confident that money they accept today for a good or service rendered will be considered valuable tomorrow when they seek to trade it for a good or service. Lacking that confidence, they will not accept money today. Diff: 2 Type: SA Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

10.2

Discuss the definitions of the money supply used in Canada today

1) The most liquid measure of money supply is A) M0. B) M1+. C) M2+. D) M3. E) M1++. Answer: B Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 2) The M1+ measure of the money supply equals A) paper money plus coins in circulation. B) currency plus savings account balances. C) currency plus chequing account balances. D) currency plus chequing account balances plus savings account balances. E) currency plus personal, non-personal demand and notice deposits at chartered banks. Answer: C Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 3) The Bank of Canada's narrowest definition of the money supply is A) M0. B) M1+. C) M2+. D) M3. E) M2++. Answer: B Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

4) The largest proportion of M1+ is made up of A) currency. B) chequing account deposits. C) traveller's cheques. D) savings account deposits. E) time deposits. Answer: B Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 5) The M2 measure of money equals A) currency, personal non-personal demand and notice deposits, and fixed-term deposits. B) currency plus chequable deposits. C) currency. D) currency plus personal deposits plus non-personal deposits plus stocks and bonds. E) currency plus personal chequable deposits plus non-personal term deposits at chartered banks. Answer: A Diff: 2 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 6) Which of the following is not counted in M1+? A) chequing account balances B) credit card balances C) coins in circulation D) currency in circulation E) non-chequable deposits Answer: B Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

7) Which of the following is a reason why Bitcoin is not included in the Bank of Canada's measures of the money supply? A) Bitcoin is not accepted as payment anywhere in Canada. B) Bitcoins are not appropriately divisible. C) Only a very small portion of transactions are in Bitcoin. D) Recent collapses of Bitcoin exchanges have reduced the Banks confidence in Bitcoin. E) The limited number of Bitcoins mean inflation will not undermine its value. Answer: C Diff: 2 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 8) The Bank of Canada currently treats virtual currencies as A) credit or debit cards. B) chequing accounts at chartered banks. C) chequing deposits at trust and mortgage and loan companies. D) Canada savings bonds. E) Foreign currency deposits resident at chartered banks. Answer: A Diff: 3 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 9) Money's most narrow definition is based on its function as a A) store of value. B) unit of account. C) standard of deferred payment. D) medium of exchange. E) standard of barter. Answer: D Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

10) You earn $500 a month, currently have $200 in currency, $100 in your chequing account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have A) money = $2,300, annual income = $6,000, and wealth = $5,000. B) money = $300, annual income = $6,000, and wealth = $4,300. C) money = $200, annual income = $500, and wealth = $4,300. D) money = $300, annual income = $6,000, and wealth = $5,000. E) money = $3500, annual income = $6,000, and wealth = $5,300. Answer: B Diff: 2 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth 11) If a person cashes in a $500 Canada Savings Bond and puts it in his/her chequing account, then M1+ will ________ and M2++ will ________. A) increase; decrease B) increase; not change C) not change; increase D) not change; decrease E) not change; not change Answer: A Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 12) If a person withdraws $500 from his/her chequing account and holds it as currency, then M1+ will ________ and M1++ will ________. A) increase; decrease B) not change; not change C) not change; increase D) decrease; increase E) decrease; decrease Answer: B Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++

13) If a person takes $100 from his/her piggy bank at home and buys Canada Savings Bonds, then M1+ will ________ and M2++ will ________. A) increase; increase B) not change; increase C) decrease; increase D) decrease; not change E) increase; decrease Answer: D Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 14) If credit card balances rise in the economy, then M1+ will ________ and M2+ will ________. A) increase; increase B) not change; increase C) decrease; increase D) not change; not change E) increase; decrease Answer: D Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ Scenario 10.1

Consider the information above for a simple economy. Assume there are no traveller's cheques. 15) Refer to Scenario 10.1. M1+ in this simple economy equals A) $1,000. B) $2,000. C) $3,000. D) $8,000. E) $14,000. Answer: C Diff: 2 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

16) Refer to Scenario 10.1. M2+ in this simple economy equals A) $3,000. B) $8,000. C) $11,000. D) $14,000. E) $21,000. Answer: D Diff: 2 Type: MC Topic: M2 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 17) If households and firms decide to hold less of their money in chequing account deposits and more in currency, then the money supply A) will not change. B) will increase. C) will decrease. D) may increase or decrease. E) becomes more sensitive to the interest rate. Answer: A Diff: 2 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 18) Liquidity increases as we move from the M1+ to the M2+ definition of the money supply. Answer: FALSE Diff: 1 Type: TF Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 19) The Canadian government makes a profit from issuing fiat money. Answer: TRUE Diff: 2 Type: TF Topic: Seigniorage Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 20) The amount of national income in an economy equals the money supply in an economy. Answer: FALSE Diff: 2 Type: TF Topic: Money, Income, and Wealth Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth

21) Suppose you withdraw $1,000 from your savings account and put it under your mattress. Briefly explain how this will affect M1+ and M2+. Answer: M2+ will not change and M1+ will rise by $1,000. When under your mattress, the $1,000 would be counted as currency. Going from a savings account to currency, would raise M1+, but both are part of M2+, so M2+ would not change. Diff: 2 Type: ES Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 22) Suppose you withdraw $1,000 from your savings account and put it in your chequing account. Briefly explain how this will affect M1+ and M2+. Answer: M2+ will not change and M1+ will rise by $1,000. Going from a savings account to chequing account would raise M1+, but both are part of M2+, so M2+ would not change. Diff: 2 Type: ES Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 23) In Canada, currency includes A) gold, silver, and paper money. B) chequing and savings account deposits. C) paper money and coins in circulation. D) traveller's cheques. E) deposits at the Bank of Canada. Answer: C Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 24) The narrowest official definition of the money supply is A) M1+. B) M1++. C) M2+. D) M2++. E) M3. Answer: A Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

25) M1++ includes A) currency outside banks; and all chequable and non-chequable deposits at chartered banks, trust and mortgage loan companies, credit unions, and caisses populaires. B) currency outside banks; everything in M1 and M1+; and all chequable deposits at chartered banks, trust and mortgage loan companies, credit unions and caisses populaires. C) currency outside banks; savings account balances; chequing account deposits in banks; and holdings of traveller's cheques. D) coins, paper currency, savings account balances, and traveller's cheques. E) currency outside banks; chequable deposits at chartered banks; and outstanding credit card balances. Answer: A Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 26) Most payments in Canada for goods and services are made using A) currency. B) chequing account deposits. C) traveller's cheques. D) gold. E) Bitcoin. Answer: B Diff: 2 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 27) One potential advantage of Bitcoin over conventional currency is A) limited supply means less inflation. B) digit currency is less likely to be stolen. C) digit currency is easier for government to tax. D) more sellers accept it than conventional currency. E) bitcoin charges a higher transaction fee than credit cards. Answer: A Diff: 1 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money?

28) The increasing use of Bitcoin and other cryptocurrency causes A) all measures of money supply to remain unchanged. B) the value of M1+ to rise while M2 remains unchanged. C) the value of M1+ to remain unchanged while M2 rises. D) the value of M1+ to fall while M2 rises. E) the value of M1+ to fall while M2 falls. Answer: A Diff: 1 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Analytic Skills Special Feature: Apply the Concept: Are Bitcoins Money? 29) One potential problem with cryptocurrency is A) the value of Bitcoin is too stable in terms of locally purchased goods and services. B) the value of cryptocurrencies is not controlled by any government's central bank. C) stores and sellers accepting cryptocurrency are charged a very high transaction fee. D) cryptocurrency exchanges are more subject to hacking than other systems have been. E) cryptocurrencies are difficult to transport from place to place. Answer: D Diff: 1 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 30) M2 includes currency held outside banks plus A) currency in circulation, chequing account deposits in banks, and holdings of traveller's cheques. B) personal deposits at chartered banks, non-personal demand and notice deposits at chartered banks, and fixed-term deposits. C) chequing account deposits, large-denomination time deposits, and noninstitutional money market fund shares. D) currency in circulation, savings account balances, and small-denomination time deposits. E) currency in circulation and credit card balances. Answer: B Diff: 1 Type: MC Topic: M2 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

31) A person's wealth A) is a measure of how much money the person has. B) equals the value the person's assets minus his or her liabilities. C) is measured independent of his or her current and expected future income. D) is a measure of how many hours they have worked. E) is all of the above. Answer: B Diff: 1 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth 32) If households in the economy decide to take money out of chequing account deposits and put this money into savings accounts, this will initially A) decrease M1+ and increase M1++. B) decrease M1+ and decrease M1++. C) decrease M1+ and not change M1++. D) increase M1+ and decrease M1++. E) increase M1+ and increase M1++. Answer: C Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 33) If households in the economy decide to take money out of chequing account deposits and hold it as currency, this will initially A) not change M1+ and increase M1++. B) decrease M1+ and decrease M1++. C) decrease M1+ and not change M1++. D) not change M1+ and not change M1++. E) increase M1+ and decrease M2+. Answer: D Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++

34) If you transfer all of your currency to your chequing account then, initially, M1+ will ________ and M1++ will ________. A) increase; not change B) not change; increase C) not change; not change D) decrease; increase E) increase; increase Answer: C Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 35) If you liquidate $3,000 of your Canada Savings Bonds and transfer the funds to your chequing account, then initially, M1+ will ________ and M2++ will ________. A) not change; decrease B) increase; decrease C) increase; not change D) not change; not change E) not change; increase Answer: C Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 36) Credit card balances are A) part of M1+. B) part of M1++. C) part of M2. D) part of M3. E) not part of the money supply. Answer: E Diff: 1 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

37) If the Bank of Canada decided to include virtual money like Bitcoins in its measure of the money supply, what would be the effect on M1+ or M2? A) M1+ would rise. B) M1+ would fall. C) M1+ would rise and M2 would remain constant. D) M2 would rise but M1+ would remain constant. Answer: A Diff: 3 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Analytic Skills Special Feature: Apply the Concept: Are Bitcoins Money? 38) Innovations, including new products and services, in financial markets and institutions have made the job of defining the money supply easier. Answer: FALSE Diff: 2 Type: TF Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 39) The only way money can be removed from circulation is for it to be held by the government. Answer: FALSE Diff: 2 Type: TF Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 40) A person's wealth is the same as his income. Answer: FALSE Diff: 2 Type: TF Topic: Money, Income, and Wealth Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth 41) Canada was the first nation to remove the penny from circulation. Answer: FALSE Diff: 2 Type: TF Topic: Seigniorage Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money?

42) Suppose you transfer $2,000 from your non-money market mutual fund account to your chequing account. What is the immediate impact of this transfer on M1+ and M2++? Answer: Mutual fund balances are part of M2++, but are not part of M1+. Chequing account balances are included in both money supply measures. Thus, M1+ will increase by $2,000 with the increase in your chequing account balance. M2++ will not change, as the $2,000 increase in your chequing account balance is offset by the $2,000 decrease in mutual fund accounts. Diff: 2 Type: SA Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 43) Suppose that you decide that you no longer want to hold currency, so you deposit all of your currency holdings into your chequing account. What is the immediate impact of this transaction on M1+ and M1++? Answer: Neither M1+ nor M1++ will change (at least not initially). Both chequing account balances and currency holdings outside commercial banks are included in M1+ and in M1++. The decrease in currency holdings would be perfectly offset by the increase in chequing account balances. Diff: 2 Type: SA Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

10.3

Explain how banks create money

1) The major assets on a bank's balance sheet are its A) chequing and savings account deposits. B) loans, and chequing and savings account deposits. C) reserves, loans, and holdings of securities. D) reserves, chequing and savings account deposits. E) reserves, loans, and chequing account deposits. Answer: C Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 2) The largest liability on the balance sheet of most banks is their A) loans. B) holdings of securities. C) deposits with the Bank of Canada. D) chequing account and savings account deposits of their customers. E) vault cash. Answer: D Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

3) A bank will consider a car loan to a customer to be ________ and a customer's chequing account to be ________. A) a liability; an asset B) an asset; a liability C) a liability; a liability D) an asset; an asset E) an asset; net worth Answer: B Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Assets and Liabilities 4) Bank reserves include A) vault cash and deposits with the Bank of Canada. B) loans to bank customers and deposits with the Bank of Canada. C) vault cash and loans to bank customers. D) customer chequing accounts and vault cash. E) deposits with the Bank of Canada and holdings of securities. Answer: A Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 5) The desired reserves of a bank equal its ________ the desired reserve ratio. A) deposits divided by B) deposits multiplied by C) loans divided by D) loans multiplied by E) loans plus deposits multiplied by Answer: B Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

6) Banks will make additional loans when desired reserves are A) greater than total reserves. B) less than total reserves. C) less than total deposits. D) less than total loans. E) equal to total reserves. Answer: B Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking Scenario 10.2 Imagine that Kristy deposits $10,000 of currency into her chequing account deposit at Bank A and that the desired reserve ratio is 20%. 7) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A's reserves immediately increase by A) $2,000. B) $8,000. C) $10,000. D) $40,000. E) $50,000. Answer: C Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 8) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A's desired reserves increase by A) $2,000. B) $8,000. C) $10,000. D) $40,000. E) $50,000. Answer: A Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

9) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A's excess reserves increase by A) $2,000. B) $8,000. C) $10,000. D) $40,000. E) $50,000. Answer: B Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 10) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A can make a maximum loan of A) $2,000. B) $8,000. C) $10,000. D) $40,000. E) $50,000. Answer: B Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 11) Refer to Scenario 10.2. As a result of Kristy's deposit, chequing account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of A) $8,000. B) $10,000. C) $50,000. D) $100,000. E) $500,000. Answer: C Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

12) If the desired reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support an increase in chequing account deposits (including the original deposit) in the banking system as a whole of up to A) $100. B) $900. C) $1,000. D) $10,000. E) $100,000. Answer: D Diff: 3 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 13) Suppose you withdraw $500 from your chequing account deposit and bury it in a jar in your back yard. If the desired reserve ratio is 10 percent, chequing account deposits in the banking system as a whole could drop up to a maximum of A) $0. B) $50. C) $500. D) $5,000. E) $50,000. Answer: D Diff: 3 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 14) If the desired reserve ratio (rd) is 20 percent, the simple deposit multiplier is A) 1.25. B) 2. C) 5. D) 10. E) 20. Answer: C Diff: 1 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

15) Suppose that you deposit $2,000 in your bank and the desired reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is A) $200. B) $1,800. C) $2,000. D) $2,222. E) $20,000. Answer: B Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking Table 10.1 Assets Liabilities Reserves +$4,000 Deposits +$4,000 16) Refer to Table 10.1. Suppose a transaction changes a bank's balance sheet as indicated in the Taccount, and the desired reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of A) $0. B) $400. C) $3,600. D) $4,000. E) $40,000. Answer: C Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

Table 10.2 Assets Liabilities Reserves +$8,000 Deposits +$8,000 17) Refer to Table 10.2. Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the desired reserve ratio is 10 percent. As a result of the transaction, the bank can make a maximum loan of A) $0. B) $800. C) $7,200. D) $8,000. E) $8,888. Answer: C Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Table 10.3 Assets Liabilities Reserves +$7,000 Deposits +$50,000 Loans +$46,000 Net Worth +$3,000 18) Refer to Table 10.3. Consider the following simplified balance sheet for a bank: If the desired reserve ratio is 10 percent, the bank can make a maximum loan of A) $2,000. B) $3,000. C) $5,000. D) $6,300. E) $45,000. Answer: A Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 19) Banks will continue to make loans until A) their actual reserves equal their desired reserves. B) their excess reserves equal their desired reserves. C) their actual reserves equal their excess reserves. D) their actual reserves equal their chequing account balances. E) they are forced to stop by the central bank. Answer: A Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 33 Copyright © 2024 Pearson Canada Inc.

20) Suppose Kevin O'Leary withdraws $1 million from his chequing account at Scotia Bank. If Scotia Bank's desired reserve ratio is 20 percent, what is the maximum change in deposits in the banking system? A) -$5 million B) -$4 million C) -$200,000 D) $1 million E) $5 million Answer: A Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 21) Suppose Kevin O'Leary sells $20 million in government bonds and deposits the proceeds into his chequing account at the Royal Bank. If the Royal Bank has a desired reserve ratio of 10 percent, what is the maximum change in money supply? A) -$200 million B) -$180 million C) $2 million D) $180 million E) $200 million Answer: E Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 22) Suppose the Bank of Canada suggests banks should have a reserve ratio of 20 percent. If banks are conservative and choose not to loan all of their excess reserves, the real-world deposit multiplier is A) less than 5. B) equal to 5. C) greater than 5. D) equal to 20. E) greater than 20. Answer: A Diff: 3 Type: MC Topic: Simple Deposit Multiplier vs. Real World Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

23) Which of the following best describes how banks create money? A) Banks charge higher interest rates on loans than they pay on deposits. B) Banks charge fees for providing financial advice. C) Banks create chequing account deposits when making loans from excess reserves. D) Banks make loans from reserves. E) Banks bid for the right to print their own currency under the Bank Act. Answer: C Diff: 2 Type: MC Topic: How Do Banks Create Money? Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 24) The more reserves banks choose to keep, A) the larger the deposit multiplier. B) the smaller the deposit multiplier. C) the higher the reserve ratio. D) the lower the reserve ratio. E) the more loans there will be in the banking system. Answer: B Diff: 2 Type: MC Topic: Simple Deposit Multiplier vs. Real World Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 25) Which of the following determines the amount of money the banking system as a whole can create? A) the quantity of bank reserves B) the quantity of vault cash held by banks C) the gold reserves held by the Bank of Canada D) the limit on profits by banks imposed by the Bank of Canada E) the value of the Canadian dollar in international markets Answer: A Diff: 3 Type: MC Topic: How Do Banks Create Money? Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 26) If households choose to take some fraction of each cheque they deposit and hold it as currency, then the simple deposit multiplier ________ the real-world multiplier. A) is greater than B) is less than C) is equal to D) bears no relationship to E) is more complex than Answer: A Diff: 2 Type: MC Topic: Simple Deposit Multiplier vs. Real World Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 35 Copyright © 2024 Pearson Canada Inc.

27) If banks receive a greater amount of currency and do not hold all of this new currency as reserves, the money supply expands. Answer: TRUE Diff: 1 Type: TF Topic: How Do Banks Create Money? Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 28) If bankers become more uncertain regarding future deposits and withdrawals and choose to hold more reserves against deposits, the money multiplier will increase. Answer: FALSE Diff: 2 Type: TF Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 29) The real-world money multiplier is greater than the simple money multiplier (1/rd). Answer: FALSE Diff: 2 Type: TF Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 30) Why do banks create money? Do they create money to help the Bank of Canada control the money supply or is there a more basic reason? Answer: Banks create money to make a profit. Banks create money when they make loans. The loans take the form of chequing account deposits. Asking why banks create money is the same as asking why they make loans. Diff: 2 Type: ES Topic: How Do Banks Create Money? Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 31) Suppose you withdraw $1,000 in cash from your chequing account. Draw a T-account to show the effect of this transaction on your bank's balance sheet. Answer: The withdrawal of $1,000 from your chequing account will reduce the bank's chequing account deposits and reserves by $1,000. Assets Liabilities Reserves -$1,000 Deposits -$1,000 Diff: 2 Type: ES Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

32) Suppose you deposit $4,000 in currency into your chequing account at Royal Bank. Assume that Royal Bank has no excess reserves at the time you make your deposit and that the desired reserve ratio is 10 percent. a. Use a T-account to show the initial effect of this transaction on Royal Bank's balance sheet. b. Suppose that Royal Bank makes the maximum loan they can from the funds you deposited. Use a Taccount to show the initial effect on Bank of America's balance sheet from granting the loan. Also include in this T-account the transaction from question (a.). c. Now suppose that whoever took out the loan in question (b) writes a cheque for this amount and that the person receiving the cheque deposits it in CIBC. Show the effect of these transactions on the balance sheet of Royal Bank and CIBC, after the cheque has been cleared. On the T-account for Royal Bank, include the transactions from questions (a) and (b). d. What is the maximum increase in chequing account deposits that can result from your $4,000 deposit? What is the maximum increase in the money supply? Explain.

Answer: a. Royal Bank's (Bank A) chequing account deposits and reserves rise by $4,000. Bank A Assets Reserves

Liabilities +$4,000 Deposits

+$4,000

b. Royal Bank (Bank A) has to hold $400 of desired reserves, leaving $3,600 of excess reserves which they loan. Bank of America increases the chequing account of the borrower by $3,600. Bank A Assets Reserves Loans

Liabilities +$4,000 Deposits +$3,600 Deposits

+$4,000 +$3,600

c. At Royal Bank (Bank A), when the $3,600 cheque clears, reserves will fall by $3,600 and the borrower's chequing account will be empty. At CIBC (Bank B), the deposit of the $3,600 cheque increases chequing account deposits and reserves by $3,600. Bank A Assets Reserves Loans

Liabilities +$400 Deposits +$3,600

+$4,000

Bank B Assets Reserves

Liabilities +$3,600

Deposits

+$3,600

d. The maximum increase in chequing account deposits is $40,000: $4,000 times the simple deposit multiplier of

, or 10. Given that the original deposit of $4,000 came from currency, the money supply

will increase by $36,000: $40,000 minus $4,000. Diff: 3 Type: ES Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money

33) Suppose the Bank of Canada purchases $10,000 of government bonds from you and that you deposit the $10,000 into your chequing account deposit at Bank Y. Assume that Bank Y has no excess reserves at the time you make your deposit and that the desired reserve ratio is 20 percent. a. Use a T-account to show the initial effect of this transaction on Bank Y's balance sheet. b. Suppose that Bank Y makes the maximum loan they can from the funds you deposited. Use a Taccount to show the initial effect on Bank Y's balance sheet from granting the loan. Also include in this Taccount the transaction from question (a.). c. Now suppose that whoever took out the loan in question (b) writes a cheque for this amount and that the person receiving the cheque deposits it in Bank Z. Show the effect of these transactions on the balance sheet of Bank Y and Bank Z, after the cheque has been cleared. On the T-account for Bank Y, include the transactions from questions (a) and (b). d. What is the maximum increase in chequing account deposits that can result from your $10,000 deposit? What is the maximum increase in the money supply? Explain.

Answer: a. Bank Y's chequing account deposits and reserves rise by $10,000. Bank Y Assets Reserves

Liabilities +$10,000 Deposits

+$10,000

b. Bank Y has to hold $2,000 of desired reserves, leaving $8,000 of excess reserves which they loan. Bank Y increases the chequing account of the borrower by $8,000. Bank Y Assets Reserves Loans

Liabilities +$10,000 Deposits +$8,000 Deposits

+$10,000 +$8,000

c. At Bank Y, when the $8,000 cheque clears, reserves will fall by $8,000 and the borrower's chequing account will be empty. At Bank Z, the deposit of the $8,000 cheque increases chequing account deposits and reserves by $8,000. Bank Y Assets Reserves Loans

Liabilities +$2,000 Deposits +$8,000

+$10,000

Bank Z Assets Reserves

Liabilities +$8,000 Deposits

+$8,000

d. The maximum increase in chequing account deposits is $50,000: $10,000 times the simple deposit multiplier of

, or 5. The money supply also increases by $50,000, because the original deposit of

$10,000 came from a cheque from the Bank of Canada. Diff: 3 Type: ES Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money

34) Why does the holding of excess reserves by banks and the holding of currency by households and firms cause the real-world deposit multiplier to be less than the simple deposit multiplier? Answer: If banks hold excess reserves, these reserves are not loaned out. The corresponding chequing account deposits are not created and neither are the additional chequing account deposits from other banks that would have been created through the deposit multiplier process. If households and firms hold currency, then banks do not get the deposits and the corresponding reserves. If the currency was deposited, the banks would create a multiple expansion of chequing account deposits through the multiplier process. Diff: 2 Type: ES Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 35) A bank's assets are A) things owned by or owed to the bank. B) things the bank owes to someone else. C) a measure of the bank's net worth. D) always greater than the bank's liabilities. E) chequing deposits. Answer: A Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 36) A bank's liabilities are A) things owned by or owed to the bank. B) things the bank owes to someone else. C) a measure of the bank's net losses. D) included as part of the bank's reserves. E) loans made by the bank they might not be repaid. Answer: B Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 37) Net worth is A) a measure of a firm's profits. B) part of stockholder equity. C) the difference between a firm's assets and liabilities. D) listed on the asset side of a firm's balance sheet. E) reported to the government for taxation. Answer: C Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 41 Copyright © 2024 Pearson Canada Inc.

38) Which of the following is an asset for a bank? A) deposits of its customers B) short-term borrowing C) shareholders' equity D) loans E) borrowing from the Bank of Canada Answer: D Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 39) Which of the following is counted as a liability for a bank? A) customer deposits B) bank reserves C) securities D) bank loans E) customer loyalty Answer: A Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 40) A bank's largest liability is its A) short-term borrowing. B) long-term debt. C) deposits of its customers. D) shareholder equity. E) borrowing from the Bank of Canada. Answer: C Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 41) Typically, a bank's largest asset is A) its reserves. B) its holdings of securities. C) its deposits of its customers. D) its loans. E) the buildings that house its branches. Answer: D Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

42) The portion of ________ that a bank does not loan out or spend on securities is known as ________. A) loans; reserves B) deposits; reserves C) deposits; securities D) loans; securities E) deposits; debt Answer: B Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 43) A bank holds its reserves as ________ and ________. A) securities; loans B) securities; deposits at the Bank of Canada C) vault cash; deposits at the Bank of Canada D) vault cash; loans E) securities; customer deposits Answer: C Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 44) A bank's reserves equal its A) vault cash. B) deposits with the Bank of Canada. C) vault cash plus deposits with the Bank of Canada. D) vault cash plus deposits of its customers. E) government bonds plus loans to other banks. Answer: C Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 45) A bank will generally hold a fraction of its ________ as ________. A) deposits; desired reserves B) deposits; required reserves C) loans; required reserves D) loans; desired reserves E) deposits; excess reserves Answer: A Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

46) Which of the following is a true statement? A) excess reserves = actual reserves - desired reserves B) excess reserves = deposits - desired reserves C) excess reserves = deposits - loans D) excess reserves = loans - desired reserves E) excess reserves = Bank of Canada deposits Answer: A Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 47) Suppose the desired reserve ratio is Rd. Then, A) desired reserves = Rd × actual reserves. B) desired reserves = Rd × excess reserves. C) desired reserves = Rd × deposits. D) desired reserves = Rd × loans. E) desired reserves =

× deposits.

Answer: C Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 48) When you open a chequing account at the Canadian Imperial Bank of Commerce by making a deposit, the CIBC A) has more reserves and more excess reserves. B) has more reserves, but excess reserves remain unchanged. C) has more deposits and less in excess reserves. D) has more deposits, but excess reserves remain unchanged. E) has more reserves; but lower than desired reserves. Answer: A Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

49) If the Scotiabank in Waterloo receives a $10,000 deposit, and the desired reserve ratio is 10 percent, how much can the bank loan out? (Assume that before the deposit this bank had reserves exactly equal to its desired reserve ratio.) A) $1,000 B) $9,000 C) $10,000 D) $11,000 E) $100,000 Answer: B Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 50) A balance sheet A) measures flows of income and expenditure over a given period of time. B) measures assets, liabilities, and net worth at a given instance in time. C) equates flows of revenue with flows of expenditure. D) measures marginal costs and marginal benefits of a firm's activities. E) None of the above is correct. Answer: B Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 51) Suppose you deposit $2,000 into Royal Bank and the bank's desired reserve ratio is 10 percent. How does this affect the bank's balance sheet? A) Reserves rise by $200. B) Desired reserves rise by $2,000. C) Deposits rise by $1,000. D) Excess reserves rise by $1,800. E) The bank's desired reserve ratio will rise by 10 percent. Answer: D Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

52) A commercial bank like Bank of Montreal creates money by A) printing paper money. B) earning profits. C) selling corporate bonds. D) making loans. E) distributing new currency printed by the Canadian mint. Answer: D Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 53) Suppose a transaction changes the balance sheet of TD Canada Trust bank as indicated in the following T-account. Assets Reserves + $1,000

Liabilities Deposits + $1,000

At this point, what percentage of the new deposits does TD Canada Trust hold in reserves? A) 100 percent B) 90 percent C) 10 percent D) 5 percent E) 1 percent Answer: A Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 54) Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the desired reserve ratio is 10 percent. Assets Reserves + $2,000

Liabilities Deposits + $2,000

As a result of the transaction, the bank can make a maximum loan of A) $0. B) $200. C) $1,800. D) $2,000. E) $20,000. Answer: C Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 46 Copyright © 2024 Pearson Canada Inc.

55) Consider the following T-account for National City Bank. Assets Reserves Loans

Liabilities $10,000 Deposits $100,000 $90,000

If the desired reserve ratio is lowered to 8 percent, how much more can National City loan out? A) $92,000 B) $10,000 C) $8,000 D) $2,000 E) $0 Answer: D Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 56) If the desired reserve ratio is 5 percent, then the simple deposit multiplier is A) 1.05. B) 2. C) 5. D) 10. E) 20. Answer: E Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 57) If the desired reserve ratio is Rd, the simple deposit multiplier is defined as A) B) C)

. . × change in bank reserves.

D) E)

× change in bank reserves. .

58) The simple deposit multiplier is the ratio of the amount of A) new reserves created by the banks to the amount of deposits. B) new reserves created by the banks to the amount of loans. C) deposits created by the banks to the amount of new reserves. D) deposits created by the banks. E) new economic activity to the amount of new reserves. Answer: C Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 59) With a desired reserve ratio of 20 percent, an increase in reserves of $10,000 could lead to a maximum increase in chequing account deposits in the entire banking system of A) $2,000. B) $8,000. C) $12,500. D) $50,000. E) $100,000. Answer: D Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 60) The ________ the reserve ratio, the ________ the money multiplier. A) smaller; smaller B) smaller; larger C) larger; larger D) All of the above are correct. E) None of the above is correct. Answer: B Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 61) A cash withdrawal from the banking system A) decreases reserves. B) decreases deposits. C) decreases excess reserves. D) All of the above are correct. E) None of the above is correct. Answer: D Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 48 Copyright © 2024 Pearson Canada Inc.

62) If banks do not loan out all their excess reserves, then the real world multiplier is A) smaller than 1/Rd. B) larger than 1/Rd. C) equal to 1/Rd. D) not related to 1/Rd. E) zero. Answer: A Diff: 2 Type: MC Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 63) If, during a deposit expansion, not all money gets redeposited into the banking system and some leaks out as currency, then the real world multiplier is A) smaller than 1/Rd. B) larger than 1/Rd. C) equal to 1/Rd. D) not related to 1/Rd. E) zero. Answer: A Diff: 2 Type: MC Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 64) When banks gain ________, they can ________ their loans; and the money supply ________. A) reserves; increase; contracts B) withdrawals; increase; expands C) withdrawals; decrease; expands D) reserves; increase; expands E) deposits; reduce; expands Answer: D Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

65) Suppose Bill Gates deposits $20 million into his chequing account at the Royal Bank. If the required reserve ratio is 10 percent, what is the maximum change in money supply? A) -$200 million B) -$180 million C) $2 million D) $180 million E) $200 million Answer: D Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 66) Your chequing account balance is included in your bank's assets. Answer: FALSE Diff: 1 Type: TF Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Assets and Liabilities 67) Consider the following T-account for a bank. Assets Reserves Loans

$1,000 $4,000

Liabilities Deposits $5,000

If the desired reserve ratio is 20 percent and the bank is holding no excess reserves, the bank at this point can make no more loans. Answer: TRUE Diff: 3 Type: TF Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money

68) Consider the following T-account for a bank. Assets Reserves Loans

$1,000 $4,000

Liabilities Deposits $5,000

If the desired reserve ratio is 10 percent, the bank at this point can make no more loans. Answer: FALSE Diff: 3 Type: TF Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 69) A cash withdrawal reduces deposits, reserves, and excess reserves in the banking system. Answer: TRUE Diff: 2 Type: TF Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 70) Suppose a bank has the following balance sheet: Assets Reserves Loans

Liabilities $14,000 Deposits $100,000 $90,000 Net Worth $4,000

If the desired reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans? Answer: If the desired reserve ratio is 10 percent, then a bank wants to hold 10 percent of its deposits as reserves. Therefore desired reserves equal 0.1 × $100,000 = $10,000. This bank has $4,000 in excess reserves ($14,000 - $10,000 = $4,000). This is the maximum that the bank can use to make new loans. Diff: 2 Type: SA Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money

71) Suppose that the bank has the following balance sheet: Assets Reserves Loans

Liabilities $75,000 Deposits $500,000 $430,000 Net worth $5,000

If the desired reserve ratio is 10 percent, what is the maximum the bank can loan out? Suppose the bank makes this loan and the borrower spends the money, which is deposited in a different bank. Show the impact of these transactions on the bank's balance sheet. Answer: Since the desired reserve ratio is 10 percent, desired reserves are 0.1 × $500,000 = $50,000. Thus, excess reserves are $75,000 - $50,000 = $25,000. If the bank loans out that amount, the effect on the balance sheet is shown below. Essentially, reserves will be reduced by $25,000 when the money borrowed is spent and deposited in a different bank. Loans will increase by $25,000. Note that the right-hand side of the balance sheet does not change (it increases by the amount of the loan, then decreases by the amount of the loan when the money is spent): Assets Reserves

Loans

Liabilities $75,000 -$25,000 $50,000 $430,000 +$25,000 $455,000

Deposits

$500,000

Net worth

$5,000

Diff: 3 Type: SA Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 72) Suppose that the desired reserve ratio is 20 percent and you deposit $50,000 of freshly minted currency given to you by the Bank of Canada into ScotiaBank. What is the potential increase in deposits in the banking system brought about by your deposit? What is the potential change in the money supply? Answer: The simple deposit multiplier is equal to (1/desired reserve ratio). In this case it is . Since the deposit multiplier is 5, then an increase in deposits in the banking system is equal to the multiplier times the initial deposit. This is 5 × $50,000 = $250,000. To find the change in the money supply, we must then subtract the initial deposit because cash held by the public declines by the size of the initial deposit. Thus the change in the money supply is . Diff: 3 Type: SA Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

73) Suppose that the desired reserve ratio is 10 percent and you withdraw $25,000 from Bank of Montreal and hold it in cash. What is the deposit multiplier? What is the total decrease in deposits in the banking system? What is the change in the money supply? Answer: The simple deposit multiplier is equal to (1/desired reserve ratio). In this case it is . Since the deposit multiplier is 10, then a decrease in deposits in the banking system is equal to the multiplier times the initial withdrawal. The change in deposits will be negative as the withdrawal will shrink deposits in the banking system. This is 10 × -$25,000 = -$250,000. To find the change in the money supply, we must then add back the initial withdrawal, as now cash held by the public increases by the size of the initial withdrawal. Thus the change in the money supply is -$250,000 + $25,000 = -$225,000. Diff: 3 Type: SA Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 74) Why is the real-world deposit multiplier smaller than 1/Rd, where Rd is the desired reserve ratio? Answer: There are two reasons why the real world multiplier is smaller than the deposit multiplier, 1/Rd. First, banks do not loan out all their excess reserves. Banks like to keep some excess reserves on hand in case withdrawals are higher than the bank might typically expect. If this is the case, then the amount of money that is available to loan out in the next round is a bit smaller. This will shrink the amount of money expansion. Second, not all money that is loaned out in the money expansion process is put back into the banking system. Some of it leaks out in the form of currency and does not get entirely redeposited. Both of these actions make the money expansion smaller. Diff: 2 Type: SA Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

10.4

Discuss the policy tools the Bank of Canada uses to manage the money supply

1) Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic? A) Bank total reserves would decrease. B) Reserves would increase. C) Bank chequing account balances would decrease. D) Individual banks would have to shrink the value of loans they made. E) The economy would likely enter into a recession. Answer: B Diff: 3 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 2) Banks keep ________ of chequing deposits as reserves because on a typical day withdrawals ________ deposits. A) more than 100%; are much greater than B) exactly 100%; are about the same as C) less than 100%; are about the same as D) exactly 100%; are much greater than E) less than 100%; are much greater than Answer: C Diff: 2 Type: MC Topic: Fractional Reserve Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 3) The lender of last resort for banks in Canada is A) the Minister of Finance. B) the Office of the Superintendent of Financial Institutions (OSFI). C) the Bank of Canada. D) the Royal Canadian Mint. E) the International Monetary Fund. Answer: C Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

4) If the central bank can act as a lender of last resort during a banking panic, then banks can A) call in their loans to their customers and eventually restore the public's faith in the banking system. B) satisfy customer withdrawal needs and eventually restore the public's faith in the banking system. C) borrow more and more money from the central bank, and this will lower its reserves and decrease the public's faith in the banking system. D) encourage the public to borrow directly from the central bank, and this will worsen the banking panic. E) raise additional liquidity by selling assets whenever needed, and this will prevent banking panics from gathering momentum. Answer: B Diff: 2 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 5) The 12 outside directors of the board of directors of the Bank of Canada are appointed by A) Parliament. B) the Minister of Finance. C) the Senate. D) the CEOs of leading Canadian Banks. E) the Governor of the Bank of Canada. Answer: B Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 6) Which of the following is not a function of the Bank of Canada? A) acting as a lender of last resort B) acting as a banker's bank C) performing cheque clearing services D) insuring deposits in the banking system E) taking actions to control the money supply Answer: D Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

7) Which of the following people is not on the governing council of the Bank of Canada? A) the governor of the Bank of Canada B) the senior deputy governor of the Bank of Canada C) the Minister of Finance D) four deputy governors of the Bank of Canada E) all of the above Answer: C Diff: 2 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 8) If people speculate that a run on one bank will cause a run on all banks in the financial system, and this speculation proves accurate, then the financial system would experience what is known as a(n) A) commodity crisis. B) securitization meltdown. C) bank panic. D) institutional death spiral. E) currency crisis. Answer: C Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 9) The bank rate is A) the rate at which banks are taxed on their profits. B) the interest the Bank of Canada charges to lend to financial institutions. C) the interest rates at which banks lend to each other. D) the interest rate consumers pay when they borrow from the bank. E) the rate of profit made by commercial banks. Answer: B Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 10) Open market operations refer to the purchase or sale of ________ to control the money supply. A) corporate bonds and stocks by the Bank of Canada B) government securities by the Bank of Canada C) corporate bonds and stocks by the Minister of Finance D) government securities by the Treasury Board E) government securities by commercial banks Answer: B Diff: 1 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 56 Copyright © 2024 Pearson Canada Inc.

11) The Bank of Canada uses open market operations to A) limit the federal government debt. B) reinforce its target for the overnight interest rate. C) reduce the federal government's cost of running a deficit. D) ensure commercial banks remain profitable. E) limit the risk of banking panics. Answer: B Diff: 2 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 12) The two main monetary policy tools used by the Bank of Canada to implement monetary policy are A) open market operations and tax rates. B) tax rates and lending to financial institutions. C) open market operations and lending to financial institutions. D) tax rates and printing money. E) lending to financial institutions and changing the desired reserve ratio. Answer: C Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 13) The main tool that the Bank of Canada uses to conduct monetary policy is A) open market operations. B) discount policy. C) setting reserve requirements. D) acting as the lender of last resort. E) cheque clearing. Answer: A Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 14) A purchase and resale agreement implemented by the Bank of Canada tends to A) not change the money supply. B) not change the quantity of reserves held by banks. C) increase the quantity of reserves held by banks. D) decrease the quantity of reserves held by banks. E) decrease the money supply. Answer: C Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

15) A sale and repurchase agreement implemented by the Bank of Canada tends to A) not change the money supply. B) not change the quantity of reserves held by banks. C) increase the quantity of reserves held by banks. D) decrease the quantity of reserves held by banks. E) increase the money supply. Answer: D Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 16) The purchase of $1 million of government securities by the Bank of Canada, if there is no change in the quantity of currency, will cause reserves at banks to A) increase by $1 million. B) increase by less than $1 million. C) decrease by $1 million. D) decrease by less than $1 million. E) fall to zero. Answer: A Diff: 3 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 17) To increase the money supply, the Bank of Canada could A) raise the bank rate. B) decrease income taxes. C) raise the desired reserve ratio. D) enter into a purchase and resale agreement. E) lower transfer payments. Answer: D Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 18) To decrease the money supply, the Bank of Canada could A) lower the bank rate. B) raise income taxes. C) lower the desired reserve ratio. D) enter into a sale and repurchase agreement. E) raise transfer payments. Answer: D Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 58 Copyright © 2024 Pearson Canada Inc.

19) Which of the following is not a reason why the Bank of Canada conducts monetary policy principally through open market operations? A) Open market operations can be done secretly. B) Open market operations allow the Bank of Canada to control their volume. C) Open market operations can be large. D) Open market operations can be implemented quickly. E) Open market operations can be small. Answer: A Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 20) If a bank receives a $1 million advance loan from the Bank of Canada, then the bank's reserves will A) not change. B) increase by $1 million. C) increase by less than $1 million. D) increase by more than $1 million. E) fall to zero. Answer: B Diff: 2 Type: MC Topic: Lending to Financial Institutions Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 21) The goal of the Bank of Canada's monetary policy is A) to keep the unemployment rate below 8 percent. B) to keep the inflation rate between 1 and 3 percent. C) to keep mortgage rates below 10 percent. D) to keep the money supply growing at a rate of 2 percent per year. E) to regulate banking practice. Answer: B Diff: 2 Type: MC Topic: The Bank of Canada's Approach to Monetary Policy Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 22) Securitization refers to A) the process of buying insurance. B) the purchase of improved electronic and Internet security for commercial banks. C) the process of transforming loans into assets that can be bought or sold in a financial market. D) the process undertaken by banks of transforming loans into debts. E) the process of hedging against financial risk. Answer: C Diff: 2 Type: MC Topic: Desired Reserves Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking, Communication 59 Copyright © 2024 Pearson Canada Inc.

23) How are firms in the shadow banking industry different from traditional banks? A) Traditional banks face more regulation. B) Traditional banks are entirely legal, while the shadow banks exist in a legal grey area. C) Traditional banks fund most of their lending from the wholesale market while shadow banks fund lending by taking deposits. D) Shadow banks offer lower returns to investor than traditional banks in good economic times. E) Shadow banks deal more directly with central banks than traditional banks. Answer: A Diff: 2 Type: MC Topic: Desired Reserves Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 24) Assume an asset costs $100. The asset will return $5. If you purchased the asset entirely with your own money the rate of return would be ________. If you purchased the asset $10 of your own money and $90 of borrowed money the rate of return would be ________. A) 5%; 50% B) 50%; 5% C) 5%; 5% D) 5.5%; 5% E) 5%; 11% Answer: A Diff: 2 Type: MC Topic: Shadow Banks and Leverage Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 25) Assume an asset costs $100. The asset ends up losing $2. If you purchased the asset entirely with your own money the rate of return would be ________. If you purchased the asset with $10 of your own money and $90 of borrowed money, the rate or return would be ________. A) -2%; -20% B) -20%; -2% C) -2%; -2.22% D) 2%; 20% E) 20%; 2% Answer: A Diff: 2 Type: MC Topic: Shadow Banks and Leverage Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills

26) To offset the effect of households and firms deciding to hold less of their money in chequing account deposits and more in currency, the Bank of Canada could A) decrease its lending to financial institutions. B) purchase government securities. C) raise the bank rate. D) sell government securities. E) increase the desired reserve ratio. Answer: B Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 27) To offset the effect of households and firms deciding to hold more of their money in chequing account deposits and less in currency, the Bank of Canada could A) raise bank taxes. B) sell government securities. C) raise government spending. D) buy government securities. E) increase lending to banks. Answer: B Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 28) The process of bundling loans together and buying and selling these bundles in a secondary financial market is called A) open market operations. B) securitization. C) fractional reserve lending. D) seigniorage. E) tied selling. Answer: B Diff: 1 Type: MC Topic: Securitization Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

29) One way investment banks differ from commercial banks is that investment banks A) lend exclusively to households. B) do not take in deposits. C) only buy and sell mortgages. D) trade only in foreign exchange markets. E) generate less profit for their owners. Answer: B Diff: 1 Type: MC Topic: Shadow Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 30) Money market mutual funds sell shares to investors and use the money to buy A) mortgage-backed securities. B) foreign currency. C) short-term securities. D) overseas assets through foreign direct investment. E) real estate assets that generate income. Answer: C Diff: 2 Type: MC Topic: Shadow Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 31) As was demonstrated in 2007, firms in the shadow banking system A) were very vulnerable to bank runs. B) were protected from financial ruin by federal deposit insurance. C) were well insulated from bank runs. D) were more insulated from the financial crisis than were commercial banks. E) were less a source of macroeconomic risk than commercial banks. Answer: A Diff: 1 Type: MC Topic: The Financial Crisis of 2007-2009 Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 32) In 2008, the Federal Reserve of the United States and the Treasury decided to allow Lehman Brothers (an investment bank) to fail; as a direct result A) consumers around the U.S. suffered a large fall in their savings. B) American exporters were no longer able to get loans to finance production for export. C) mortgage rates fell dramatically across the U.S. D) securitization outside the government guaranteed mortgages stopped. E) commercial banks stopped taking deposits. Answer: D Diff: 1 Type: MC Topic: The Financial Crisis of 2007-2009 Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 62 Copyright © 2024 Pearson Canada Inc.

33) Banks hold 100% of their chequing deposits as vault cash to ensure that bank runs do not occur. Answer: FALSE Diff: 1 Type: TF Topic: Fractional Reserve Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 34) A series of bank runs in a country should have no effect on M1+ as money simply moves from chequing deposits to currency. Answer: FALSE Diff: 2 Type: TF Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 35) The Bank of Canada has complete control over the money supply. Answer: FALSE Diff: 1 Type: TF Topic: How the Bank of Canada Manages the Money Supply Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 36) How will the purchase of $100 million of government securities by the Bank of Canada change bank reserves and total chequing account deposits in the banking system as a whole? Assume that banks do not hold any excess reserves, that households and firms do not change the amount of currency they hold, and that the desired reserve ratio is 20 percent. Answer: Bank reserves will increase by $100 million when the seller of the bond deposits the $100 million in its chequing account. Total chequing account deposits in the banking system as a whole will increase by $500 million — the $100 million increase in reserves times the simple deposit multiplier of 5. Diff: 2 Type: ES Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 37) If the desired reserve ratio is 100 percent, could the Bank of Canada still change the money supply with open market operations? Explain whether they could or could not. Answer: The Bank of Canada could still change the money supply, because the initial purchase or sale of government securities would change chequing account deposits. For instance, if the Bank of Canada purchases a $1,000 government bond from you and you deposit the funds in the bank, then chequing account deposits and the money supply would go up $1,000. The simple deposit multiplier with a 100 percent desired reserve ratio would equal one, not zero, so an increase in reserves still increases chequing account deposits. Diff: 2 Type: ES Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills

38) Would the maximum loan that a bank can make be different when receiving an advance from the Bank of Canada of $1 million versus receiving a chequing account deposit of $1 million? Explain why or why not. Answer: They are different. Both increase the reserves at the bank by $1 million, but the bank does not have to hold desired reserves against the advance because it is not a deposit. The entire $1 million of the advance is excess reserves, which the bank can loan out. Diff: 2 Type: ES Topic: Lending to Financial Institutions Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 39) A fractional reserve banking system is one in which banks hold less than 100 percent of ________ in reserves. A) loans B) deposits C) securities D) shareholder equity E) debts Answer: B Diff: 1 Type: MC Topic: Fractional Reserve Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 40) A central bank can help stop a bank panic by A) raising the required reserve ratio. B) calling in consumer loans. C) acting as a lender of last resort. D) decreasing income taxes. E) selling government securities. Answer: C Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 41) The bank panics seen in the late nineteenth and early twentieth centuries were accompanied by A) inflation. B) deflation. C) a depression. D) a recession. E) political uncertainty. Answer: D Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

42) In 1933, a Royal Commission recommended establishing the Bank of Canada to be responsible for Canada's A) banking system. B) unemployment rates. C) printing of currency and minting of coins. D) monetary policy. E) fiscal policy. Answer: D Diff: 2 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 43) Which of the following is not a major function of the Bank of Canada? A) acting as lender of last resort B) clearing cheques between banks C) setting income tax rates D) controlling the money supply E) managing the funds of the federal government Answer: C Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 44) The Bank of Canada is overseen by a governing council made up of A) political appointees selected by the Prime Minister. B) the governor of the Bank of Canada, the senior deputy governor, the minister of finance, and 12 outside directors. C) the governor of the Bank of Canada, four deputy governors, and the minister of finance. D) the governor of the Bank of Canada, the senior deputy governor, and four deputy governors. E) the governor of the Bank of Canada, the deputy minister of finance, and the auditor general of the federal government. Answer: D Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

45) The real power within the Bank of Canada lies with the A) Prime Minister. B) Governing Council. C) Board of Directors. D) Council of Commercial Banks. E) Privy Council of the Federal Government. Answer: B Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 46) The Bank of Canada maintains an operating band for the overnight interest rate of A) 50 percent of the bank rate. B) 50 basis points below the bank rate. C) 50 percent of the inflation rate. D) 50 basis points below the inflation rate. E) 50 basis points above the prime rate. Answer: B Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 47) Which of the following is not a reason the Bank of Canada conducts monetary policy principally through open market buyback operations? A) Because the Bank of Canada initiates them, it completely controls their volume. B) They can be done on both a large and small scales. C) They can be implemented quickly, without administrative delay. D) Because printing and destruction of Canadian currency is a violation of Canadian law. E) They can be implemented quickly, without regulation changes. Answer: D Diff: 1 Type: MC Topic: Bank Run Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 48) Which of the following is not a tool the Bank of Canada uses to manage the money supply? A) purchase and resale agreements B) setting the overnight rate C) setting reserve requirements for deposits in the banking system D) sale and repurchase agreements E) lending to commercial banks Answer: C Diff: 1 Type: MC Topic: How the Bank of Canada Manages the Money Supply Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 66 Copyright © 2024 Pearson Canada Inc.

49) If the rate of inflation is expected to fall below the target range of 1 to 3 percent, the Bank of Canada will A) increase the target for the overnight interest rate. B) decrease the exchange rate for the Canadian dollar. C) increase their demand for Canadian dollars. D) decrease the target for the overnight interest rate. E) engage in sale and repurchase agreements with commercial banks. Answer: D Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 50) Which is the most important tool the Bank of Canada has in preventing financial panics? A) the ability to print money B) the operating target band for the rate of inflation C) lending to commercial banks D) open market buyback operations E) timing the sale of government securities Answer: C Diff: 1 Type: MC Topic: How the Bank of Canada Manages the Money Supply Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 51) Open market operations refer to the buying and selling of ________ by the ________ to control the money supply. A) government securities; Bank of Canada B) government securities; Ministry of Finance C) stocks and bonds; Bank of Canada D) stocks and bonds; Ministry of Finance E) corporate bonds; Toronto Stock Exchange Answer: A Diff: 1 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

52) If the Bank of Canada wants to decrease the money supply through open market operations, it will A) buy Canada Treasury bills and bonds. B) sell Canada Treasury bills and bonds. C) increase the desired reserve ratio. D) decrease the desired reserve ratio. E) increase it's loans to commercial banks. Answer: B Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 53) The primary tool the Bank of Canada uses to increase the money supply is A) printing more money. B) lowering the desired reserve ratio. C) buying government securities. D) lowering the overnight interest rate. E) reducing lending to commercial banks. Answer: C Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 54) The overnight interest rate is A) the interest rate peer to peer lenders charge each other for overnight loans. B) the interest rate banks charge their best customers. C) the interest rate the Bank of Canada charges to banks for advances from the Bank of Canada. D) the interest rate the Bank of Canada pays on Canada Savings Bonds. E) the interest rate on credit card borrowing paid off before the balance is due. Answer: C Diff: 1 Type: MC Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 55) Which policy tool allows the Bank of Canada the greatest control over monetary policy? A) the overnight interest rate B) open market operations C) the reserve requirement D) lender of last resort E) its control over commercial banks' reserve ratio Answer: B Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

56) Lowering the overnight interest rate will A) decrease reserves, encourage banks to make fewer loans, and decrease the money supply. B) decrease reserves, encourage banks to make fewer loans, and increase the money supply. C) increase reserves, encourage banks to make more loans, and increase the money supply. D) increase reserves, encourage banks to make more loans, and decrease the money supply. E) decrease reserves, encourage banks to make more loans, and decrease the money supply. Answer: C Diff: 2 Type: MC Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 57) If the Bank of Canada buys government securities, then this A) increases reserves, encourages banks to make more loans, and increases the money supply. B) decreases reserves, causes banks to reduce their loans, and decreases the money supply. C) decreases reserves, causes banks to reduce their loans, and increases the money supply. D) increases reserves, causes banks to reduce their loans, and increases the money supply. E) decreases reserves, encourages banks to make more loans, and increases the money supply. Answer: A Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 58) Which of the following tools of monetary policy is used least often? A) sale and repurchase agreements B) printing more money C) setting the overnight interest rate D) acting as a lender of last resort E) purchase and resale agreements Answer: B Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 59) Which of the following is an appropriate policy for the Bank of Canada to pursue if it wants to increase the money supply? A) raise the reserve requirement B) raise the overnight interest rate C) purchase and resale agreements D) lower taxes E) sale and repurchase agreements Answer: C Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 69 Copyright © 2024 Pearson Canada Inc.

60) Which of the following describes the degree of control that the Bank of Canada has over the money supply? A) The Bank of Canada has absolute control over the money supply. B) The Bank of Canada has no control of the money supply. C) The Bank of Canada has substantial control over the money supply. D) The Bank of Canada has very little control over the money supply. E) The Bank of Canada allows the money supply to find its own level. Answer: C Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 61) To increase the money supply, the Bank of Canada could A) lower the overnight interest rate. B) decrease income taxes. C) raise the desired reserve ratio. D) conduct an open market sale of government securities. E) reduce lending to commercial banks. Answer: A Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 62) To decrease the money supply, the Bank of Canada could A) lower the overnight interest rate. B) raise income taxes. C) raise the desired reserve ratio. D) conduct an open market sale of government securities. E) increase lending to commercial banks. Answer: D Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

63) An increase in the overnight interest rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; has no impact on Answer: D Diff: 2 Type: MC Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 64) If a bank receives a $20 million advance from the Bank of Canada, then the bank's reserves will A) not change. B) increase by $20 million. C) increase by less than $20 million. D) increase by more than $20 million. E) decrease by $20 million. Answer: B Diff: 2 Type: MC Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 65) Suppose a bank has $100 million in chequing account deposits with no excess reserves and the desired reserve ratio is 10 percent. If commercial banks raise the desired reserve ratio to 15 percent, then the bank will now have excess reserves of A) -$15 million. B) -$5 million. C) $0. D) $5 million. E) $15 million. Answer: B Diff: 2 Type: MC Topic: Reserve Requirements Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills

66) Suppose a bank has $100 million in chequing account deposits with no excess reserves and the desired reserve ratio is 10 percent. If commercial banks reduce the desired reserve ratio to 4 percent, then the bank can make a maximum loan of A) $0. B) $4 million. C) $6 million. D) $10 million. E) $25 million. Answer: C Diff: 2 Type: MC Topic: Reserve Requirements Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 67) Suppose a bank has $100,000 in chequing account deposits with no excess reserves and the desired reserve ratio is 5 percent. If commercial banks lower the desired reserve ratio to 3 percent, then the bank will now have excess reserves of A) $0. B) $2,000. C) $3,000. D) $5,000. E) $20,000. Answer: B Diff: 2 Type: MC Topic: Reserve Requirements Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 68) The process of bundling financial assets together and buying and selling these bundles in a secondary financial market is called A) open market operations. B) securitization. C) fractional reserve lending. D) seigniorage. E) risk redistribution. Answer: B Diff: 1 Type: MC Topic: Securitization Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

69) When a financial asset is first sold, the sale takes place in the ________ market, and subsequent sales take place in the ________ market. A) stock; bond B) primary; secondary C) investment; commercial D) secure; risk E) bond; stock Answer: B Diff: 1 Type: MC Topic: Shadow Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 70) ________ sell shares to investors and use the money to buy short-term securities. A) Mortgage-backed securities dealers B) Hedge funds C) Money market mutual funds D) Shadow banks E) Commercial banks Answer: C Diff: 2 Type: MC Topic: Shadow Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 71) In 2008, U.S. Secretary of Treasury Timothy Geithner referred to investment banks, money market mutual funds, hedge funds, and other financial firms engaged in similar activities as the A) shadow banking system. B) commercial banking system. C) securitization market. D) secondary market. E) the near-banking system. Answer: A Diff: 1 Type: MC Topic: The Financial Crisis of 2007-2009 Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

Article Summary In August 2017, the Central Bank of Russia (CBR) announced plans to bail out Otkritie, the country's seventh-largest bank, raising fears of a nationwide crisis in the banking sector. Otkritie Bank had grown rapidly in recent years, with the acquisitions of smaller banks, non-pension funds, insurers, and even a diamond business, prompting the CBR's first deputy chairman to refer to the bank's business practices as "questionable." While not stating a specific amount to be spent on the bailout, the CBR did say it planned to take a minimum 75 percent stake in the bank. Source: Sam Meredith, "Russia bailout stokes fears of a systemic banking crisis," cnbc.com, August 30, 2017. 72) Refer to the Article Summary. The CBR's announcement in August 2017 of its intention to bail out Otkritie Bank raised fears of a nationwide banking crisis in Russia. Fears of a banking crisis have been known to lead to a bank run, a situation in which A) a majority of the shareholders in a bank decide to sell off all their shares of stock. B) many depositors simultaneously decide to withdraw money from a bank. C) a majority of the bank's loans go into default all at once. D) a bank stops paying interest on all of its interest-bearing accounts. E) a bank starts to borrow from other banks. Answer: B Diff: 1 Type: MC Topic: Bank Run Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 73) Refer to the Article Summary. The CBR announced in August 2017 its intention to bail out Otkritie Bank, Russia's seventh-largest bank. In bailing out this bank, the CBR was, in effect, acting as a(n) A) shadow bank. B) conductor of open market operations. C) private equity firm. D) lender of last resort. E) insurer. Answer: D Diff: 1 Type: MC Topic: Bank Run Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 74) An open market purchase of government securities by the Bank of Canada causes the reserves of banks to rise. Answer: TRUE Diff: 2 Type: TF Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

75) If the Bank of Canada wishes to decrease the supply of money and credit, it may sell government securities, raise the bank rate, or lower desired reserve ratios. Answer: FALSE Diff: 2 Type: TF Topic: How the Bank of Canada Manages the Money Supply Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 76) The Bank of Canada was established in 1934 to serve as lender of last resort and to manage monetary policy in Canada. Answer: TRUE Diff: 2 Type: TF Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 77) Describe the impact of shadow banking as a cause of the financial crisis of 2007-2009. Answer: Neither the Office of the Superintendent of Financial Institutions Canada (OSFI) nor the Bank of Canada had regulatory authority over the shadow banking institutions like they did over commercial banks. Also, these firms were more highly leveraged than charter banks, and thus while they were able to reap large profits, they also had the potential for large losses. They also did not qualify for insurance from the Canada Deposit Insurance Corporation (CDIC) and thus became vulnerable to bank runs when they saw huge losses from defaults of mortgages, which weakened the value of their mortgage-backed securities. Diff: 2 Type: SA Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 78) How do open market operations work? Answer: If the Bank of Canada decides to increase the money supply, it will use purchase and resale agreements (PRAs) to buy government securities from primary dealers (i.e. banks or securities brokers) with an agreement to resell them later. When the sellers of these securities deposit the funds from the sale into their bank, the reserves of the banking system will rise. This will start the process of expanding the money supply as the increase in reserves expands loans and chequing account deposits. If the Bank of Canada wants to reduce the money supply, it will use sale and repurchase agreements (SRAs) to sell government securities. This will decrease reserves, contract loans, contract chequing accounts, and shrink the money supply. Diff: 2 Type: SA Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

79) How effective is the overnight interest rate as compared to open market operations in managing the money supply? Explain how the Bank of Canada uses overnight interest rate today. Answer: The effectiveness of overnight interest rate in changing the money supply depends upon banks' willingness to borrow reserves. The Bank of Canada may lower the overnight interest rate, encouraging bankers to borrow reserves and increase loans. But bankers are not required to increase their borrowing. In contrast, an open market purchase of securities will increase reserves in the banking system and encourage lending. The Bank of Canada tends to use the overnight interest rate to help banks that are temporarily in need of reserves. That is, as a policy to serve as a lender of last resort for banks. Diff: 2 Type: SA Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 80) What is the principle monetary policy tool used by the Bank of Canada? Why? Answer: The tool that the Bank of Canada primarily uses is open market operations. There are three reasons. First, because the Bank of Canada is the party that initiates the open market operations, it completely controls the volume. Second, it can make the volume large or small, depending on how many government securities it decides to buy or sell. Finally, it can implement this policy tool quickly. It does not have to change regulations and the administrative machinery is in place for it to make changes quickly. Diff: 2 Type: SA Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur 1) The quantity equation states that the A) money supply divided by the velocity of money equals the price level divided by real output. B) money supply times the velocity of money equals the price level times real output. C) money supply times the price level equals real output divided by the velocity of money. D) money supply times the price level equals real output times the velocity of money. E) money supply times the velocity equals the real output divided by price level. Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 2) Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be A) 19 percent. B) 15 percent. C) 11 percent. D) 6 percent. E) 5 percent. Answer: C Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 3) The quantity theory of money predicts that, in the long run, inflation results from the A) velocity of money growing at a faster rate than real GDP. B) velocity of money growing at a lower rate than real GDP. C) money supply growing at a lower rate than real GDP. D) money supply growing at a faster rate than real GDP. E) price level growing at a faster rate than money supply. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

4) The quantity theory of money was derived from the quantity equation by asserting that A) real output was fixed. B) the money supply was fixed. C) the velocity of money was fixed. D) the velocity of money was zero. E) the price level was fixed. Answer: C Diff: 3 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 5) According to the quantity theory of money, the inflation rate equals A) the money supply minus real output. B) the growth rate of the money supply minus the growth rate of real output. C) real output minus the money supply. D) the growth rate of real output minus the growth rate of the money supply. E) the growth rate of the money supply minus the growth rate of the velocity of money. Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 6) According to the quantity theory of money, if the money supply grows at 20 percent and real GDP grows at 5 percent, then the inflation rate will be A) 4 percent. B) 15 percent. C) 20 percent. D) 25 percent. E) 100 percent. Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

7) Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be A) 19 percent. B) 15 percent. C) 11 percent. D) 6 percent. E) 14 percent. Answer: C Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 8) According to the quantity theory of money, deflation will occur if the A) money supply is less than real GDP. B) money supply is more than real GDP. C) money supply grows at a slower rate than real GDP. D) money supply grows at a faster rate than real GDP. E) the velocity of money grows at a faster rate than money supply. Answer: C Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 9) Hyperinflation can be caused by A) the government selling bonds to the central bank. B) the central bank selling bonds to the public. C) the government selling bonds to the public. D) the central bank selling bonds to the government. E) the central bank selling bonds to commercial banks. Answer: A Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills

10) In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience A) stagflation. B) deflation. C) inflation. D) hyperinflation. E) disinflation. Answer: D Diff: 1 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 11) Which of the following is not a consequence of hyperinflation? A) Money's function as a medium of exchange is enhanced. B) Money loses value so rapidly that firms and individuals stop holding it. C) It causes an economy to suffer slow growth. D) The price level grows in excess of hundreds of percentage points per year. E) Money's function as a store of value is destroyed. Answer: A Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 12) The German Hyperinflation of the early 1920s was caused by A) the German government raising funds for expenditures by selling bonds to the central bank. B) an overly aggressive monetary policy implemented to combat a severe recession. C) rising oil prices after World War I caused a severe stagflation and hyperinflation. D) large deficits resulting from the high levels of war spending and falling taxes. E) a severe drop in consumer confidence. Answer: A Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Apply the Concept: The German Hyperinflation of the Early 1920s

13) Based on the quantity theory of money, what is required for price level stability? A) a money supply that grows more quickly than real GDP. B) a money supply that grows at the same rate as real GDP. C) a velocity of money that grows more quickly than money supply. D) a real GDP that grows more quickly than money supply. E) an ever accelerating velocity of money. Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 14) Hyperinflation in Zimbabwe was most likely caused by A) excessive imports from other countries. B) extreme money supply growth. C) excessive government budget surpluses. D) overly high required reserve ratios at commercial banks. E) unstable government. Answer: B Diff: 2 Type: MC Topic: Desired Reserves Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 15) There is a strong link between changes in the money supply and inflation A) in both the short run and the long run. B) in neither the short run nor the long run. C) in the short run, but not in the long run. D) in the long run, but not in the short run. E) in countries without hyperinflation. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 16) If the rate of growth in real GDP exceeds the rate of growth in the money supply, the quantity theory of money predicts a price deflation. Answer: TRUE Diff: 2 Type: TF Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

17) Hyperinflations occur because governments want to spend more than they raise in taxes, and they pay for the extra purchases by printing money. Answer: TRUE Diff: 3 Type: TF Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 18) For the purchasing power of money to increase, the price level has to fall. Answer: TRUE Diff: 2 Type: TF Topic: Money, Income, and Wealth Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash? 19) How is the quantity theory of money different from the quantity equation and why must the quantity equation always be true? Answer: The quantity equation is that the money supply (M) times the velocity of money (V) equals the price level (P) times real output (Y), i.e., M × V = P × Y. The quantity equation must always be true, because of the definition of the velocity of money: V =

. Substitute

in for V, and the quantity

equation yields P × Y = P × Y. The quantity theory of money is a theory derived from the quantity equation by asserting that the velocity of money is fixed, and can be true or not true. Diff: 3 Type: ES Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

20) Suppose the velocity of money is not fixed, but stable at about two percent growth per year. How could the quantity theory of money be modified to include a stable growth rate of the velocity of money? In this modified quantity theory of money with velocity growing at two percent per year, what would the growth rate of the other variables in the theory need to be to cause inflation? Answer: The quantity theory of money would have to include a growth rate for the velocity of money of about two percent, instead of zero percent. The inflation rate would then be determined by the following equation: Inflation rate = Growth rate of the money supply + Growth rate of the velocity of money - Growth rate of real GDP. Inflation would occur if the growth rate of the money supply plus the two percent growth rate of the velocity of money exceeds the growth rate of real GDP. In other words, the growth rate of the money supply must be two percent less than the growth rate of real GDP, or inflation will occur. Diff: 3 Type: ES Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 21) In countries that have experienced hyperinflation, what role have large government budget deficits played in causing the very high inflation rates? Answer: The large government budget deficits lead to the massive increases in the money supply necessary to generate the hyperinflation. The public, especially in the developing world, will not buy the government bonds necessary to finance the large budget deficits. The central bank has had to purchase the government bonds, which has sent the money supply through the roof, leading to hyperinflation. Diff: 2 Type: ES Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 22) When a government has a budget deficit, it must issue (sell) government bonds to finance the deficit. Does it matter for the rate of inflation if the government sells the government bonds to the public or sells the government bonds to the central bank? Explain why it does or does not matter. Answer: It matters greatly. When the government sells the bonds to the public the money supply does not change, but when they sell the bonds to the central bank the money supply increases. If there are large budget deficits, the money supply will increase substantially when the central bank buys government bonds. Using the quantity theory of money, the increase in money supply from the purchase of the bonds by the central bank will increase the inflation rate. Diff: 2 Type: ES Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills

23) The quantity theory of money seeks to explain the connection between money and A) interest rates. B) unemployment. C) output. D) prices. E) consumer confidence. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 24) The quantity equation states that A) the money supply (M) divided by the velocity of money (V) equals the price level (P) divided by real output (Y), i.e., M/V = P/Y. B) M × V = P × Y. C) M + V = P + Y. D) M - V = P - Y. E)

= V.

Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 25) The velocity of money is defined as A) the average number of times each dollar is used to purchase goods and services. B)

C) the total number of times each dollar is used to purchase goods and services. D) P × Y. E) the speed with which banks can clear transactions. Answer: A Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

26) The quantity theory of money assumes that A) the velocity of money is negative. B) the velocity of money is constant. C) the velocity of money is zero. D) the velocity of money fluctuates unpredictably. E) the velocity of money is growing at an ever accelerating rate. Answer: B Diff: 1 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 27) According to the quantity theory of money, inflation is caused by A) the money supply growing slower than real GDP. B) GDP growing faster than the money supply. C) GDP growing at the same rate as the money supply. D) the money supply growing faster than real GDP. E) government deficit spending. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 28) The quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals A) 0. B) the growth rate of the price level. C) the growth rate of the velocity of money. D) the growth rate of real GDP. E) the growth rate of real GDP times the current price level. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

29) According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be A) 12%. B) 8%. C) 6%. D) 4%. E) 2%. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 30) Hyperinflation is caused by A) a constant increase in the money supply. B) a high rate of growth in the money supply. C) real GDP growing more rapidly than the money supply. D) the money supply growing more slowly than GDP. E) large government surpluses. Answer: B Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 31) Which of the following is not one of the ways that the German government ended the hyperinflation of the 1920s? A) reducing reparations payments B) reducing government expenditures C) raising the required reserve ratio to reduce bank loans D) replacing the existing mark with a new mark E) raising taxes to balance its budget Answer: C Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Apply the Concept: The German Hyperinflation of the Early 1920s

32) During the German hyperinflation of the 1920s, the large increases in the money supply were generated by the German government A) significantly lowering the required reserve ratio to enable German businesses to obtain loans. B) significantly raising the required reserve ratio to reduce business loans. C) printing large quantities of German marks. D) selling large quantities of government bonds to the central bank, the Reichsbank. E) running large budget surpluses. Answer: D Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Apply the Concept: The German Hyperinflation of the Early 1920s 33) In 2008, Zimbabwe ran out of locally produced Coca-Cola and local Coke bottlers were not able to import the concentrated syrup needed to make Coke from the United States because they could not obtain U.S. dollars. A small amount of Coke was imported from South Africa, but a single bottle sold for around 15 billion Zimbabwean dollars. Zimbabwe was experiencing rapid increases in the price level, which is known as A) stagflation. B) deflation. C) inflation. D) hyperinflation. E) disinflation. Answer: D Diff: 1 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 34) An increase in the purchasing power of money would not, on average, result in an increase in the purchasing power of people's income because a ________ price level would likely mean ________ wages and salaries. A) rising; falling B) rising; rising C) falling; falling D) falling; rising E) falling; no changes in Answer: C Diff: 3 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash?

35) If GDP is currently growing at 28 % a year, the velocity of money is growing at 1% a year, and the growth rate of money supply is 15%, what rate of inflation can this country expected based on the quantity theory of money? A) -12% B) 12% C) 44% D) 0.5% E) -13% Answer: A Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills Special Feature: Algorithmic Question 36) The quantity equation becomes the basis for a theory when we assume that velocity of money is constant. Answer: TRUE Diff: 2 Type: TF Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 37) If the rate of growth in real GDP exceeds the rate of growth in the money supply, the quantity theory of money predicts inflation. Answer: FALSE Diff: 2 Type: TF Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 38) An increase in the purchasing power of money need not lead to an increase in the purchasing power of income, because the falling price level would likely mean falling wages and salaries. Answer: TRUE Diff: 2 Type: TF Topic: Money, Income, and Wealth Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash?

39) What are the implications of the quantity theory of money for monetary policy and price stability? Answer: If one assumes that the velocity of money is constant, there are clear implications on how to use monetary policy for price stability. If we transform the quantity equation, MV = PY, into an equation about growth rate for these variables, then the quantity equation becomes: growth rate of money + growth rate of velocity = growth rate in prices (inflation rate) + growth rate of real output. Rearranging this, we get: inflation rate = growth rate of money + growth rate of velocity - growth rate of real output. If velocity does not change, then the growth rate of velocity is zero. Then, inflation is determined by: growth rate of money - growth rate of output. As long as money does not grow faster than real output, inflation will not occur. If the supply of money grows faster than the growth of real output, the result will be inflation. Diff: 3 Type: SA Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 40) According to monetary theory, if the money supply is growing at a rate of 5 percent, real GDP is growing at a rate of 2 percent, and velocity is constant, what will the inflation rate be? Answer: Using the growth rate version of the quantity equation, we have: growth rate of the price level (or inflation rate) = growth rate of money + growth rate of velocity - growth rate of real output. If velocity does not change, then the growth rate of velocity is zero. Then: growth rate of the price level (or inflation rate) = growth rate of money - growth rate of output. Substituting in our values: growth rate of the price level (or inflation rate) = 5 percent - 2 percent = 3 percent. Diff: 2 Type: SA Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 11 Monetary Policy 11.1

Define monetary policy and describe the Bank of Canada's monetary policy goals

1) In both 2007-2009 and 2020, the Bank of Canada took measures that went far beyond its usual monetary policy actions including non-interest rate tools known as non-conventional monetary policy tools to stimulate the economy. These tools take the form(s) of A) liquidity provision and asset purchases. B) liquidity provision, asset purchases, and forward guidance. C) asset purchases and forward guidance. D) liquidity provision and forward guidance. E) forward guidance only. Answer: B Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Analytical Thinking Special Feature: Chapter Opener: The Bank of Canada Deals with Two "Once in a Lifetime" Crises Within 15 Years. 2) Why would businesses watch the Bank of Canada for signs of changing interest rates? A) Changes in the Bank of Canada's key policy rate determine the cost of the labour. B) Many consumers borrow heavily to finance durable products, sales of these goods are likely to rise when the Bank of Canada lowers the interest rate. C) Changes in Bank of Canada policy determine the federal income tax rate. D) Changes in the Bank of Canada's key policy rate are good indicators of federal government spending decisions. E) Many consumers base their expectations of future income on the Bank of Canada's policy announcements. Answer: B Diff: 1 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking Special Feature: Chapter Opener: The Bank of Canada Deals with Two "Once in a Lifetime" Crises Within 15 Years.

3) If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Bank of Canada usually ________ interest rates during this time. A) low; lowers B) low; raises C) high; lowers D) high; raises E) low; does not change Answer: A Diff: 1 Type: MC Topic: Monetary Policy and Recessions Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should You Buy a House During a Recession? 4) Monetary policy refers to the actions the A) Prime Minister and Parliament take to manage the money supply and interest rates to pursue their economic objectives. B) Bank of Canada takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives. C) Prime Minister and Parliament take to manage government spending and taxes to pursue their economic objectives. D) Bank of Canada takes to manage government spending and taxes to pursue its economic objectives. E) commercial banks take to manage the amount of their desired reserves. Answer: B Diff: 1 Type: MC Topic: What Is Monetary Policy? Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 5) The Bank of Canada system's four monetary policy goals are A) low government budget deficits, low current account deficits, high employment, and a high foreign exchange value of the dollar. B) rate of bank failures, high reserve ratios, price stability, and economic growth. C) price stability, high employment, economic growth, and stability of financial markets and institutions. D) price stability, low government budget deficits, low current account deficits, and low rate of bank failures. E) price stability, high levels of retirement savings, economic growth, and financial market stability. Answer: C Diff: 1 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

6) When the Bank of Canada Act was passed in 1934, it was stated that the main responsibility is to conduct monetary policy to A) prevent bank panics. B) promote price stability. C) promote the best interests of economic life of Canada. D) keep employment high. E) promote good governance in Canada. Answer: C Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 7) The turmoil in financial markets that began in 2007 led the Bank of Canada to put new emphasis on A) fighting inflation. B) increasing employment. C) increasing economic growth. D) increasing regulation of commercial banks. E) increasing financial market stability. Answer: E Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 8) The Bank of Canada does not regulate financial institutions, but it does act as the "lender of last resort" by lending to commercial banks when they are temporarily short of funds. The goal of the Bank of Canada filling this role is to A) reduce the rate of inflation. B) stimulate economic growth. C) reduce unemployment. D) reassure financial markets and promote financial stability. E) reduce the current account deficit. Answer: D Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

9) The goals of monetary policy tend to be interrelated. For example, when the Bank of Canada pursues the goal of ________, it also can achieve the goal of ________ simultaneously. A) high employment; economic growth B) high employment; lowering government spending C) economic growth; a low current account deficit D) stability of financial markets; a low current account deficit E) price stability; low budget deficits Answer: A Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 10) One of the monetary policy goals of the Bank of Canada is price stability. Answer: TRUE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 11) Since World War II, the Bank of Canada has not been involved in carrying out monetary policy. Answer: FALSE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 12) Inflation rates during the years 1979-1981 were the highest Canada has ever experienced post-1950. Answer: TRUE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

13) List the Bank of Canada's four main monetary goals. Answer: 1. Price stability 2. High employment 3. Stability of financial markets and institutions 4. Economic growth Diff: 2 Type: ES Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 14) What is a symmetric inflation targeting, and what does it mean for the Bank of Canada? Answer: Symmetric inflation targeting means that a central bank is equally concerned with inflation rising above the target as inflation falling below its target. This means the Bank of Canada must be weary of high inflation as well as deflation (a decline in the price level). Diff: 2 Type: ES Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 15) Central banks around the world have pursued historically low interest rates in an effort to A) redistribute wealth from lenders to borrowers. B) reduce government interest payment on past borrowing thus allowing more to be spent on social programs. C) provide governments with a justification for running large budget deficits. D) encourage consumers to spend more and thus shift aggregate demand to the right. E) reduce the incomes of capitalists. Answer: D Diff: 2 Type: MC Topic: Monetary Policy and the Canadian Housing Market Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking Special Feature: Chapter Opener: The Bank of Canada Deals with Two "Once in a Lifetime" Crises Within 15 Years.

16) Monetary policy refers to the actions the Bank of Canada takes to manage A) the money supply and income tax rates to pursue its economic objectives. B) the money supply and interest rates to pursue its economic objectives. C) income tax rates and interest rates to pursue its economic objectives. D) government spending and income tax rates to pursue its economic objectives. E) the money supply to meet its budgetary objectives. Answer: B Diff: 2 Type: MC Topic: What Is Monetary Policy? Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 17) Which of the following are goals of monetary policy? A) maximizing the value of the dollar relative to other currencies, economic growth, and high employment B) price stability, maximizing the value of the dollar relative to other currencies, and high employment C) price stability, economic growth, and high employment D) price stability, economic growth, and maximizing the value of the dollar relative to other currencies E) price stability, high employment, economic growth, and encourage financial literacy Answer: C Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 18) The Bank of Canada focuses on which of the following as their main goal of monetary policy? A) high employment B) price stability C) economic growth D) stability of financial markets E) balanced budgets Answer: B Diff: 1 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

19) The Bank of Canada seeks to promote stability of financial markets because A) they want to lift the self-esteem of workers. B) it was a principle mandated in the Royal Commission of 1933, which directly led to the founding of the Bank of Canada. C) resources are lost when there is not efficient matching of savers and borrowers. D) unstable markets result in increased efficiency. E) stable financial markets are key to growing concentrations of wealth. Answer: C Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 20) The main goal of monetary policy for the Bank of Canada recently has been to maintain high employment in labour markets. Answer: FALSE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 21) Monetary policy is conducted by the federal Department of Finance. Answer: FALSE Diff: 1 Type: TF Topic: What Is Monetary Policy? Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 22) Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Bank of Canada listed in the textbook. Answer: TRUE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

23) Given that it does not regulate financial institutions, how does the Bank of Canada promote stability of financial markets and institutions? Answer: The Bank of Canada promotes the stability of financial markets and institutions by providing liquidity to banks. Commercial banks can borrow from the Bank of Canada when they find themselves temporarily short of funds at the bank rate. By acting as a "lender of last resort" the Bank of Canada reduces the risk of a financial institution—that is otherwise healthy—failing because it cannot access short-term funds. Diff: 1 Type: SA Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 24) What problems can high inflation rates cause for the economy? Answer: The problems that inflation causes the economy include the loss of purchasing power of money, menu costs, and an unintended redistribution of income. Diff: 1 Type: SA Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate 1) The Bank of Canada's two main ________ are the money supply and the interest rate. A) monetary policy targets B) policy tools C) fiscal policy targets D) fiscal tools E) monetary policy goals Answer: A Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 2) The Bank of Canada can directly affect its monetary policy ________, which then affect its monetary policy ________. A) goals; targets B) goals; tools C) targets; goals D) targets; tools E) goals; levers Answer: C Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 3) The money demand curve has a A) negative slope because an increase in the interest rate decreases the quantity of money demanded. B) positive slope because an increase in the interest rate increases the quantity of money demanded. C) negative slope because an increase in the price level decreases the quantity of money demanded. D) positive slope because an increase in the price level increases the quantity of money demanded. E) positive slope because an increase in the interest rate increases the value of future savings. Answer: A Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

4) An increase in the interest rate A) decreases the opportunity cost of holding money. B) increases the opportunity cost of holding money. C) decreases the percentage yield of holding money. D) increases the percentage yield of holding money. E) increases the value of alternative assets. Answer: B Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 5) An increase in the interest rate causes A) a movement up along the money demand curve. B) a movement down along the money demand curve. C) the money demand curve to shift to the left. D) the money demand curve to shift to the right. E) the money demand curve to become steeper. Answer: A Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 6) An increase in the price level causes A) the money demand curve to shift to the left. B) the money demand curve to shift to the right. C) a movement up along the money demand curve. D) a movement down along the money demand curve. E) the money demand curve to become steeper. Answer: B Diff: 3 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

7) Which of the following would cause the money demand curve to shift to the left? A) an open market purchase of Government of Canada securities by the Bank of Canada B) an increase in the interest rate C) an increase in the price level D) a decrease in real GDP E) a growing population Answer: D Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking Figure 11.1

8) Refer to Figure 11.1. In the figure, the money demand curve would move from MD1 to MD2 if A) real GDP increased. B) the price level decreased. C) the interest rate increased. D) the Bank of Canada sold government of Canada securities. E) the economy is in a recession. Answer: A Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 11 Copyright © 2024 Pearson Canada Inc.

9) Using the money demand and money supply model, an open market purchase of government of Canada securities by the Bank of Canada would cause the equilibrium interest rate to A) increase. B) decrease. C) not change. D) increase if the economy is in a recession. E) decrease if the economy is expanding. Answer: B Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 10) Using the money demand and money supply model, an open market sale of government of Canada securities by the Bank of Canada would cause the equilibrium interest rate to A) increase. B) decrease. C) not change. D) increase, then decrease. E) decrease, then increase. Answer: A Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 11) Suppose that households became mistrustful of the banking system and decide to decrease their chequing accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should A) increase. B) decrease. C) not change. D) increase, then decrease. E) decrease, then increase. Answer: A Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

12) Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to A) increase. B) decrease. C) not change. D) increase, then decrease. E) decrease, then increase. Answer: A Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 13) Which of the following will lead to a decrease in the equilibrium interest rate in the economy? A) an increase in the price level B) a sale of government of Canada securities by the Bank of Canada C) a decrease in GDP D) an increase in the discount rate E) an increase in the reserve requirement Answer: C Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 14) An increase in real GDP can shift A) money demand to the right and decrease the equilibrium interest rate. B) money demand to the right and increase the equilibrium interest rate. C) money demand to the left and decrease the equilibrium interest rate. D) money demand to the left and increase the equilibrium interest rate. E) money demand to the right and leave the equilibrium interest rate unchanged. Answer: B Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

15) When the Bank of Canada increases the money supply, at the previous equilibrium interest rate households and firms will now have A) more money than they want to hold. B) less money than they want to hold. C) the amount of money that they want to hold. D) to sell Treasury bills. E) increased purchasing power. Answer: A Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 16) When the Bank of Canada decreases the money supply, at the previous equilibrium interest rate households and firms will now want to A) buy government of Canada securities. B) sell government of Canada securities. C) neither buy nor sell government of Canada securities. D) hold less money. E) increase their purchases of durable goods. Answer: B Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 17) An increase in the demand for government of Canada securities will A) increase the price of government of Canada securities. B) increase the interest rate on government of Canada securities. C) increase the opportunity cost of holding money vs. government of Canada securities. D) eventually cause households to hold less money. E) increase government debt. Answer: A Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

18) Which of the following is true? A) The money market model is essentially a model that determines the short-term nominal rate of interest. B) The money market model is essentially a model that determines the short-term real rate of interest. C) The loanable funds model is essentially a model that determines the short-term real rate of interest. D) The loanable funds model is essentially a model that determines the long-term nominal rate of interest. E) The money market model is essentially a model that determines the long-term nominal rate of interest. Answer: A Diff: 2 Type: MC Topic: A Tale of Two Interest Rates Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking Figure 11.2

19) Refer to Figure 11.2. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will A) buy Canada bonds. B) sell Canada bonds. C) neither buy nor sell Canada bonds. D) want to hold less money. E) increase their purchases of durable goods. Answer: B Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 15 Copyright © 2024 Pearson Canada Inc.

Figure 11.3

20) Refer to Figure 11.3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will A) buy Canada bonds. B) sell Canada bonds. C) neither buy nor sell Canada bonds. D) want to hold more money. E) increase their savings. Answer: A Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 21) For purposes of monetary policy, the Bank of Canada has targeted the interest rate known as the A) overnight interest rate. B) Canada bond rate. C) discount rate. D) prime rate. E) 5 year fixed mortgage rate. Answer: A Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 16 Copyright © 2024 Pearson Canada Inc.

22) The monetary policy target the Bank of Canada focuses primarily on today is A) the unemployment rate. B) M1+. C) the inflation rate. D) the overnight interest rate. E) M2. Answer: D Diff: 2 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 23) The interest rate that banks charge other banks for overnight loans is the A) prime rate. B) discount rate. C) overnight interest rate. D) Canada bond rate. E) open market rate. Answer: C Diff: 1 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 24) Changes in the overnight interest rate usually result in A) changes in both short-term and long-term interest rates with more of an effect on short-term interest rates. B) changes in both short-term and long-term interest rates with more of an effect on long-term interest rates. C) changes in both short-term and long-term interest rates with equal effect on both. D) no change in both short-term and long-term interest rates. E) changes in the short-term real interest rate but not the short-term nominal interest rate. Answer: A Diff: 2 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

25) The Bank of Canada can increase the overnight interest rate by A) selling Canada bonds, which increases bank reserves. B) buying Canada bonds, which increases bank reserves. C) selling Canada bonds, which decreases bank reserves. D) buying Canada bonds, which decreases bank reserves. E) lowering the operating band. Answer: C Diff: 2 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 26) The Bank of Canada can directly lower the inflation rate. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 27) The Bank of Canada can simultaneously reduce the inflation rate and stimulate growth through lowering interest rates. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 28) A monetary policy target is a variable that the Bank of Canada can affect directly, which then affects one or more of the Bank of Canada's policy goals. Answer: TRUE Diff: 1 Type: TF Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

29) Does the money demand curve have a positive slope or a negative slope? Why does it have this slope? Explain why an increase in the variable on the vertical axis of the money demand curve causes either an increase or a decrease in the variable on the horizontal axis of the money demand curve. Answer: The money demand curve has a negative slope. An increase in the interest rate, the variable on the vertical axis, causes a decrease in the quantity of money demanded, the variable on the horizontal axis, because an increase in the interest rate increases the opportunity cost of holding money. Money earns little or no interest, so an increase in the interest rate induces people to reduce their holdings of money and switch into interest-bearing financial assets. Diff: 3 Type: ES Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 30) Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Bank of Canada's open market sale of government of Canada securities. Answer: An open market sale of government of Canada securities by the Bank of Canada decreases the money supply from MS1 to MS2, raising the interest rate from 3% to 4%.

Diff: 3 Type: ES Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

31) Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $80 billion. Suppose the Bank of Canada increases the money supply to $85 billion. At the previous equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short-term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $85 billion of the money supply. What causes households and firms to want to hold the additional $5 billion of the money supply? Answer: They will be holding more money than they want to hold, so they will buy short-term financial assets. The lower interest rate at the new equilibrium decreases the opportunity cost of holding money, so households and firms desire to hold more money.

32) Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases. Answer: The increase in real GDP shifts the money demand curve to the right from MD1 to MD2, raising the interest rate from 4% to 5%.

Diff: 2 Type: ES Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 33) The Bank of Canada's two main monetary policy targets are A) the money supply and the inflation rate. B) the money supply and the interest rate. C) the interest rate and real GDP. D) the inflation rate and financial market stability. E) the inflation rate and real GDP growth. Answer: B Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

34) If the Bank of Canada raises the overnight interest rate, this will ________ inflation and ________ real GDP in the short run. A) reduce; raise B) increase; lower C) increase; raise D) reduce; lower E) not affect; not affect Answer: D Diff: 2 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 35) A monetary policy target is a variable that A) the Bank of Canada can affect directly. B) equals one of the Bank of Canada's main policy goals. C) the Bank of Canada has no ability to change. D) the Bank of Canada cannot affect directly. E) the Bank of Canada can influence only with the help of the federal government. Answer: A Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 36) The money demand curve, against possible levels of interest rates, has a(n) A) positive slope. B) negative slope. C) zero slope. D) infinite slope. E) positive slope for low levels of money demand, and a negative slope for high levels of money demand. Answer: B Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

37) The money demand curve has a negative slope because A) lower interest rates cause households and firms to switch from money to financial assets. B) lower interest rates cause households and firms to switch from financial assets to money. C) lower interest rates cause households and firms to switch from money to stocks. D) lower interest rates cause households and firms to switch from money to bonds. E) lower interest rates cause households and firms to take more risks. Answer: B Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 38) An increase in real GDP A) increases the buying and selling of goods and increases the demand for money as a medium of exchange. B) increases the buying and selling of goods and decreases the demand for money as a medium of exchange. C) decreases the buying and selling of goods and increases the demand for money as a medium of exchange. D) decreases the buying and selling of goods and decreases the demand for money as a store of value. E) increases the buying and selling of goods and decreases the demand for money as unit of account. Answer: A Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 39) Increases in the price level A) increase the opportunity cost of holding money. B) decrease the opportunity cost of holding money. C) increase the quantity of money needed for buying and selling. D) decrease the quantity of money needed for buying and selling. E) decreases the quantity of money needed as a unit of account. Answer: C Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

Figure 11.4

40) Refer to Figure 11.4. In the figure above, the money demand curve would move from Money demand1 to Money demand2 if A) real GDP decreased. B) the price level increased. C) the interest rate increased. D) the Bank of Canada sold government securities. E) households expected lower incomes in the future. Answer: B Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

Figure 11.5

41) Refer to Figure 11.5. In the figure above, a movement from point A to point B would be caused by A) a decrease in real GDP. B) an increase in the price level. C) a decrease in the price level. D) an increase in the interest rate. E) a decrease in the interest rate. Answer: D Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 42) The money supply curve is vertical if A) banks and the Bank of Canada jointly determine the money supply. B) the Bank of Canada is able to completely determine the money supply. C) banks and households determine the money supply. D) households and the Bank of Canada jointly determine the money supply. E) the supply of money increases as the interest rate increases. Answer: B Diff: 2 Type: MC Topic: Money Supply Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

43) Suppose the Bank of Canada increases the money supply. Which of the following is true? A) At the original interest rate, the quantity of money demanded is equal to the quantity of money supplied. B) At the original interest rate, the quantity of money demanded is less than the quantity of money supplied. C) At the original interest rate, the quantity of money demanded is greater than the quantity of money supplied. D) The interest rate must rise for the money market to clear. E) The supply of money must fall in the future to restore equilibrium. Answer: B Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 44) When the price of a financial asset ________ its interest rate will ________. A) rises; rise B) falls; fall C) falls; rise D) rises; remain the same E) remains the same; rise Answer: C Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 45) Suppose the Bank of Canada decreases the money supply. In response, households and firms will ________ short-term assets and this will drive ________ interest rates. A) buy; up B) buy; down C) sell; up D) sell; down E) hold on to; up Answer: C Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

46) If the Bank of Canada buys Canada bonds, this will A) shift the money supply curve to the right. B) shift the money supply curve to the left. C) shift the money demand curve to the right. D) shift the money demand curve to the left. E) cause the money demand curve to become steeper. Answer: A Diff: 3 Type: MC Topic: Money Supply Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 47) An increase in the money supply will A) increase the interest rate. B) decrease the interest rate. C) have no effect on the interest rate. D) decrease the equilibrium quantity of money in the economy. E) cause a future rise in the interest rate. Answer: B Diff: 1 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

Figure 11.6

48) Refer to Figure 11.6. In the figure above, the movement from point A to point B in the money market would be caused by A) an increase in the price level. B) a decrease in real GDP. C) an open market sale of Canada bonds by the Bank of Canada. D) a decrease in the desired reserve ratio by commercial banks. E) an increase in the willingness of commercial banks to make risky loans. Answer: C Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

Figure 11.7

49) Refer to Figure 11.7. In the figure above, the movement from point A to point B in the money market would be caused by A) an increase in the price level. B) a decrease in real GDP. C) an open market sale of Canada bonds by the Bank of Canada. D) an increase in the desired reserve ratio by commercial banks. E) the Bank of Canada making more loans to commercial banks. Answer: A Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 50) A decrease in real GDP can A) shift money demand to the right and decrease the interest rate. B) shift money demand to the right and increase the interest rate. C) shift money demand to the left and decrease the interest rate. D) shift money demand to the left and increase the interest rate. E) cause the money demand curve to become steeper and increase the interest rate. Answer: C Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

51) The money market model is concerned with ________ and the loanable funds market model is concerned with ________. A) short-term real interest rates; long-term nominal interest rates B) long-term nominal interest rates; long-term real interest rates C) short-term real interest rates; long-term real interest rates D) short-term nominal interest rates; long-term real interest rates E) long-term real interest rates; long-term nominal interest rates Answer: D Diff: 2 Type: MC Topic: A Tale of Two Interest Rates Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 52) Which of the following correctly describes a monetary target the Bank of Canada has focused on? A) The Bank of Canada has used M1+ and M1++ as targets since 1993. B) The Bank of Canada has focused on M1+ as a target after deregulation of the financial markets. C) The Bank of Canada uses the overnight interest rate to target the interest rate. D) After 1980 and before the 1990s, the Bank of Canada focused on interest rate targets. E) The Bank of Canada has focused on the growth of M2, rather than the level of M2. Answer: C Diff: 2 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 53) The overnight interest rate is A) the interest rate the Bank of Canada charges investment banks, trusts, credit unions, and caisses populaires. B) the interest rate a bank charges its best customers. C) the interest rate banks charge each other for overnight loans. D) the interest rate on a Canada bond. E) the interest rate charged on credit card borrowing if payments are made before they are due. Answer: C Diff: 1 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

54) The rate of interest banks charge other banks for overnight loans of reserves is the A) discount rate. B) prime rate. C) overnight interest rate. D) real rate. E) daily nominal rate. Answer: C Diff: 1 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 55) The overnight interest rate A) is determined administratively by the Bank of Canada. B) is determined by the supply of and demand for bank reserves. C) is determined directly by household demand for funds. D) is determined directly by firm demand for funds. E) is determined by the demand for loanable funds. Answer: B Diff: 3 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 56) Buying a house during a recession may be a good idea if your job is secure because the Bank of Canada often A) raises interest rates during recessions. B) lowers interest rates during recessions. C) lowers income taxes during recessions. D) sells Canada bonds to help the housing market. E) makes it easier to qualify for a mortgage during recessions. Answer: B Diff: 2 Type: MC Topic: Monetary Policy and Recessions Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills Special Feature: Economics in Your Life and Career: Should You Buy a House During a Recession? 57) Rising nominal GDP will increase the demand for money and short-term interest rates. Answer: TRUE Diff: 2 Type: TF Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 31 Copyright © 2024 Pearson Canada Inc.

58) Ceteris paribus, an increase in the money supply will lower short-term interest rates. Answer: TRUE Diff: 2 Type: TF Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 59) Buying a house during a recession may be a good idea if your job seems secure because the Bank of Canada often lowers interest rates during a recession. Answer: TRUE Diff: 2 Type: TF Topic: Monetary Policy and Recessions Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should You Buy a House During a Recession? 60) Give an example of a monetary policy target. Explain why the Bank of Canada uses policy targets. Answer: One possible monetary target is the money supply. Another possible target is the interest rate. (Either answer is correct). A monetary policy target is an economic variable that the Bank of Canada can affect directly. The Bank of Canada uses monetary targets because it cannot directly manipulate and change monetary policy goals such as high employment, economic growth and price stability. The Bank of Canada can affect the targets directly and they in turn affect the variables such as real GDP and the price level, which are closely related to the Bank of Canada's policy goals. Diff: 2 Type: SA Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 61) Describe how the Bank of Canada uses open market operations to change short-term and long-term interest rates. Answer: The Bank of Canada tries to achieve a target level for the Bank of Canada overnight interest rate by using open market operations. If it wants to lower the overnight interest rate, it will buy Canada bonds using open market operations. This purchase will inject the banking system with reserves. The increased supply of reserves will lower the overnight loan rate on these reserves, which is called the overnight interest rate. Changes in the overnight interest rate will usually result in changes in the interest rates on other short-term financial assets such as Canada bonds, and eventually affect longer-term rates such as the rate of corporate bonds and mortgages. However, the effect on these longer-term rates is usually smaller than the impact on short-term rates and occurs with a lag. Diff: 2 Type: SA Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

62) Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Bank of Canada's open market purchase of government securities. Answer: An open market purchase of government securities by the Bank of Canada increases the money supply from MS1 to MS2, lowering the interest rate from 3% to 2%.

Diff: 3 Type: SA Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level 1) The ability of the Bank of Canada to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect A) tax rates. B) real interest rates. C) nominal interest rates. D) foreign exchange rates. E) commercial bank reserves. Answer: B Diff: 2 Type: MC Topic: Monetary Policy and Economic Activity Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 2) An increase in interest rates A) decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports. B) decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports. C) decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. D) increases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. E) decreases investment spending on machinery, equipment and factories, but increase net exports and consumption spending. Answer: C Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 3) A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds. A) increase; more B) decrease; less C) decrease; more D) increase; less E) increase; similar Answer: A Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 34 Copyright © 2024 Pearson Canada Inc.

4) An increase in the interest rate should ________ the demand for dollars and the value of the dollar, and net exports should ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) increase; not change Answer: C Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 5) The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as A) the Taylor rule. B) a liquidity trap. C) a zero-sum game. D) an interest rate panic. E) an inverted yield curve. Answer: B Diff: 2 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet 6) In response to already low interest rates doing little to stimulate the economy, the Bank of Canada began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as A) inflation targeting. B) contractionary monetary policy. C) securities-bubble deflating. D) quantitative easing. E) discretionary monetary policy. Answer: D Diff: 2 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet

7) By February 2021, bank reserves with the Bank of Canada had soared to more than $400 billion from $250 million before the pandemic. Which of the following is not a reason partially explaining why banks were piling up excess reserves rather than lending funds out? A) the Bank of Canada's decision to start paying interest of 0.25 percent on bank reserves held as deposits at the Bank. B) the reduced demand for loans of households and firms who already faced damaged financial positions due to COVID-19. C) the reluctance of banks to make loans at low interest rates to households and firms with financial positions damaged by COVID-19. D) liquidity traps leaving the central bank unable to lower short-term interest rates further to spur on lending. E) the inability of the Bank of Canada to keep the target overnight rate zero. Answer: B Diff: 2 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet 8) In early 2021, all key inflation measures in Canada started to rise dramatically. As of June 2022, the total CPI inflation rate was A) 6.8 B) 7.2 C) 8.1 D) 5.9 E) 9.0 Answer: C Diff: 1 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet

9) From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Bank of Canada would most likely A) decrease interest rates. B) increase interest rates. C) decrease income tax rates. D) increase income tax rates. E) leave interest rates unchanged. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 10) Expansionary monetary policy refers to the ________ to increase real GDP. A) government's increasing spending and lowering taxes B) government's decreasing spending and raising taxes C) Bank of Canada's increasing the money supply and decreasing interest rates D) Bank of Canada's decreasing the money supply and increasing interest rates E) private firms' decisions concerning the payment of dividends Answer: C Diff: 1 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

Figure 11.8

11) Refer to Figure 11.8. In the figure above, if the economy is at point A, the appropriate monetary policy by the Bank of Canada would be to A) lower interest rates. B) raise interest rates. C) lower income taxes. D) raise income taxes. E) increase spending. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

Figure 11.9

12) Refer to Figure 11.9. Suppose the economy is in a recession and the Bank of Canada pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) A to E. E) C to D. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 13) Refer to Figure 11.9. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Bank of Canada policy for this situation would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) A to E. E) C to D. Answer: C Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 39 Copyright © 2024 Pearson Canada Inc.

14) Refer to Figure 11.9. Suppose the Bank of Canada lowers its target for the overnight interest rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from A) A to B. B) B to A. C) C to B. D) E to A. E) C to D. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 15) Refer to Figure 11.9. Suppose the Bank of Canada sells government of Canada bonds in pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from A) A to B. B) B to D. C) C to B. D) B to C. E) C to D. Answer: C Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 16) Refer to Figure 11.9. Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from A) A to B. B) B to A. C) C to B. D) A to E. E) C to D. Answer: D Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

17) Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) unchanged; unchanged Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 18) Which of the following describes what the Bank of Canada would do to pursue an expansionary monetary policy? A) use open market operations to buy government of Canada bonds B) use open market operations to sell government of Canada bonds C) use discount policy to raise the discount rate D) raise the reserve requirement E) raise the capital buffers required by banks Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts 19) Contractionary monetary policy on the part of the Bank of Canada results in A) an increase in the money supply, an increase in interest rates, and an increase in GDP. B) a decrease in the money supply, an increase in interest rates, and a decrease in GDP. C) an increase in the money supply, a decrease in interest rates, and an increase in GDP. D) a decrease in the money supply, a decrease in interest rates, and a decrease in GDP. E) a decrease in the money supply, an increase in interest rates, and an increase in GDP. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

20) When the Bank of Canada uses contractionary policy, A) the price level rises higher than it would if the Bank of Canada did not pursue policy. B) the price level rises less than it would if the Bank of Canada did not pursue policy. C) it does not change the price level. D) it causes inflation. E) the price level falls. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 21) Which of the following would most likely induce the Bank of Canada to conduct expansionary monetary policy? A) a significant decrease in oil prices B) a significant decrease in business taxes C) a significant decrease in income tax rates D) a significant decrease in investment spending E) a significant rise in government infrastructure spending Answer: D Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 22) The Bank of Canada promptly cut the interest rate at the beginning of the 2007-2009 global financial crisis, even though the recession did not actually begin until some months later. Which of the following is the rationale for this action? A) The Bank of Canada inadvertently engaged in a procyclical policy as opposed to countercyclical policy. B) A new policy must be quickly implemented to do good. C) Rising growth rates over time mean recessions are not as steep as time moves on. D) Inaccurate Statistics Canada data was analyzed by the Bank of Canada's economists, which showed the recession was already underway. E) The Bank of Canada was focused on the rising value of the Canadian dollar at the time. Answer: B Diff: 2 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

23) Which of the following is true about the Bank of Canada and its ability to prevent recessions? The Bank of Canada A) does not try to eliminate recessions, but instead focuses on preventing inflation. B) can fine tune the economy and realistically hope to keep the economy from experiencing recessions. C) cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise be. D) cannot realistically fine tune the economy and has little to no effect on the magnitude and length of recessions. E) due to recent innovations in monetary policy, can prevent all but the most severe recessions. Answer: C Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 24) Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Bank of Canada can affect the economy through monetary policy? Increasing the money supply A) lowers the interest rate, and firms increase investment spending. B) causes people to spend more because they know prices will rise in the future. C) raises the interest rate and consumers decrease spending on durable goods. D) lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises net exports. E) reduces the cost of the government to borrow allowing the government to engage in more expansionary fiscal policy. Answer: A Diff: 2 Type: MC Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts 25) If the Bank of Canada raises or lowers interest rates too late, it could result in a(n) ________ policy that destabilizes the economy. A) fiscal B) budgetary C) procyclical D) countercyclical E) exchange rate Answer: C Diff: 2 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 43 Copyright © 2024 Pearson Canada Inc.

26) Monetary policy could be procyclical if the Bank of Canada A) is late recognizing that a recession has begun and conducts expansionary monetary policy. B) is quick to recognize that a recession has begun and conducts expansionary monetary policy. C) is late recognizing that a recession has begun and does not conduct expansionary monetary policy. D) is quick to recognize that a recession has begun and does not conduct expansionary monetary policy. E) is quick to recognize that a recession has ended and conducts contractionary monetary policy. Answer: A Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 27) The Bank of Canada may inadvertently engage in procyclical policy rather than countercyclical policy due to A) poor political planning. B) shifts in the AD curve. C) the global recession of 2007-2009. D) a lag in gathering and analyzing the data, delaying when the Bank of Canada can recognize a recession has begun. E) a lack of communication between the Bank of Canada and the federal government. Answer: D Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 28) Assume the unemployment rate is rising and price levels are falling. The Bank of Canada would be most likely to engage in A) purchase and resale agreements. B) sale and repurchase agreements. C) contractionary fiscal policy. D) raising bank reserve ratios. E) increasing taxes. Answer: A Diff: 2 Type: MC Topic: Monetary Policy and Economic Activity Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Algorithmic Question

29) Changes in interest rates affect all four components of aggregate demand. Answer: FALSE Diff: 2 Type: TF Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 30) Expansionary monetary policy refers to the Bank of Canada's increasing the money supply and increasing interest rates to increase real GDP. Answer: FALSE Diff: 2 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 31) When the Bank of Canada increases the money supply, people spend more because interest rates fall. Answer: TRUE Diff: 1 Type: TF Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts 32) What actions should the Bank of Canada take if it believes the economy is about to fall into recession? Answer: If the Bank of Canada believes the economy is about to fall into recession, it should conduct expansionary monetary policy, increasing the money supply and reducing interest rates. In implementing expansionary monetary policy, the Bank of Canada could lower the discount rate, lower the reserve requirement, and/or have the trading desk purchase government of Canada securities. Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

33) If the Bank of Canada orders a contractionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy: a. The money supply b. Interest rates c. Investment d. Consumption e. Net Exports f. The aggregate demand curve g. Real GDP h. The price level Answer: a. The money supply decreases. b. Interest rates rise. c. Investment decreases. d. Consumption decreases. e. Net exports decrease. f. The aggregate demand curve shifts to the left. g. Real GDP falls. h. The price level falls. Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

34) Use a graph to show the effects of an expansionary monetary policy moving an economy out of recession and to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level. Answer: If the economy is in recession, it is currently at point A, below potential real GDP. An expansionary monetary policy will shift the aggregate demand curve to the right from AD1 to AD2, increasing real GDP and the price level until it reaches potential real GDP at point B.

Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 35) Lowering the interest rate will A) decrease spending on consumer durables. B) increase investment projects by firms. C) decrease spending on new homes. D) decrease the value of the dollar and lower net exports. E) increase government spending. Answer: B Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

36) If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Bank of Canada expands the money supply under these circumstances, then the interest rate will A) fall substantially and investment and consumer spending will fall substantially. B) rise substantially and investment and consumer spending will rise substantially. C) fall substantially and investment and consumer spending will change very little. D) change very little and investment and consumer spending will change very little. E) rise substantially and investment and consumer spending will fall substantially. Answer: D Diff: 3 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 37) An increase in the domestic interest rate relative to other interest rates should A) increase investment spending. B) decrease consumption spending. C) decrease government spending. D) increase net exports. E) decrease the exchange rate. Answer: B Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 38) Falling interest rates can A) increase a firm's stock price, which causes firms to issue more stock shares, and thus increases funds for investment. B) raise the cost of borrowing for firms and decrease investment. C) raise the cost of buying new homes and fewer new homes will be purchased. D) lower the cost of buying new homes and fewer new homes will be purchased. E) increase the benefit of saving for the future and thus reduce consumption spending now. Answer: A Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

Figure 11.10

39) Refer to Figure 11.10. In the figure above, if the economy is at point A, the appropriate monetary policy by the Bank of Canada would be to A) lower the target for the overnight interest rate. B) raise the target for the overnight interest rate. C) lower income taxes. D) raise income taxes. E) lower the desired reserve ratio. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

Figure 11.11

40) Refer to Figure 11.11. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Bank of Canada? A) a decrease in income taxes B) an increase in the desired reserve ratio C) an open market purchase of Canada bonds D) an open market sale of Canada bonds E) an increase in lending to commercial banks Answer: C Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

Figure 11.12

41) Refer to Figure 11.12. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Bank of Canada? A) an increase in income taxes B) a decrease in the desired reserve ratio C) an open market purchase of Canada bonds D) an open market sale of Canada bonds E) a decrease in lending to commercial banks Answer: C Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 42) If the Bank of Canada pursues expansionary monetary policy, then A) the money supply will decrease, interest rates will rise, and GDP will fall. B) the money supply will decrease, interest rates will fall, and GDP will fall. C) the money supply will increase, interest rates will rise, and GDP will rise. D) the money supply will increase, interest rates will fall, and GDP will rise. E) the money supply will increase, interest will fall, and GDP will fall. Answer: D Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 51 Copyright © 2024 Pearson Canada Inc.

43) If the Bank of Canada lowers its target for the overnight interest rate, this indicates that A) the Bank of Canada is pursuing an expansionary monetary policy. B) the Bank of Canada is pursuing a contractionary monetary policy. C) the Bank of Canada is attempting to combat inflation. D) the Bank of Canada is concerned that the growth in aggregate demand will exceed potential GDP. E) the Bank of Canada is concerned that the unemployment rate has fallen below its natural rate. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 44) If the Bank of Canada pursues expansionary monetary policy, A) aggregate demand will rise and the price level will rise. B) aggregate demand will fall and the price level will fall. C) aggregate demand will rise and the price level will fall. D) aggregate demand will fall and the price level will rise. E) aggregate demand will be unchanged but the price level will fall. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 45) Which of the following situations is one in which the Bank of Canada will potentially pursue expansionary monetary policy? A) Potential GDP is forecasted to be higher than equilibrium GDP. B) Potential GDP is forecasted to be lower than equilibrium GDP. C) Aggregate demand is growing too fast to keep the economy at full employment. D) Aggregate demand is growing too slowly and the economy is in danger of producing GDP above potential GDP. E) The unemployment rate has fallen below its natural rate. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

46) Which of the following characterizes the Bank of Canada's ability to prevent recessions? A) The Bank of Canada is able to "fine tune" the economy and entirely eliminate recessions. B) The Bank of Canada is incapable of changing aggregate demand through its monetary policy tools. C) The Bank of Canada is able to keep a recession shorter and milder than it would otherwise be. D) The Bank of Canada is able to eliminate the business cycle and achieve absolute price stability. E) The Bank of Canada is able to eliminate all but the most severe recessions. Answer: C Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 47) If the Bank of Canada raises its target for the overnight interest rate, this indicates that A) the Bank of Canada is pursuing an expansionary monetary policy. B) the Bank of Canada is pursuing a contractionary monetary policy. C) the Bank of Canada is attempting to combat deflation. D) the Bank of Canada is concerned that the growth in aggregate demand is too slow to keep up with potential GDP. E) the Bank of Canada is attempting to reduce the value of the Canadian dollar on foreign exchange markets. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 48) Contractionary monetary policy causes A) aggregate demand to rise and the price level to rise. B) aggregate demand to fall and the price level to fall. C) aggregate demand to rise and the price level to fall. D) aggregate demand to fall and the price level to rise. E) aggregate demand to rise and the price level to remain unchanged. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

49) If the Bank of Canada's policy is contractionary, it will A) use open market operations to buy Canada bonds. B) use open market operations to sell Canada bonds. C) lower the overnight interest rate. D) lower the reserve requirement. E) increase its lending to commercial banks. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 50) In which of the following situations would the Bank of Canada conduct contractionary monetary policy? A) The Bank of Canada believes that aggregate demand is growing too slowly to keep up with potential GDP. B) The Bank of Canada fears that unemployment is climbing above the natural rate. C) The Bank of Canada is concerned that aggregate demand may continue to exceed the growth in potential GDP. D) The Bank of Canada is worried that deflation will become a problem. E) The Bank of Canada is concerned that the exchange is below its operating band. Answer: C Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 51) When the Bank of Canada increases the money supply, A) the interest rate rises, and this stimulates consumption spending. B) people spend less because they have more money. C) the interest rate falls, and this stimulates investment spending. D) the interest rate rises, and this stimulates investment spending. E) the interest rate remains constant, while investment spending rises. Answer: C Diff: 2 Type: MC Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts

52) Suppose that the economy is producing below potential GDP and the Bank of Canada implements the correct change in monetary policy, but not until after the economy has passed the trough of the recession. Then A) the Bank of Canada's contractionary policy will result in too large of a decrease in GDP. B) the Bank of Canada's contractionary policy will result in too small of a decrease in GDP. C) the Bank of Canada's expansionary policy will result in too small of a decrease in GDP. D) the Bank of Canada's expansionary policy will result in too large of an increase in GDP. E) the Bank of Canada's contractionary policy will result in too large of an increase in GDP. Answer: D Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 53) Suppose that the economy is producing above potential GDP and the Bank of Canada implements the correct change in monetary policy, but not until after the economy has passed the peak of the boom. Then A) the Bank of Canada's contractionary policy will result in too large of a decrease in GDP. B) the Bank of Canada's contractionary policy will result in too small of a decrease in GDP. C) the Bank of Canada's expansionary policy will result in too small of a decrease in GDP. D) the Bank of Canada's expansionary policy will result in too large of an increase in GDP. E) the Bank of Canada's contractionary policy will result in too large of an increase in GDP. Answer: A Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 54) The Bank of Canada A) always engages in countercyclical policy. B) always intends to engage in procyclical policy. C) can engage in procyclical policy if it mistimes its policy response. D) never intends to engage in countercyclical policy. E) is never able to engage in countercyclical policy. Answer: C Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

55) The Bank of Canada A) can easily distinguish the minor ups and downs of the economy from a recession. B) can have difficulty distinguishing the minor ups and downs of the economy from a recession. C) always times its policy responses correctly. D) can easily determine if a drop in production means a recession is inevitable. E) is legally barred from collecting the data it needs to effectively intervene in the economy. Answer: B Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 56) The body that is responsible for dating the beginning and ending dates for a recession is A) the Bank of Canada. B) Canadian Parliament. C) the Association of Chief Economics of Canadian Banks. D) Statistics Canada. E) There is no such body in Canada. Answer: E Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 57) The lag in calculating GDP and determining GDP can cause the Bank of Canada to engage in A) countercyclical policy. B) procyclical policy. C) monetary policy. D) quantitative easing. E) fiscal policy. Answer: B Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

58) When the Bank of Canada embarked on a policy known as quantitative easing, they A) slowly lowered the federal funds rate target until it was equal to zero. B) reduced the required reserve ratio by one-quarter point per month for 12 months. C) bought longer-term securities than are usually bought in open market operations. D) opened up lending to primary dealers, commercial banks, and investment banks. E) generated a rapid economic recovery. Answer: C Diff: 2 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet Article Summary In a September 2019 tweet, President Trump said that Fed officials should cut interest rates to zero or below, adopting a policy that has been used in Europe and Japan. Negative interest rates would result in commercial banks paying the Fed interest for funds kept at the central bank instead of banks receiving interest on their reserves. If negative rates become a reality in the United States, consumers may end up having new fees to pay on their bank accounts and investors could be faced with negative yields on government bonds. President Trump has pushed for zero or negative interest rates to spur the economy and to combat the strengthening dollar in European markets, where negative rates have weakened the euro and made U.S. exports less competitive. Critics of possible negative interest rates have pointed to the mixed results in Europe, with some reports stating that lending has increased because of the rates, and other reports stating the opposite. Some critics have also pointed to the important role of money market mutual funds in the U.S. financial market, and that these funds' business models would suffer in an environment with negative interest rates, which could ultimately destabilize the economy. Source: Jeanna Smialek, "Trump Wants Negative Rates. Here's How That Would Work," New York Times, September 11, 2019 59) Refer to the Article Summary. Implementing a negative interest rate policy, as is discussed in the article summary, would be an example of ________ monetary policy designed to ________ aggregate demand. A) expansionary; increase B) expansionary; decrease C) contractionary; increase D) contractionary; decrease E) expansionary; not affect Answer: A Diff: 2 Type: MC Topic: Monetary Policy Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

60) Refer to the Article Summary. Implementing a negative interest rate policy, as is discussed in the article summary, would be designed to ________ the price level and ________ real GDP. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) not affect; increase Answer: D Diff: 2 Type: MC Topic: Monetary Policy Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 61) Contractionary monetary policy refers to the Bank of Canada's decreasing the money supply and decreasing interest rates to decrease real GDP. Answer: FALSE Diff: 2 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 62) Your income will increase if the Bank of Canada buys a Canada savings bond from you and pays you with a cheque. Answer: FALSE Diff: 1 Type: TF Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts 63) When the Bank of Canada increases the money supply, people spend more because they now have more money. Answer: FALSE Diff: 3 Type: TF Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts

64) What actions should the Bank of Canada take if it believes the economy is about to experience a high rate of inflation? Answer: If the Bank of Canada believes the economy is about to experience a high rate of inflation, it should conduct contractionary monetary policy, decreasing the money supply and raising interest rates. In implementing contractionary monetary policy, the Bank of Canada could raise the overnight interest rate, and/or sell government securities. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 65) If the Bank of Canada orders an expansionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy: a. the money supply b. interest rates c. investment d. consumption e. net exports f. the aggregate demand curve g. real GDP h. the price level Answer: a. The money supply increases. b. Interest rates fall. c. Investment increases. d. Consumption increases. e. Net exports increase. f. The aggregate demand curve shifts to the right. g. Real GDP rises. h. The price level rises. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

66) Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level. Answer: If the economy is experiencing inflation, it is currently at point B, beyond potential real GDP. A contractionary monetary policy will shift the aggregate demand curve to the left from AD2 to AD1, decreasing real GDP and the price level until it reaches potential real GDP at point A.

Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy Figure 11.13

1) Refer to Figure 11.13. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Bank of Canada would most likely A) increase interest rates. B) decrease interest rates. C) not change interest rates. D) decrease the inflation rate target. E) increase the natural rate of unemployment. Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 2) Refer to Figure 11.13. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues no policy, then at point B A) there is pressure on wages and prices to rise. B) the unemployment rate is very, very low. C) firms are operating above their normal capacity. D) the economy is below full employment. E) incomes and profits are rising. Answer: D Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

3) Refer to Figure 11.13. In the dynamic model of AD-AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues the appropriate policy. This will result in A) unemployment rates higher than what would occur if no policy had been pursued. B) inflation higher than what would occur if no policy had been pursued. C) real GDP lower than what would occur if no policy had been pursued. D) short-term interest rates higher than what would occur if no policy had been pursued. E) long-term interest rates higher than what would occur if no policy had been pursued. Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Figure 11.14

4) Refer to Figure 11.14. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Bank of Canada would most likely A) increase interest rates. B) decrease interest rates. C) not change interest rates. D) increase the inflation rate. E) adjust its inflation target upward. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

5) Refer to Figure 11.14. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues no policy, then at point B A) firms are producing above capacity. B) there is pressure on wages and prices to fall. C) the unemployment rate is greater than the natural rate of unemployment. D) incomes and profits are falling. E) inventories will likely be rising. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 6) Refer to Figure 11.14. In the dynamic AD-AS model, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues the appropriate policy. This will result in A) unemployment rates higher than what would occur if no policy had been pursued. B) inflation rates higher than what would occur if no policy had been pursued. C) potential real GDP levels lower than what would occur if no policy had been pursued. D) real GDP levels higher than what would occur if no policy had been pursued. E) long-term interest rates lower than if no policy had been pursued. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 7) From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly faster than long-run aggregate supply, then the Bank of Canada would most likely A) increase income tax rates. B) decrease income tax rates. C) increase interest rates. D) decrease interest rates. E) decrease the operating band for the bank rate. Answer: C Diff: 2 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking

8) Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: D Diff: 2 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking Table 11.1 Year 2022 2023

Potential Real GDP $1.62 trillion 1.66 trillion

Real GDP $1.62 trillion 1.65 trillion

Price Level 119 121

9) Refer to Table 11.1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2023 if the Bank of Canada does not use monetary policy. Which of the following policies makes sense if the Bank of Canada wants to keep real GDP at its potential level in 2023? A) The Bank of Canada should sell government of Canada securities. B) The Bank should lower the target for the overnight interest rate. C) The Bank of Canada should pursue contractionary policy. D) The Bank of Canada should lower capital gains taxes. E) The Bank of Canada should extend fewer loans to commercial banks. Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy 10) The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year. Answer: TRUE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking

11) Expansionary monetary policy enacted during a recession will cause the inflation rate to increase. Answer: TRUE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 12) In reality, the Bank of Canada is unable to use monetary policy to keep real GDP exactly at its potential level. Answer: TRUE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking Special Feature: Solved Problem: The Effects of Monetary Policy 13) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and shortrun aggregate supply such that the condition of the economy will induce the Bank of Canada to conduct an expansionary monetary policy. Briefly explain the condition of the economy and what the Bank of Canada is attempting to do. Answer: The Bank of Canada conducts an expansionary monetary policy to increase real GDP to potential real GDP. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any expansionary monetary policy. At point B, real GDP is below potential real GDP. The Bank of Canada would increase the money supply and lower interest rates to stimulate aggregate demand, trying to push the economy to reach potential real GDP.

Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy 65 Copyright © 2024 Pearson Canada Inc.

Table 11.2 Year 2022 2023

Potential Real GDP $1.35 trillion 1.40 trillion

Real GDP $1.35 trillion 1.44 trillion

Price Level 104 110

14) Refer to Table 11.2. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2023 if the Bank of Canada does not use monetary policy: a. If the Bank of Canada wants to keep real GDP at its potential level in 2023, should it use an expansionary policy or a contractionary policy? Should the trading desk buy bonds or sell them? b. Suppose the Bank of Canada's policy is successful in keeping real GDP at its potential level in 2023. State whether each of the following will be higher or lower than if the Bank of Canada had taken no action: (i) Real GDP (ii) Full-employment real GDP (iii) The inflation rate (iv) The unemployment rate c. Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2022 and 2023; SRAS curves 2022 and 2023; AD curve for 2022 and 2023, with and without monetary policy actions; and equilibrium real GDP and the price level in 2023 with and without policy.

Answer: a. The Bank of Canada should use contractionary monetary policy. It needs to sell Canada bonds. b. If the Bank of Canada's contractionary policy is successful, real GDP in 2023 will be lower as will the inflation rate. Full-employment real GDP will not change and the unemployment rate will rise. c. The economy starts out in equilibrium in 2022 at point A. In 2023, with no contractionary monetary policy, the economy will go to point B with real GDP above potential real GDP and the price level at 150. Contractionary monetary policy will slow down the growth of aggregate demand and the economy will reach equilibrium at point C.

Diff: 3 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

15) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and shortrun aggregate supply such that the condition of the economy will induce the Bank of Canada to conduct a contractionary monetary policy. Briefly explain the condition of the economy and what the Bank of Canada is attempting to do. Answer: The Bank of Canada conducts a contractionary monetary policy to reduce inflation. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any contractionary monetary policy. At point B, inflation is higher than it would be if real GDP equaled potential real GDP. The Bank of Canada would decrease the money supply and raise interest rates to slow down aggregate demand, trying to keep the economy at potential.

Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 16) Would the Bank of Canada respond more aggressively with interest rate cuts in a recession caused by a decrease in spending, as in the 2008-2009 recession, than in a recession caused by an increase in oil prices, as in the 1974-75 recession? Answer: The inflation rate responds differently in the two recessions. A large increase in oil prices decreases real GDP (or slows down the growth rate), but increases inflation. The large decrease in spending decreases real GDP and decreases inflation. The Bank of Canada wants to increase real GDP, but they also want to prevent an increase in inflation. Cutting interest rates increases aggregate demand which increases real GDP and increases inflation. With a recession caused by a drop in spending, the rate of inflation declines, which allows the Bank of Canada to more aggressively cut interest rates. Diff: 3 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 68 Copyright © 2024 Pearson Canada Inc.

Figure 11.15

17) Refer to Figure 11.15. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Bank of Canada would be to A) expand the money supply. B) reduce the money supply. C) lower income taxes. D) raise income taxes. E) reduce the exchange rate. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

Figure 11.16

18) Refer to Figure 11.16. In the figure above, if the economy in Year 1 is at point A and is expected in Year 2 to be at point B, then the appropriate monetary policy by the Bank of Canada would be to A) purchase Canada bonds. B) sell Canada bonds. C) lower income taxes. D) raise reserve requirements. E) extend more loans to commercial banks. Answer: B Diff: 3 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

Figure 11.17

19) Refer to Figure 11.17. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Bank of Canada use to move the economy to point C? A) decrease income taxes B) increase the desired reserve ratio C) buy government securities D) sell government securities E) buy Canadian dollars on the foreign exchange market Answer: C Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

Figure 11.18

20) Refer to Figure 11.18. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Bank of Canada use to move the economy to point C? A) decrease income taxes B) decrease the desired reserve ratio C) buy government securities D) sell government securities E) extend additional loans to commercial banks Answer: D Diff: 3 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 21) From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Bank of Canada would most likely A) increase its target for the overnight rate. B) extend fewer loans to commercial banks. C) purchase government securities. D) sell government securities. E) tighten mortgage lending rules to prevent a banking crisis. Answer: D Diff: 2 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 72 Copyright © 2024 Pearson Canada Inc.

22) Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) lower; unchanged Answer: A Diff: 2 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking Table 11.3 Year 2022 2023

Potential Real GDP $1.40 trillion 1.45 trillion

Real GDP $1.40 trillion 1.42 trillion

Price Level 105 105.2

23) Refer to Table 11.3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the Bank of Canada does not use monetary policy. If the Bank of Canada wants to keep real GDP at its potential level in 2023, it should A) buy government securities. B) sell government securities. C) increase the desired reserve ratio. D) increase income taxes. E) raise the target for the overnight rate. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.4 Year 2022 2023

Potential Real GDP $1.40 trillion 1.45 trillion

Real GDP $1.40 trillion 1.48 trillion

Price Level 105 105.4

24) Refer to Table 11.4. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2022 and in 2023 if the Bank of Canada does not use monetary policy. If the Bank of Canada wants to keep real GDP at its potential level in 2023, it should A) buy government securities. B) sell government securities. C) decrease the desired reserve ratio. D) decrease income taxes. E) extend additional loans to commercial banks. Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy 25) Refer to Table 11.4. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the Bank of Canada does not use monetary policy. If the Bank of Canada uses monetary policy successfully to keep real GDP at its potential level in 2023, which of the following will be lower than if the Bank of Canada had taken no action? A) real GDP and the unemployment rate B) real GDP and the inflation rate C) real GDP and potential GDP D) potential GDP and the inflation rate E) the employment population ratio and potential GDP Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.5 Year 2022 2023

Potential Real GDP $1.40 trillion 1.45 trillion

Real GDP $1.40 trillion 1.42 trillion

Price Level 105 105.2

26) Refer to Table 11.5. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the Bank of Canada does not use monetary policy. If the Bank of Canada uses monetary policy successfully to keep real GDP at its potential level in 2023, which of the following will be higher than if the Bank of Canada had taken no action? A) real GDP and the unemployment rate B) real GDP and the inflation rate C) real GDP and potential GDP D) potential GDP and the inflation rate E) unemployment and the participation rate Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy 27) The Bank of Canada can use contractionary monetary policy in an attempt to keep inflation from increasing. Answer: TRUE Diff: 1 Type: TF Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 28) The Bank of Canada can use expansionary monetary policy to lower interest rates to stimulate aggregate demand. Answer: TRUE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 29) The Bank of Canada is able to use monetary policy to keep real GDP exactly at its potential level. Answer: FALSE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking Special Feature: Solved Problem: The Effects of Monetary Policy 75 Copyright © 2024 Pearson Canada Inc.

Table 11.6 Year 2022 2023

Potential Real GDP $1.51 trillion 1.54 trillion

Real GDP $1.51 trillion 1.53 trillion

Price Level 105 105.3

30) Refer to Table 11.6. Suppose the table illustrates the values of real and potential GDP and the price level if the Bank of Canada does not change its current policy to be more contractionary or expansionary. If the Bank of Canada wants to keep real GDP at its potential level in 2023, should the Bank of Canada use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal? Answer: The information in the table indicates that if the Bank of Canada does not change its current policy to be more contractionary or expansionary, then real GDP will fall below potential GDP in 2023. To keep the economy at potential GDP in 2023, the Bank of Canada should use expansionary monetary policy. This would mean that the Bank of Canada should buy government securities. If this is done, reserves in the banking system will increase, banks can increase the number of loans, and this should raise the money supply and lower the interest rate. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.7 Year 2022 2023

Potential Real GDP $1.44 trillion 1.47 trillion

Real GDP $1.44 trillion 1.45 trillion

Price Level 104.4 104.6

31) Refer to Table 11.7. Suppose the table above illustrates the values of real and potential GDP and the price level if the Bank of Canada does not change its current policy to be more contractionary or expansionary. Suppose that the Bank of Canada uses an appropriate policy and is successful in keeping real GDP at potential in 2023. State whether each of the following will be higher or lower than if the Bank of Canada had taken no action: a. real GDP b. potential real GDP c. the price level d. the unemployment rate Answer: If the Bank of Canada's policy was successful, real GDP in 2023 will rise from $1.45 trillion, to the level of potential GDP in 2023 which is $1.47 trillion. Potential GDP is not influenced by monetary policy so it should stay at $1.47 trillion. Since expansionary monetary policy increases AD, the short-run equilibrium will move up the short-run aggregate supply curve and the price level will be higher. Finally, because the level of real GDP is higher with policy, the unemployment rate will be lower than it would have been without the change in policy. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.8 Year 2022 2023

Potential Real GDP $1.51 trillion 1.54 trillion

Real GDP $1.51 trillion 1.56 trillion

Price Level 105 105.5

32) Refer to Table 11.8. Suppose the table above illustrates the values of real and potential GDP and the price level if the Bank of Canada does not change its current policy to be more contractionary or expansionary. If the Bank of Canada wants to keep real GDP at its potential level in 2023, should the Bank of Canada use a contractionary or expansionary policy? Should it raise or lower its interest rate target? How should it conduct open market operations to achieve its goal? Answer: The information in the table indicates that if the Bank of Canada does not change its current policy to be more contractionary or expansionary, then real GDP will rise above potential GDP in 2023. To keep the economy at potential GDP in 2023, the Bank of Canada should use contractionary monetary policy. The Bank of Canada should raise its interest rate target. This would mean that the Bank of Canada should sell government securities. If this is done, reserves in the banking system will decrease, banks will decrease the number of loans, and this should lower the money supply and raise the interest rate. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.9 Year 2022 2023

Potential Real GDP $1.42 trillion 1.48 trillion

Real GDP $1.42 trillion 1.46 trillion

Price Level 105.4 105.6

33) Refer to Table 11.9. Suppose the table above illustrates the values of real and potential GDP and the price level if the Bank of Canada does not change its current policy to be more contractionary or expansionary. Suppose that the Bank of Canada uses an appropriate policy and is successful in keeping real GDP at potential in 2023. Draw an aggregate demand and supply curve to illustrate your answer. Answer:

The economy starts in equilibrium in 2022 at point A, with the SRAS1 curve intersecting AD1 along the LRAS1 curve. Real GDP is at its potential level and the price level is at 105.4. Without a change in monetary policy, the AD curve shifts to AD2 (without policy) and the economy is in short-run equilibrium at point B. Because potential real GDP has increased from $1.42 trillion to $1.48 trillion, shortrun equilibrium real GDP of $1.46 trillion is below the potential level. The price level has increased from 105.4 to 105.6. With policy, the AD curve shifts to AD2(with policy) and the economy is in equilibrium at point C. Real GDP is at its potential level of $1.48 trillion. We don't have enough information to be sure of the exact level of the new equilibrium price level. We do know that it will be higher than 105.6. The inflation rate is 1.3% without policy and higher with policy. Diff: 3 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

11.5

Describe the Bank of Canada's setting of monetary policy targets

1) Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the long-run rate of growth of A) inflation. B) real GDP. C) interest rates. D) employment. E) population. Answer: B Diff: 3 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 2) Monetarists think that the Bank of Canada should use ________ as a target when conducting monetary policy. A) the money supply B) the overnight interest rate C) the Treasury bill rate D) the inflation rate E) the unemployment rate Answer: A Diff: 1 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 3) With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would A) decrease at the same rate as the employment/population ratio. B) increase at the same rate as the unemployment rate. C) not change. D) decrease at the same rate as real GDP. E) increase at the same rate as inflation. Answer: C Diff: 3 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

4) The supporters of a monetary growth rule believe that active monetary policy A) stabilizes the economy, decreasing the number of recessions and their severity. B) destabilizes the economy, increasing the number of recessions and their severity. C) cannot change the inflation rate. D) cannot change real GDP. E) is always counter-cyclical. Answer: B Diff: 3 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 5) Most of the pressure for a monetary growth rule has disappeared because since 1980, A) the relationship between movements in the money supply and movements in real GDP and the price level have become much stronger. B) the relationship between movements in the money supply and movements in real GDP and the price level have become much weaker. C) the relationship between movements in interest rates and movements in real GDP and the price level have become much stronger. D) the relationship between movements in interest rates and movements in real GDP and the price level have become much weaker. E) the relationship between money supply and the state of the labour market has become stronger than at any point since the 1930s. Answer: B Diff: 3 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 6) Most economists believe that the best monetary policy target is A) an interest rate. B) the money supply. C) total bank reserves. D) the discount rate. E) total liquidity in financial markets. Answer: A Diff: 1 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

7) The Bank of Canada cannot target both the money supply and the interest rate because it does not control A) bank reserves. B) money demand. C) the discount rate. D) open market operations. E) government spending. Answer: B Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 8) If the Bank of Canada targets the money supply, and the money demand curve shifts to the left, then the Bank of Canada A) cannot maintain the money supply target. B) can maintain the money supply target, but at a lower interest rate. C) can maintain the money supply target, but at a higher interest rate. D) can maintain the money supply target with no change in the interest rate. E) cannot maintain the money supply target without a change in the exchange rate. Answer: B Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 9) If the Bank of Canada targets the interest rate and the money demand curve shifts to the left, then the Bank of Canada A) will have to abandon its interest rate target. B) can maintain the interest rate target, but will have to sell government securities. C) can maintain the interest rate target, but will have to buy government securities. D) can maintain the interest rate target without buying or selling securities. E) can maintain the interest rate target by raising reserve requirements. Answer: B Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

10) The Bank of Canada does not target both the money supply and an interest rate because A) it would be too confusing to Bay Street and would disrupt the financial markets. B) it would be too easy for Bay Street to determine what policy the Bank of Canada is following and this would destabilize the economy. C) it would be illegal according to the Bank Act. D) the Bank of Canada cannot achieve a target for both the money supply and an interest rate at the same time. E) such a policy would put the Bank of Canada in conflict with the Office of the Superintendent of Financial Institutions. Answer: D Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 11) The Taylor rule links the Bank of Canada's target for the A) money supply to shifts in money demand. B) money supply to changes in interest rates. C) overnight interest rate to economic variables. D) overnight interest rate to the money supply. E) money supply growth to real GDP growth. Answer: C Diff: 1 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 12) The Bank of Canada adheres to the ideas expressed by ________. If the economy moves into a recession, the Bank of Canada would recommend that the overnight lending rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation. A) the gold standard B) the monetarist school of thought C) flexible inflation targeting D) the Taylor Rule E) Milton Friedman Answer: C Diff: 3 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

13) Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the overnight interest rate target rate equals the A) current discount rate. B) current inflation rate. C) equilibrium real overnight interest rate. D) current inflation rate plus the real equilibrium overnight interest rate. E) current unemployment minus the natural rate of unemployment. Answer: D Diff: 3 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 14) Using the Taylor rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate. A) will be greater than B) will be less than C) will be the same as D) may be greater than or less than E) None of the above is correct. Answer: A Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 15) Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate. A) will be greater than B) will be less than C) will be the same as D) may be greater than or less than E) None of the above is correct. Answer: B Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

16) Suppose the equilibrium real overnight interest rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the overnight interest target rate equals A) 2 percent. B) 4 percent. C) 6 percent. D) 8 percent. E) 10 percent. Answer: D Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 17) Based on the information below and the Taylor Rule, what is the appropriate target for the overnight rate? Current inflation = 9% Equilibrium real interest rate = 0% Inflation target = 2% Output Gap = 1% Unemployment rate = 10.3% A) 13% B) 13.5% C) 16.5% D) 8.5% E) 23.3% Answer: B Diff: 3 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Discuss the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills Special Feature: Algorithmic Question 18) Inflation targeting refers to conducting ________ policy so as to commit the central bank to achieving a ________. A) fiscal; publicly announced level of inflation B) fiscal; zero inflation rate C) monetary; publicly announced level of inflation D) monetary; zero inflation rate E) monetary; stable price level Answer: C Diff: 1 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

19) Which of the following statements about inflation targeting is true? A) Inflation targeting would not allow the central bank the flexibility to take action against a severe recession. B) Inflation targeting has been adopted by the central banks of fewer than five countries. C) With changes in leadership over time at the Bank of Canada, inflation targeting could help institutionalize good Canadian monetary policy. D) Inflation targeting is practiced strongly in Canada but is ignored in Europe. E) Inflation targeting prevents central banks from changing the money supply. Answer: C Diff: 3 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 20) Which of the following statements about inflation targeting is true? A) Inflation targeting by the central banks in other countries has not typically lowered inflation. B) Inflation targeting would not reduce the flexibility of monetary policy to address other policy goals. C) Inflation targeting would not allow the central bank the flexibility to take action against a severe recession. D) Inflation targeting would make it easier for households and firms to form accurate expectations of future inflation, improving their planning and the efficiency of the economy. E) Inflation targeting allows the central bank to devote all of its resources to ensuring unemployment is at its natural rate. Answer: D Diff: 3 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 21) In the countries that have adopted inflation targeting, the inflation rate has typically A) increased. B) decreased. C) decreased to zero. D) not changed. E) become less tied to changes in the business cycle. Answer: B Diff: 2 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

22) The Bank of Canada uses ________ to measure inflation. A) the index of leading economic indicators B) the personal consumption expenditures index C) the consumer price index D) the GDP deflator E) the producer price index Answer: C Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 23) The Bank of Canada uses a "core" price index, one that excludes food and energy prices, to measure inflation. It does so because A) food and energy are inelastic goods and consumers will buy them regardless of their price. B) it wants to avoid the blame for high gasoline prices causing inflation. C) food and energy prices have wide swings that are not related to the causes of general inflation. D) food and energy prices do not change all that much during the short run, so are irrelevant to the calculation of inflation. E) food and energy make up a very small portion of the spending done by Canadian households. Answer: C Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 24) The relationship between GDP and the money supply has gotten stronger since the 1980s. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 25) The Bank of Canada has adopted an interest rate target for most of the time since World War II. Answer: TRUE Diff: 2 Type: TF Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

26) Present two arguments as to why the Bank of Canada should adopt inflation targeting as a framework for monetary policy. Answer: Any two of the following three reasons are correct. First, an explicit inflation target will draw the public's attention to the fact that the Fed can only have an impact on inflation and not real GDP in the long run. Second, the public announcement of the target makes it easier for households and firms to form accurate expectations about future inflation. This will increase efficiency in the economy. Third, an inflation target would promote accountability by the Fed. The target would offer a yardstick to measure the performance of the Fed. Diff: 2 Type: SA Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 27) Using the money demand and money supply model, show and explain why the Bank of Canada cannot achieve a target for both the money supply and an interest rate. Answer: The Bank of Canada does not control money demand, so it cannot achieve a target for both the money supply and an interest rate. In the graph below, the Bank of Canada could achieve an interest rate of 4 percent or a money supply of $90 billion. It appears that since the money market is in equilibrium at point A with an interest rate of 4 percent and the money supply of $90 billion that the Bank of Canada can achieve both targets. If money demand shifts, however, the Bank of Canada must choose whether to maintain the interest rate target of 4 percent or the money supply target of $90 billion.

28) Consider the Taylor rule for the target of the overnight interest rate. Suppose the equilibrium real overnight interest rate is 2 percent, the target rate of inflation is 3 percent, the current inflation rate is 3 percent, real GDP equals potential real GDP, and the weights are 1/2 for the inflation gap and the output gap. Using the Taylor rule, what does the target for the overnight interest rate equal? Next, if the Bank of Canada lowered the target for the inflation rate to 1 percent, how much would the target for the overnight interest rate change? Answer: The interest target rate would equal 5 percent. With no inflation gap or output gap, the interest target rate equals the current inflation rate plus the equilibrium real overnight interest rate. A decrease in the inflation target from 3 percent to 1 percent with a weight on the inflation gap of 1/2 would raise the overnight interest target rate by 1 percentage point, from 5 percent to 6 percent. Diff: 2 Type: ES Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 29) In the Taylor rule, does the target for the overnight interest rate respond differently for a recession caused by a decrease in aggregate demand and for a recession caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the overnight interest rate changes. Answer: The target for the overnight interest rate responds differently. The output gap is negative with both recessions, but the current inflation rate and the inflation gap differ. The decrease in short-run aggregate supply will increase current inflation and the inflation gap (current inflation rate minus the target inflation rate). The decrease in aggregate demand will decrease both current inflation and the inflation gap. The target for the overnight interest rate will be higher for the recession caused by a decrease in short-run aggregate supply. Diff: 3 Type: ES Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 30) According to the Taylor rule, does the target for the overnight interest rate respond differently for an increase in inflation caused by an increase in aggregate demand and for an increase in inflation caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the overnight interest rate changes. Answer: The target for the overnight interest rate responds differently. The current inflation rate and the inflation gap are the same in both cases, but the output gap differs. The output gap (percentage difference between real GDP and potential real GDP) will be positive for the inflation caused by an increase in aggregate demand, but negative for the inflation caused by a decrease in short-run aggregate supply. The target for the overnight interest rate will be higher in the case of the increase in inflation caused by an increase in aggregate demand. Diff: 3 Type: ES Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills

31) A monetary growth rule means that A) the Bank of Canada will lower interest rates if it thinks a recession is on the horizon. B) the Bank of Canada will raise interest rates if it thinks the economy is growing faster than potential. C) the money supply should grow at a constant rate. D) the money supply should grow in response to economic conditions. E) the money supply should grow at the same rate as the population. Answer: C Diff: 1 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 32) In recent years, a monetary growth rule has fallen out of favour because A) it is believed that active monetary policy destabilizes the economy and makes the business cycle worse. B) the growth rate of GDP has been highly unstable. C) the relationship between movements in M1+ and movements in real GDP has become weaker. D) the growth rate of M1+ has become more stable. E) the ability of central banks to predict recessions has increased. Answer: C Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 33) The argument advanced by economist Milton Friedman for adopting a monetary growth rule is that A) active monetary policy potentially destabilizes the economy. B) central banks can control the money supply, but not the level of interest rates. C) a constant rate of growth in the money supply would eliminate the booms and recessions that make up the business cycle. D) the growth rate of M1+ has been unstable. E) active monetary policy is the only defense a modern economy has against recession. Answer: A Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

34) The leader of the monetarist school and major proponent of a monetary growth rule was A) Janet Yellen. B) Milton Friedman. C) Alan Greenspan. D) Stephen Poloz. E) Mark Carney. Answer: B Diff: 1 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 35) Why doesn't the Bank of Canada have both a money supply target and an interest rate target? A) Short-term interest rates do not respond to changes in the money supply, which the Bank of Canada can control. B) The Bank of Canada does not control money demand. C) The Bank of Canada cannot offset the impact of changes in cash management by the public or changes in lending policies of commercial banks on the money supply. D) Only the level of interest rates matters when we consider rates of growth in real GDP, employment, and rates of price inflation. E) A money supply target and an interest rate target amount to the same thing. Answer: B Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 36) The Taylor Principle states a central bank should raise the nominal interest rate by ________ the increase in the inflation rate so that the real interest rate ________. A) an amount equal to; stays stable B) less than; also decreases C) less than; increases D) more than; also increases E) more than; decreases Answer: D Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

37) According to the Taylor rule, the Bank of Canada should set the target for the overnight interest rate equal to the sum of the equilibrium real overnight interest rate, the current inflation rate, one-half times the ________, and one-half times the ________. A) interest rate gap; inflation gap B) interest rate gap; output gap C) inflation gap; output gap D) unemployment gap; government-spending gap E) real GDP growth gap; inflation gap Answer: C Diff: 1 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 38) Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is greater than potential GDP, then the overnight lending target rate ________ the sum of the current inflation rate plus the real equilibrium overnight interest rate. A) will be greater than B) will be less than C) will be the same as D) may be greater than or less than E) None of the above is correct. Answer: A Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 39) Suppose the equilibrium real overnight interest rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule, the overnight interest target rate equals A) 1 percent. B) 5 percent. C) 9 percent. D) 13 percent. E) 17 percent. Answer: D Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills Special Feature: Solved Problem: Applying the Taylor Rule

40) Suppose the equilibrium real overnight interest rate is 3 percent, the target rate of inflation is 3 percent, the current inflation rate is 1 percent, and real GDP is 8 percent below potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule, the overnight interest rate equals A) -3 percent. B) -1 percent. C) 3.5 percent. D) 7 percent. E) 9.5 percent. Answer: B Diff: 2 Type: MC Topic: Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills Special Feature: Solved Problem: Applying the Taylor Rule 41) Inflation targeting is a framework for carrying out monetary policy whereby A) the central bank adopts a rigid target for inflation and ignores declines in output. B) the central bank commits to achieving a publicly announced level of inflation. C) the central bank commits to achieving a target level of inflation that is never announced publicly. D) the central bank commits to a monetary growth rule. E) the central bank commits to achieving a level of inflation equal to the rate of real GDP growth. Answer: B Diff: 1 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 42) Which of the following is not an argument against inflation targeting? A) Inflation targeting reduces the flexibility of a central bank to pursue other policy goals. B) Inflation targeting assumes that a central bank can accurately forecast future inflation rates. C) Inflation targeting makes monetary policy ineffective because the targets are publicly announced. D) Inflation targeting holds a central bank accountable for an inflation goal. E) Inflation targeting may make it less likely a central bank will achieve other goals. Answer: C Diff: 2 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

43) To measure inflation, the Bank of Canada has targets for A) core CPI and the CPI. B) GDP deflator, the broadest available price index. C) the consumer price index (CPI). D) producer price index (PPI). E) the commodities price Index (CPI). Answer: A Diff: 1 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Ethical Reasoning Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 44) The Bank of Canada uses the rate of change in the CPI rather than the GDP deflator to measure inflation because A) the GDP deflator is more prone to biases and error than the CPI. B) the CPI is a more accurate reflection of the inflation faced by households than the GDP deflator. C) the GDP deflator lacks the information on inflation in the price of industrial equipment and other goods not found in the CPI. D) the CPI includes the prices of goods but not services. E) the CPI is easier to calculate than the GDP deflator. Answer: B Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 45) Food and energy prices are omitted from the core CPI because A) of their vulnerability to fluctuations for reasons that may not be related to general inflation and that are not readily controlled by monetary policy. B) the majority of food and energy are purchased by large firms rather than consumers, making them a poor reflection of inflation faced by households. C) the provision of food and energy is more related to services than goods. D) it is a fixed market-basket price index that does not allow the mix of products to change each year. E) food and energy make up a very small portion of household spending. Answer: A Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline?

46) The core personal consumption expenditures price index excludes A) food and energy prices. B) food and housing prices. C) energy and housing prices. D) housing and health care prices. E) alcohol and tobacco prices. Answer: A Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 47) Over the last approximately 20 years, the consumer price index (CPI) and the core CPI have A) moved roughly together, with the CPI being the most stable. B) not moved together, with the core CPI being the most stable. C) moved roughly together, with the core CPI being the most stable. D) not moved together, with the CPI being the most stable. E) moved together initially, with the core CPI becoming disconnected from CPI recently. Answer: C Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 48) The Bank of Canada could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply. Answer: TRUE Diff: 2 Type: TF Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 49) The Taylor Principle says that when the overnight inflation rate increases by more than the increase in the inflation rate, then the real interest rate would decline, stimulating economic activity and leading to more inflation. Answer: FALSE Diff: 2 Type: TF Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills

50) The Taylor rule puts more emphasis on the inflation gap than the output gap. Answer: FALSE Diff: 2 Type: TF Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 51) Over the past decade, many economists have proposed that the United States should adopt inflation targeting, following the leads of many other central banks, including the Bank of Canada. Answer: TRUE Diff: 1 Type: TF Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 52) Inflation targeting, typically, has been accompanied by lower inflation. Answer: TRUE Diff: 1 Type: TF Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 53) An argument in favour of using inflation targeting, as the Bank of Canada does, is that in the long run, it can have an impact on inflation but not on real GDP. Answer: TRUE Diff: 2 Type: TF Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 54) Write out the expression for the Taylor rule. Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Bank of Canada's target for the overnight interest rate. Answer: The Taylor rule states that the Bank of Canada should set the overnight interest target so that it is equal to the real equilibrium overnight interest rate + the current inflation rate + (w1) × inflation gap + (w2) × output gap. The inflation gap is the difference between the current inflation rate and the target rate. The output gap is the percentage difference between real GDP and potential GDP. The values w1 and w2 are weights determined by the Bank of Canada. If the growth rate in real GDP is below potential GDP, then the output gap will be negative. This will lower the overnight interest target. Diff: 3 Type: SA Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills

55) Explain the two inflation targets specified by the Bank of Canada and their rationale. Answer: The Bank of Canada inflation targets are specified in terms of "headline CPI" (all items), but it also uses "core CPI," which excludes volatile components (such as food, energy, and the effect of indirect taxes) as a measure of the headline rate's trend. For example, prices of food and energy tend to fluctuate up and down for reasons that may not be related to the causes of general inflation and that can't easily be controlled by monetary policy. Oil prices, in particular have moved dramatically up and down in recent years. Therefore, a price index that includes food and energy prices may not give a clear view of underlying trends in inflation. Diff: 2 Type: SA Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 56) Why is the Bank of Canada limited to targeting the money supply or the interest rate, but not both simultaneously? Answer: The Bank of Canada controls the money supply, but does not control money demand. As equilibrium interest rates occur at the intersection of the money demand curve and the money supply curve, the only way the Bank of Canada can successfully target interest rates is through manipulation of the money supply. If it targets the money supply, it must accept the equilibrium interest rate that occurs at the desired money supply. Diff: 2 Type: SA Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

11.6

Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions

1) The best definition for a bubble in a stock market is A) a period of rapidly rising stock prices after a sharp fall in stock prices. B) sustained and steady growth in stock prices in line with economic growth. C) a rapid increase stock prices to levels inconsistent with the profitability of firms. D) quickly rising stock prices caused by rapid growth in the population. E) a rapid drop in stock prices once new information about the market is revealed. Answer: C Diff: 1 Type: MC Topic: The Housing Market Bubble Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 2) When housing prices fall, as they do after a housing market bubble, consumption spending on furniture, appliances, and home improvements ________, as many households find it ________ to borrow against the value of their homes. A) declines; easier B) declines; harder C) increases; easier D) increases; harder E) stays the same; harder Answer: B Diff: 1 Type: MC Topic: The Housing Market Bubble Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 3) When housing prices fall, as they do after a housing market bubble, most banks and other lenders ________ the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages. A) tighten; easier B) tighten; harder C) ease; easier D) ease; harder E) stay the same; harder Answer: B Diff: 1 Type: MC Topic: The Housing Market Bubble Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

4) A financial asset is considered a security if A) the owner of the security receives dividends and realizes a capital gain when the asset is sold. B) it can be sold in a secondary market. C) its value increases after it is sold in a primary market. D) its value is secure; that is, the owner will not suffer a financial loss when the asset is sold. E) the asset is not easily transferred from one party to another. Answer: B Diff: 2 Type: MC Topic: The Mortgage Market Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 5) Which of the following explains why mortgages weren't considered securities in the United States prior to 1970? A) The Federal Reserve Act of 1913 prohibited mortgages from being considered securities. An amendment to the Act was approved in 1970 that allowed mortgages to be considered securities. B) Until 1970, the average annual increase in housing prices did not allow the buying and selling of mortgages to be profitable. There has been a significant annual increase in housing prices and mortgage values since 1970. C) Congress passed a law in 1970 stipulating that mortgages could be classified as securities. D) Prior to 1970, mortgages were rarely resold in the secondary market. E) Between the end of WWII and 1970, mortgage lending was subject to large swings in volume and interest rates. Answer: D Diff: 2 Type: MC Topic: The Mortgage Market Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 6) To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac A) sell mortgages to investors and use the funds to purchase bonds from banks. B) sell bonds to investors and use the funds to purchase mortgages from banks. C) sell bonds to banks and use the funds to purchase mortgages from investors. D) sell mortgages to banks and use the funds to purchase bonds from investors. E) use government tax revenue to insure mortgage issuers against defaults. Answer: B Diff: 1 Type: MC Topic: The Mortgage Market Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

7) By the 2000s, an important change in the U.S. mortgage market had occurred when ________ became significant participants in the secondary market for mortgages. A) investment banks B) Federal Reserve Banks C) commercial banks D) savings banks E) Fannie Mae and Freddie Mac Answer: A Diff: 2 Type: MC Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 8) By the height of the U.S. housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes. A) sub-prime; "Alt-A" B) adjustable rate; shadow-banking C) "credit crunch"; illicit market D) "fresh-start"; prime rate E) domestic; foreign Answer: A Diff: 1 Type: MC Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 9) The U.S. Federal Reserve and the U.S. Treasury responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed and the Treasury responded? A) The Fed made investment banks eligible for discount loans. B) The Fed lent investment banks Treasury securities in exchange for mortgage-backed securities. C) The Fed lowered the required reserve ratio on demand deposit accounts in order to increase the amount of bank reserves. D) The Fed helped JP Morgan to acquire Bear Stearns, a nearly bankrupt investment bank. E) The Treasury had the federal government take control of Fannie Mae and Freddie Mac. Answer: C Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

10) Although the U.S. Federal Reserve had traditionally made discount loans only to commercial banks, in response to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well. A) the Treasury Department B) mortgage brokers C) savings banks D) primary dealers E) mortgage holders Answer: D Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 11) Firms that participate in regular open market transactions with the U.S. Federal Reserve are called A) secondary market banks. B) Treasury banks. C) primary dealers. D) Federal Reserve partners. E) reserve banks. Answer: C Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 12) In 2008, the U.S. Treasury and the U.S. Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing. Which of the following is one reason why these measures were taken? A) The Emergency Economic Stabilization Act required the Fed and the Treasury to provide financial assistance to firms that participated in regular open market actions with the Fed. B) The bankruptcy of a large financial firm would force the firm to sell its holdings of securities, which could cause other firms that hold these securities to also fail. C) The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the firms before they went bankrupt. D) The failure of these firms would have forced the Fed to increase interest rates, which could have led to a severe recession. E) The bankruptcy of these firms would have damaged the value of government employees' pension funds. Answer: B Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

13) While many analysts defended the actions taken by the U.S. Federal Reserve and the U.S. Treasury to respond to the financial crisis in 2008, others were critical of these actions. The critics were concerned that by not allowing large firms to fail, A) smaller firms will resent not receiving similar assistance. B) stockholders and bondholders of these firms were not allowed to receive the proceeds from the sale of assets that would have occurred if the firms had declared bankruptcy. C) there is an increased likelihood that other firms will engage in risky behaviour in the future with the expectation that they will also not be allowed to fail. D) there will be less competition in the U.S. economy, which could lead to higher prices for consumers. E) there will be fewer opportunities for new small firms to form. Answer: C Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 14) In October 2008, the U.S. Congress passed the ________, under which the U.S. Treasury provided funds to banks in exchange for stock. A) Bank Rescue Alliance Treaty (BRAT) B) Mortgage Transfer Agency (MTA) C) Troubled Asset Relief Program (TARP) D) Financial Assurance Association (FAA) E) Office of the Superintendent of Financial Institutions (OSFI) Answer: C Diff: 1 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 15) If the amount you owe on your house is greater than the price of the house, you have A) no value to your house. B) a mortgage rate that is too high. C) negative equity in your house. D) a reverse mortgage on your house. E) a traditional mortgage. Answer: C Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking Special Feature: Apply the Concept: The Wonderful World of Leverage

16) The larger the fraction of an investment financed by borrowing, A) the greater the potential return and potential loss on that investment. B) the smaller the potential return and potential loss on that investment. C) the smaller the leverage and the potential return on that investment. D) the greater the leverage and the smaller the potential return on that investment. E) the smaller the leverage and the greater the potential return on that investment. Answer: A Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking Special Feature: Apply the Concept: The Wonderful World of Leverage 17) Low interest rates that resulted from the Bank of Canada's response to the global financial crisis have caused Canadian household debt to disposable income ratio to ________, causing the likelihood of a housing bubble to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) remain constant; decrease Answer: A Diff: 2 Type: MC Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 18) A borrower defaults on a loan when he stops making payments on the loan. Answer: TRUE Diff: 2 Type: TF Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 19) Canadian banks are regulated by the Bank of Canada. Answer: FALSE Diff: 2 Type: TF Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

20) With the Troubled Asset Relief Program (TARP), the U.S. Treasury provided funds to banks in exchange for stock. Answer: TRUE Diff: 2 Type: TF Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 21) Mortgage lenders often resell mortgages in secondary markets. How might this make lenders act differently than if they intended to hold the mortgages themselves? Answer: Lenders would be more likely to grant mortgages if they intended to resell the mortgages than if they intended to hold them. Reselling reduces the risk of granting mortgages because lenders no longer need to worry that borrowers will default on their mortgage loans. Diff: 2 Type: ES Topic: The Mortgage Market Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 22) In the following table, fill in the columns for your return on investment if the price of your house increased or decreased by 20 percent, based on the down payments specified in the first column. Return on Your Investment From

Down Payment 100% 20 10 5

A 20 Percent Increase in the A 20 Percent Decrease in the Price of Your House Price of Your House

Answer: Return on Your Investment From A 20 Percent Increase in the A 20 Percent Decrease in the Down Payment Price of Your House Price of Your House 100% 20% -20% 20 100 -100 10 200 -200 5 400 -400 Diff: 3 Type: ES Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Analytic Skills Special Feature: Apply the Concept: The Wonderful World of Leverage 104 Copyright © 2024 Pearson Canada Inc.

23) Beginning in 2008, the U.S. Federal Reserve and the U.S. Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways. Briefly summarize the actions of the U.S. Fed and the U.S. Treasury. Answer: Among the actions taken by the Fed and Treasury were: (1) In March 2008, the Fed announced the Primary Dealer Credit Facility, under which primary dealers — firms that participate in open market operations with the Fed — are eligible for discount loans. (2) Also in March, the Fed announced the Term Securities Lending Facility under which the Fed will loan up to $200 billion of Treasury securities in exchange for mortgage-backed securities. (3) The Fed and the Treasury took direct action to keep large financial institutions from bankruptcy. In March 2008, they helped JP Morgan Chase acquire the investment bank Bear Stearns. The Fed agreed that if JP Morgan Chase acquired Bear Stearns, the Fed would guarantee any losses JP Morgan Chase suffered on Bear Stearns holdings of mortgage-backed securities, up to $29 billion. (4) In September the Treasury moved to have the federal government take control of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac were each provided with up to $100 billion in exchange for 80 percent ownership of the firms. (5) In September, the Fed agreed to provide an $85 billion loan to the American International Group (AIG) insurance company in exchange for an 80 percent ownership stake, effectively giving the federal government control of the company. (6) In September, the Treasury announced a plan to provide insurance for deposits in money market mutual funds, similar to the existing insurance on bank deposits. (7) Also in September, the Fed announced that it would lend directly to corporations through the Commercial Paper Funding Facility by purchasing threemonth commercial paper issued by non-financial corporations. (8) In October, Congress passed the Troubled Asset Relief Program (TARP), under which the Treasury attempted to stabilize the commercial banking system by providing funds to banks in exchange for stock. Diff: 3 Type: ES Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 24) The United States saw a housing bubble and banking crisis emerge between 2007-2009. When did Canada see its housing bubble and banking crisis emerge? A) earlier than the United States, in 2006-2008 B) at the same time as the United States, in 2007-2009 C) immediately after the United States, in 2009-2010 D) after the United States, in 2011-2012 E) Canada did not see a housing bubble and banking crisis. Answer: E Diff: 1 Type: MC Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

25) Which of the following is a reason that Canada did not see a housing bubble and banking crisis in 2008? A) The Canadian government was quicker to act than the U.S. government. B) Canadian housing prices are more stable than U.S. housing prices. C) The Canadian government delivered larger bailouts to Canadian banks than the U.S. Treasury did to U.S. banks. D) The Office of the Superintendent of Financial Institutions (OSFI) was more conservative than banking regulators in other countries. E) Municipal regulations in Canada prevent over building. Answer: D Diff: 1 Type: MC Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 26) The Bank of Canada, the Department of Finance, and the Office of the Superintendent of Financial Institutions are all alarmed by the high household debt to after-tax income ratio of Canadians and the overheated housing marked caused by A) U.S. government intervention. B) interest rates kept at historic long lows. C) overuse of monetary policy and fiscal policy. D) uncoordinated use of monetary policy and fiscal policy. E) excessive government deficit spending. Answer: B Diff: 1 Type: MC Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 27) A financial asset is considered ________ if it can be sold in a secondary market. A) a commodity B) a security C) a liability D) durable E) liquid Answer: B Diff: 2 Type: MC Topic: The Changing Mortgage Market in the United States Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

28) Prior to 1970, mortgages were ________ resold in the secondary market. A) never B) rarely C) occasionally D) often E) always Answer: B Diff: 2 Type: MC Topic: The Changing Mortgage Market in the United States Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 29) To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, ________, to sell bonds to investors and use the funds to purchase mortgages from banks. A) the Canada Mortgage and Housing Corporation (CMHC) B) Fannie Mae and Freddie Mac C) the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) D) ACORN and the Federal Housing Administration (FHA) E) The Federal Reserve and American Mortgage Insurance Group Answer: B Diff: 1 Type: MC Topic: The Changing Mortgage Market in the United States Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 30) By the 2000s, an important market change occurred when U.S. investment banks became significant participants in the secondary market for A) mortgages. B) government securities. C) corporate bonds. D) currency. E) foreign exchange. Answer: A Diff: 2 Type: MC Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

31) By the height of the U.S. housing bubble in 2005 and early 2006, lenders in the United States had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ________ and "Alt-A" borrowers ________. A) with flawed credit histories; who did not document their incomes B) who borrowed money at rates below the prime interest rate; who had AAA credit ratings C) who borrowed more than 120 percent of the value of the house; with no proof of U.S. citizenship D) who purchased homes in depressed housing markets; who purchased homes which were repossessed by government agencies E) who purchased homes in "undesirable" areas; who purchased second homes Answer: A Diff: 1 Type: MC Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 32) The U.S. Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the U.S. Federal Reserve responded? A) The U.S. Federal Reserve banned investment banks from obtaining discount loans. B) The U.S. Federal Reserve lent investment banks U.S. Treasury securities in exchange for mortgagebacked securities. C) The U.S. Federal Reserve lowered the required reserve ratio on demand deposit accounts in order to increase the amount of bank reserves. D) The U.S. Federal Reserve helped Citibank to acquire General Motors and Chrysler. E) The U.S. Federal Reserve printed new currency and distributed the extra cash by helicopter. Answer: B Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 33) Although the U.S. Federal Reserve had traditionally made discount loans only to ________, in response to the financial crisis in 2008 the U.S. Federal Reserve made primary dealers eligible for discount loans as well. A) commercial banks B) government agencies C) investment banks D) mortgage lenders E) the federal government Answer: A Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

34) Firms that participate in regular open market transactions with ________ are called primary dealers. A) commercial banks B) U.S. Treasury banks C) the U.S. Federal Reserve D) mortgage lenders E) consumers and private borrowers Answer: C Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 35) In 2008, the U.S. Treasury Department and U.S. Federal Reserve took several actions in response to the deepening financial crisis. One action was the creation of the Term Securities Lending Facility, under which the U.S. Federal Reserve will loan up to $200 billion of treasury securities in exchange for A) common stock. B) mortgage-backed securities. C) corporate bonds. D) required bank reserves. E) preferred shares. Answer: B Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 36) In 2008, the U.S. Treasury Department and U.S. Federal Reserve took several actions in response to the deepening financial crisis. One action was the U.S. Treasury Department's move to have the federal government take control of A) the Federal Deposit Insurance Corporation (FDIC). B) Fannie Mae and Freddie Mac. C) the Canada Mortgage and Housing Corporation (CMHC). D) Lehman Brothers. E) JPMorgan Chase. Answer: B Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

37) In October 2008, U.S. Congress passed the Troubled Asset Relief Program (TARP), under which the U.S. Treasury Department provided ________ to banks in exchange for ________. A) bonds; cash B) lines of credit; loan guarantees C) funds; stock D) financial advice; promises to expand mortgage lending E) deposits; new mortgage loans Answer: C Diff: 1 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 38) If the amount you owe on your house is less than the price of the house, you have A) positive equity in your house. B) an adjustable-rate mortgage on your house. C) negative equity in your house. D) a reverse mortgage on your house. E) a 100 percent equity mortgage on your house. Answer: A Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking Special Feature: Apply the Concept: The Wonderful World of Leverage 39) The smaller the fraction of an investment financed by borrowing, A) the greater the potential return and potential loss on that investment. B) the smaller the potential return and potential loss on that investment. C) the greater the potential return and the smaller the potential loss on that investment. D) the smaller the potential return and the greater the potential loss on that investment. E) the greater the leverage and the greater the potential loss. Answer: B Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking Special Feature: Apply the Concept: The Wonderful World of Leverage

40) Assume you purchase an asset that cost 6000 and borrow 40 % of the cost from a wealthy relative. After a year the asset is worth 7800. What is your rate of return on your investment? A) 50% B) 30% C) 7.5% D) 60% E) 5% Answer: A Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Discuss the policies central banks used during the 2007-2009 global financial crisis AACSB: Analytic Skills Special Feature: Algorithmic Question 41) By the 2000s, U.S. investment banks had become significant participants in the secondary market for mortgages. Answer: TRUE Diff: 1 Type: TF Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 42) In March 2008, the U.S. Federal Reserve announced that primary dealers would be eligible to receive discount loans. Answer: TRUE Diff: 2 Type: TF Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 43) Despite saving Lehman Brothers from failing, the U.S. Federal Reserve and the U.S. Treasury Department decided to allow Bear Stearns to go bankrupt, which it did in September, 2008. Answer: FALSE Diff: 2 Type: TF Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

44) What is a mortgage? What were the important developments in the mortgage market during the years after 1970 in the United States? Answer: A mortgage is a loan a borrower takes to buy a house. Prior to 1970, mortgages were not considered securities (financial assets that are sold in secondary markets). After 1970, Congress helped to create a secondary market in mortgages in order to help the housing market. Congress created the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), which are the equivalent to the Canada Mortgage and Housing Corporation (CMHC). These institutions sell bonds to investors and use the proceeds to buy mortgages from banks and savings and loans. By the 1990s, these developments led to a large secondary market for mortgages. Diff: 2 Type: SA Topic: The Changing Mortgage Market in the United States Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 45) In the following table, fill in the columns for your return on investment if the price of your house increases or decreases by 40 percent, based on the down payments specified in the first column. Return on Your Investment From

Down Payment 100% 20 10 5

A 40 Percent Increase in A 40 Percent Decrease in the Price of Your House the Price of Your House

Answer: Return on Your Investment From

Down Payment 100% 20 10 5

A 40 Percent Increase in A 40 Percent Decrease in the Price of Your House the Price of Your House 40% -40% 200 -200 400 -400 800 -800

Diff: 3 Type: SA Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Analytic Skills Special Feature: Apply the Concept: The Wonderful World of Leverage

46) Suppose you buy a house for $250,000. One year later, the market price for the house has fallen to $200,000. What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent? Answer: The market price has fallen by $50,000, so with a 10 percent down payment, your return on investment is -$50,000 divided by the 10 percent down payment of $25,000 or , which means you lost 200 percent. Diff: 3 Type: SA Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Analytic Skills Special Feature: Apply the Concept: The Wonderful World of Leverage

Macroeconomics, 4Ce (Hubbard) Chapter 12 Fiscal Policy 12.1

Define fiscal policy

1) In 2020 and 2021 federal government enacted policies to supplement the employment insurance program. Among other increases of federal government spending, two massive new programs were introduced: the Canada Emergency Response Benefit and the Canada Emergency Wage Subsidy. These actions were examples of ________ aimed at increasing real GDP. A) discretionary fiscal policy B) an automatic stabilizer C) more contractionary fiscal policy D) a transfer payment E) more expansionary monetary policy Answer: A Diff: 1 Type: MC Topic: The Income Tax System Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Chapter Opener: Inflation and Unemployment Always Move in Opposite Directions — Or Do They? 2) Which of the following is more likely to be effective in increasing the growth rate of real GDP? A) temporary cuts in income taxes B) permanent cuts in business taxes C) a one-time personal income tax rebate D) a carbon tax rebate E) All cuts in taxes are equally likely to increase the growth rate of real GDP. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills Special Feature: Economics in Your Life: What Would You Do with $1200 More? 3) If Parliament passed a one-time tax cut in order to stimulate the economy in 2022, and tax rate levels fell in 2023, how should this tax cut affect the economy? A) Households on average would save an amount greater than the tax cut. B) The tax cut would stimulate spending by households. C) The tax cut would shift the aggregate demand curve to the right. D) The tax cut would raise the price level in 2023. E) The tax cut would reduce investment by firms in 2023. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $500 More? 1 Copyright © 2024 Pearson Canada Inc.

4) Fiscal policy refers to changes in A) provincial and local taxes and purchases that are intended to achieve social policy objectives. B) taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to fund tighter airport security. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives. E) credit conditions, such as the requirements to qualify for a mortgage. Answer: B Diff: 1 Type: MC Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 5) Which of the following would be classified as fiscal policy? A) The federal government passes tax cuts to encourage firms to reduce air pollution. B) The Bank of Canada cuts interest rates to stimulate the economy. C) A provincial government cuts taxes to help the economy of the province. D) The federal government cuts taxes to stimulate the economy. E) Provinces increase taxes to fund education. Answer: D Diff: 2 Type: MC Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 6) Which of the following is an objective of fiscal policy? A) energy independence from Middle East oil B) drug plan coverage for all Canadians C) discovering a cure for AIDs D) high rates of economic growth E) winning hockey gold at the winter Olympics Answer: D Diff: 2 Type: MC Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

7) Automatic stabilizers refer to A) the money supply and interest rates that automatically increase or decrease along with the business cycle. B) government spending and taxes that automatically increase or decrease along with the business cycle. C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives. D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. E) restrictions on the size of government budget deficit designed to ensure the long-term fiscal stability of the government. Answer: B Diff: 1 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 8) The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy. E) progressive taxation. Answer: A Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 9) The increase in government spending on Employment Insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy. E) government purchases. Answer: A Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

10) Which of the following would not be considered an automatic stabilizer? A) legislation increasing funding for job retraining passed during a recession B) decreasing unemployment insurance payments due to decreased jobless during an expansion C) rising income tax collections due to rising incomes during an expansion D) declining social housing payments due to more persons finding jobs during an expansion E) declining sales tax (HST or GST) revenue as the economy enters a recession Answer: A Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 11) Before the 1980s, the majority of government spending took place at the ________, and since the 1990s, the majority of government spending has taken place at the ________. A) provincial and local levels; federal level B) local level; federal level C) federal level; provincial and local levels D) federal level; provincial level E) international level; municipal level Answer: C Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 12) Federal government purchases, as a percentage of GDP, A) have risen since the early 1980s. B) have fallen since the early 1980s. C) have remained roughly the same since the early 1980s. D) rose from the early 1980s until the mid 1990s, and then fell. E) fell from the 1980s until the mid 1990s and the rose rapidly. Answer: D Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 13) Government spending on health care has been A) shrinking as a share of government spending. B) steady as a share of government spending. C) falling then rising as a share of government spending. D) rising as a share of government spending. E) rising and falling from year to year as various illnesses hit the population. Answer: D Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 4 Copyright © 2024 Pearson Canada Inc.

14) Three categories of federal government expenditures, in addition to government operations, are A) debt charges, transfers to other levels of government, and transfer payments. B) interest on provincial debt, defense spending, and transfer payments. C) defense spending, budgets of federal agencies, and transfer payments. D) defense spending, income tax, and transfers. E) international aid, transfers to citizens, and lending to crown corporations. Answer: A Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 15) The largest source of federal government revenue in 2018 and 2021 was A) the Goods and Services Tax (GST). B) corporate income taxes. C) personal income taxes. D) payroll taxes to fund Employment Insurance. E) profits of crown corporations. Answer: C Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 16) Government spending on health care will likely A) decrease as the population ages. B) remain constant as the population ages. C) increase as the population ages. D) become unaffordable no matter what we do. E) fall as people become healthier over time. Answer: C Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

17) Which of the following is not an option for provincial governments facing rising health care costs? A) printing more money B) raising income and sales taxes C) reducing funding to education and other programs D) reducing the level of health care services provided E) increasing spending on health care services provided Answer: A Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 18) By the time you're likely to start thinking about retirement, A) the cost of health care will still be growing at current rates. B) the cost of health care will be falling. C) the cost of health care be growing much more slowly than it is now. D) the cost of health care will not be an issue for Canadians. E) the cost of health care will be rising more rapidly than it is now. Answer: C Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 19) A decrease in the marginal income tax rate is a fiscal policy which will increase aggregate demand. Answer: TRUE Diff: 1 Type: TF Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 20) The income tax system serves as an automatic stabilizer over the course of the business cycle. Answer: TRUE Diff: 2 Type: TF Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 21) Provincial health care systems receive no support from the federal government. Answer: FALSE Diff: 2 Type: TF Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

22) What is the difference between fiscal policy and monetary policy? Answer: Fiscal policy involves changes in federal taxes and purchases and is implemented by Parliament. Monetary policy involves changes in the money supply and interest rates and is implemented by Bank of Canada. Both are intended to achieve macroeconomic objectives. Diff: 2 Type: ES Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 23) List the major categories of federal government expenditures. Answer: 1. Defense and public safety 2. Transfers to persons 3. Transfers to other levels of government 4. Debt charges 5. Government operations Diff: 2 Type: ES Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 24) If government spending is to be considered fiscal policy, its objective must be A) changing real GDP and employment. B) changing tax revenues and the federal budget surplus. C) changing disposable income and interest rates. D) changing the money supply and money demand. E) changing the quality of physical infrastructure. Answer: A Diff: 1 Type: MC Topic: Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Chapter Opener: Inflation and Unemployment Always Move in Opposite Directions — Or Do They? 25) Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment. A) taxes; interest rates B) taxes; the money supply C) interest rates; the money supply D) taxes; expenditures E) government employment; transfers to provinces Answer: D Diff: 1 Type: MC Topic: Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

26) Which of the following would be considered an active fiscal policy? A) The Bank of Canada increases the money supply. B) Tax incentives are offered to encourage the purchase of fuel-efficient cars. C) Spending on military missions in Afghanistan is increased to promote national security. D) A tax cut is implemented to stimulate spending during a recession. E) The province of Ontario building new hockey rinks to encourage healthier living. Answer: D Diff: 2 Type: MC Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 27) Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________. A) automatic stabilizers; discretionary fiscal policy B) discretionary fiscal policy; automatic stabilizers C) automatic stabilizers; monetary policy D) discretionary fiscal policy; conscious fiscal policy E) active monetary policy; passive monetary policy Answer: B Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 28) Which of the following is an example of discretionary fiscal policy? A) an increase in employment insurance payments during a recession B) an increase in income tax receipts with rising income during an expansion C) tax cuts passed by the government to combat a recession D) a decrease in employment insurance payments during an expansion or boom E) the replacement of the sewer system after a major sewerline break Answer: C Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

29) The majority of dollars spent by government prior to 1980 was spending at the ________ level. Since the 1990s, the majority of spending by government in Canada is spent at the ________ level. A) federal; provincial and local B) provincial and local; federal C) provincial and local; provincial D) local; provincial E) international; local Answer: A Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 30) Which of the following is a government expenditure but is not a government purchase? A) The federal government buys a Hummer for the military. B) The federal government pays the salary of a Canadian Security and Intelligence Service (CSIS) agent. C) The federal government pays out an employment insurance claim. D) The federal government pays to support research on cancer. E) The federal government pays a professional photographer to take pictures of the Prime Minister. Answer: C Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 31) Which of the following is the largest category of federal government expenditures? A) health care spending B) transfer payments to individuals C) interest on government debt D) grants to provincial and local governments E) military spending Answer: B Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

32) Government transfer payments include which of the following? A) public debt charges B) grants to universities C) Canada health transfer D) national defense E) public safety Answer: C Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills Special Feature: Apply the Concept: The Exploding Costs of Health Care 33) In the last 5 years, government spending on health care has A) risen dramatically. B) fallen slowly. C) remained relatively constant. D) fallen dramatically. E) been more variable than at any time in the past. Answer: C Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 34) ________ is/are the largest source of revenue collected by the federal government. A) Corporate income taxes B) Personal income taxes C) The Goods and Services Tax (GST) D) Premiums on employment insurance E) Profits from crown corporations Answer: B Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

35) Health care costs are likely to A) decline in the future as more Canadians adopt healthier lifestyles. B) increase as the population ages. C) increase as more people immigrate to Canada. D) decline as the Canadian population gets younger on average. E) decline as Canadians are adopting healthier lifestyles. Answer: B Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 36) Which of the following is a likely implication of projected changes in government health care spending? A) falling personal income taxes B) falling spending on non-health-related programs C) rising spending on postsecondary education D) falling government borrowing E) rising government revenue Answer: B Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 37) Forecasts of health care spending in Canada suggest that by 2040, health care spending will increase by A) 3 percent of GDP. B) 8 percent of GDP. C) 10 percent of GDP. D) 13 percent of GDP. E) 42 percent of GDP. Answer: A Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

38) In 2020 and 2021, in response to COVID-19, Canadian government started several new programs to provide people with income during the economy wide shut down. This caused the largest budget deficit in the Canadian history. The deficit for 2021 was: A) $327.7 billion. B) $200 billion. C) $425.5 billion. D) $500 billion. E) $1 trillion. Answer: A Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: The Pandemic Deficit 39) An increase in the money supply is a discretionary fiscal policy that will increase aggregate demand. Answer: FALSE Diff: 1 Type: TF Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 40) Included in government expenditures are government purchases and transfer payments. Answer: TRUE Diff: 1 Type: TF Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 41) Prior to the 1970s, the majority of dollars spent by government was spent at the provincial and local levels. Answer: FALSE Diff: 2 Type: TF Topic: Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 42) What is fiscal policy and who is responsible for fiscal policy? Answer: Fiscal policy refers to changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. Parliament is responsible for fiscal policy. Diff: 1 Type: SA Topic: Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills

43) What is the difference between federal purchases and federal expenditures? Answer: Federal purchases refer to federal spending where the federal government receives a good or service in return, like an aircraft. Federal expenditures include federal purchases plus interest on the national debt, grants to provincial and local governments, and transfer payments. Diff: 1 Type: SA Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills 44) Give an example of an automatic stabilizer. Explain how automatic stabilizers work in the case of recession. Answer: Examples of automatic stabilizers are employment insurance payments and income taxes. (The student only needs to present one example.) Automatic stabilizers change tax receipts and government spending automatically as a result of fluctuations in the business cycle. This occurs without discretionary actions on the part of government. In the case of recession, they would change automatically to stimulate spending in the economy. During a recession, employment declines and government spending on employment insurance payments increases. This should raise disposable income and consumer spending above what they would otherwise be. During a recession, income tax receipts decline as incomes decline. This automatic decline in income tax revenues keeps disposable income and consumer spending from falling as much as they would without automatic stabilizers. Diff: 2 Type: SA Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills

12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy 1) Parliament carries out fiscal policy through changes in A) interest rates and the money supply. B) taxes and the interest rate. C) government purchases and the money supply. D) government purchases and taxes. E) transfers to other government and regulations. Answer: D Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 2) Fiscal policy is determined by A) the Bank of Canada. B) the Minister of Finance and the Governor of the Bank of Canada. C) Parliament and the Bank of Canada. D) Parliament. E) the Prime Minister's Office (PMO). Answer: D Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 3) An increase in government purchases will increase aggregate demand because A) government expenditures are a component of aggregate demand. B) consumption expenditures are a component of aggregate demand. C) the decline in the price level will increase demand. D) the decline in the interest rate will increase demand. E) increases in government purchases cause an increase in aggregate supply. Answer: A Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

4) Expansionary fiscal policy involves A) increasing government purchases or decreasing taxes. B) increasing taxes or decreasing government purchases. C) increasing the money supply and decreasing interest rates. D) decreasing the money supply and increasing interest rates. E) increasing taxes on the wealthy and increasing transfers to the poor. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking Figure 12.1

5) Refer to Figure 12.1. An increase in taxes would be depicted as a movement from ________, using the static AD-AS model in the figure above. A) A to B B) B to A C) B to C D) C to D E) E to B Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

6) Refer to Figure 12.1. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) B to A. E) A to E. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 7) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium below potential GDP and Parliament and the prime minister lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) B to A. E) A to E. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 8) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) B to A. E) A to E. Answer: E Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

9) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) D to C. B) A to E. C) C to B. D) B to A. E) E to A. Answer: C Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 10) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) D to C. B) A to E. C) C to D. D) C to B. E) E to A. Answer: C Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 11) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a movement from ________ using the static AD-AS model in the figure above. A) D to C B) C to B C) A to E D) B to A E) E to A Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

12) An increase in individual income taxes ________ disposable income, which ________ consumption spending. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) decreases; does not affect Answer: D Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 13) Tax cuts on business income increase aggregate demand by increasing A) business investment spending. B) consumption spending. C) government spending. D) wage rates. E) net exports. Answer: A Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 14) Tax cuts on business income ________ aggregate demand. A) would decrease B) would increase C) would not change D) may increase or decrease E) do not affect Answer: B Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

15) If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? A) an increase in the money supply and a decrease in interest rates B) an increase in government purchases C) an increase in oil prices D) an increase in taxes E) a decrease in the supply government services Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 16) Which of the following is considered contractionary fiscal policy? A) Parliament increases the income tax rate. B) Parliament increases the Canada Health Transfer. C) Legislation removes a college tuition deduction from federal income taxes. D) The Ontario legislature cuts highway spending to balance its budget. E) The Saskatchewan government increases spending to clean up abandoned oil wells. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 17) Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) higher; unchanged Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 18) Expansionary fiscal policy involves increasing government purchases or increasing taxes. Answer: FALSE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 19 Copyright © 2024 Pearson Canada Inc.

19) Contractionary fiscal policy is used to decrease aggregate demand in an attempt to fight rising inflation. Answer: TRUE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 20) Lowering the personal income tax will increase household disposable income and consumption spending. Answer: TRUE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 21) What is expansionary fiscal policy? What is contractionary fiscal policy? Answer: An expansionary fiscal policy is a decrease in taxes or an increase in government purchases intended to increase aggregate demand. A contractionary fiscal policy is an increase in taxes or a decrease in government purchases intended to decrease aggregate demand. Diff: 2 Type: ES Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 22) The problem typically during a recession is not that there is too little money, but too little spending. If the problem was too little money, what would be its cause? If the problem was too little spending, what could be its cause? Answer: Too little money would be caused by too small of a money supply by the Bank of Canada. Too little spending could be caused by a variety of reasons such as a decrease in consumption spending by households because they become pessimistic about the future, a decrease in investment spending by firms because they lower their estimates of the future profitability of new factories and machinery, or a decrease in Canadian exports because a major trading partner is in a recession. Diff: 3 Type: ES Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

23) Expansionary fiscal policy will A) shift the aggregate demand curve to the left. B) shift the aggregate demand curve to the right. C) not shift the aggregate demand curve. D) shift the short-run aggregate supply curve to the left. E) make the aggregate demand curve steeper. Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 24) Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP? A) an increase in government purchases B) an increase in the supply of money C) an increase in individual income taxes D) a decrease in transfer payments E) an increase in government support for environmental research Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 25) To combat a recession with discretionary fiscal policy, the federal government should A) decrease government spending to balance the budget. B) decrease taxes to increase consumer disposable income. C) lower interest rates and increase investment by increasing the money supply. D) raise taxes on interest and dividends, but not on personal income. E) sell government assets to reduce the budget deficit. Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

26) A decrease in individual income taxes ________ disposable income, which ________ consumption spending. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) decreases; does not affect Answer: A Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 27) Tax increases on business income decrease aggregate demand by decreasing A) business investment spending. B) consumption spending. C) government spending. D) wage rates. E) net exports. Answer: A Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 28) If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? A) an increase in the money supply and a decrease in interest rates B) an increase in government purchases C) an increase in oil prices D) an increase in taxes E) an increase transfers people Answer: D Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

29) Which of the following is considered expansionary fiscal policy? A) Parliament decreases the income tax rate. B) The federal government increases defence spending. C) Legislation increases a university tuition deduction from federal income taxes. D) The Alberta legislature cuts highway spending to balance its budget. E) The Ontario government increases electricity bills to encourage energy conservation. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 30) Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) lower; unchanged Answer: D Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

Figure 12.2

31) Refer to Figure 12.2. In the graph above, if the economy is at point A, an appropriate fiscal policy by the federal government would be to A) lower the discount rate of interest. B) execute an open market sale of government securities. C) increase government transfer payments. D) increase marginal income tax rates. E) decrease government spending. Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 32) Refer to Figure 12.2. In the graph above, if the economy is at point A, an appropriate fiscal policy by the federal government would be to A) decrease the required reserve ratio. B) sell government securities. C) increase government expenditures. D) decrease transfer payments. E) increase the marginal income tax rate for the 1%. Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

Figure 12.3

33) Refer to Figure 12.3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the federal government? A) a decrease in income taxes B) a decrease in interest rates C) a decrease in government purchases D) an increase in the money supply E) an increase in the number of national statutory holidays Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 34) Decreasing government spending ________ the price level and ________ equilibrium real GDP. A) decreases; increases B) increases; decreases C) increases; increases D) decreases; decreases E) decreases; does not change Answer: D Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 25 Copyright © 2024 Pearson Canada Inc.

Figure 12.4

35) Refer to Figure 12.4. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the federal government? A) an increase in transfer payments B) an increase in interest rates C) an increase in the marginal income tax rate D) an open market purchase of Canadian government bonds E) an increase in government spending Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 36) The problem causing most recessions is too little A) money (currency plus chequing accounts). B) spending. C) unemployment. D) taxes. E) goods available for purchase. Answer: B Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 26 Copyright © 2024 Pearson Canada Inc.

37) If expansionary fiscal policy is used following a supply shock such as the one experienced during the COVID-19 pandemic, the expansionary fiscal policy will result in real GDP ________ and the price level ________. A) decreasing; increasing B) increasing; decreasing C) increasing; increasing D) decreasing; decreasing Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 38) Contractionary fiscal policy involves decreasing government purchases or increasing taxes. Answer: TRUE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 39) Expansionary fiscal policy is used to increase aggregate demand in an attempt to fight rising inflation. Answer: FALSE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 40) An increase in government spending increases the supply of money in our economy. Answer: FALSE Diff: 2 Type: TF Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

41) How does expansionary monetary policy increase spending in the economy compared to how expansionary fiscal policy increases spending in the economy? Answer: Expansionary monetary policy increases spending by decreasing interest rates, which induces households and firms to increase spending on consumer durables and plants and equipment. Expansionary fiscal policy increases spending by directly increasing government spending or by cutting taxes to increase household disposable income, which increases consumption spending. Diff: 3 Type: SA Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 42) "The Bank of Canada fights recessions by increasing the money supply so people will have more money to spend." What is wrong with this statement and how can it be corrected? Answer: The Bank of Canada fights recessions by increasing the money supply to lower interest rates, which in turn increases spending. It is not that people will have more money to spend, but that interest rates will be lower, which stimulates spending. Diff: 3 Type: SA Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 43) Identify each of the following as (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. a. The personal income tax rate is lowered. b. Parliament cuts spending on defence. c. Students in post-secondary education are allowed to deduct tuition costs from their federal income taxes. d. The corporate income tax rate is lowered. e. The Province of Ontario builds a new tollway in an attempt to expand employment and ease traffic in Toronto. Answer: a. This is expansionary fiscal policy. b. Although a decrease in defence spending will lead to a decrease in aggregate demand, it is not part of fiscal policy because it is not intended to achieve a macroeconomic policy goal. c. Although reducing taxes in this way will lead to an increase in aggregate demand, it is not part of fiscal policy because it is not intended to achieve a macroeconomic policy goal. d. This is expansionary fiscal policy. e. This is not part of fiscal policy because the action is not intended to affect the national economy. Diff: 3 Type: SA Topic: Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

12.3

Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy

Figure 12.5

1) Refer to Figure 12.5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the federal government would most likely A) decrease government spending. B) increase government spending. C) increase oil prices. D) increase taxes. E) lower interest rates. Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 2) Refer to Figure 12.5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B A) the unemployment rate is very low. B) firms are operating below capacity. C) the economy is above full employment. D) income and profits are rising. E) there is pressure on wages and prices to rise. Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

3) Refer to Figure 12.5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the federal government would most likely pursue A) expansionary fiscal policy. B) contractionary fiscal policy. C) expansionary monetary policy. D) contractionary monetary policy. E) contractionary automatic stabilizers. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 4) From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and short-run aggregate supply, the federal government would most likely A) increase the required reserve ratio and decrease government spending. B) decrease government spending. C) decrease oil prices. D) decrease taxes. E) lower interest rates. Answer: D Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 5) Which of the following would be most likely to induce the federal government to conduct expansionary fiscal policy? A) a significant decrease in investment spending B) a significant decrease in oil prices C) a significant increase in consumption spending D) a significant increase in net exports E) a significant decrease tax revenue Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

6) If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy? A) a decrease in the money supply and an increase in the interest rate B) an increase in government spending C) an increase in taxes D) an increase in oil prices E) an increase in transfers Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Reflective Thinking 7) From an initial long-run equilibrium, if aggregate demand grows faster than long-run and short-run aggregate supply, then the federal government would most likely A) decrease the required reserve ratio. B) decrease government spending. C) decrease oil prices. D) decrease tax rates. E) decrease the value of the Canadian dollar. Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 8) Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) higher; unchanged Answer: D Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Figure 12.6

9) Refer to Figure 12.6. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the federal government would most likely A) increase the money supply and decrease the interest rate. B) increase taxes. C) increase government spending. D) increase oil prices. E) raise interest rates. Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 10) Refer to Figure 12.6. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B, A) the unemployment rate is very low. B) firms are operating at below capacity. C) the economy is below full employment. D) income and profits are falling. E) there is pressure on wages and prices to fall. Answer: A Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

11) Refer to Figure 12.6. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the federal government would most likely pursue A) expansionary fiscal policy. B) contractionary fiscal policy. C) expansionary monetary policy. D) contractionary monetary policy. E) expansionary automatic stabilizers. Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 12) Which of the following would be most likely to induce the federal government to conduct contractionary fiscal policy? A) a significant decrease in oil prices B) a significant decrease in real GDP C) a significant increase in inflation D) a significant increase in labour productivity E) a significant rise in the labour force Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 13) If the economy is slipping into a recession, which of the following would be an appropriate fiscal policy? A) an increase in the money supply and a decrease in interest rates B) a decrease in government purchases C) a decrease in taxes D) a decrease in oil prices E) an increase in the GST Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Reflective Thinking

14) An appropriate fiscal policy response when aggregate demand is growing at a slower rate than aggregate supply is to cut taxes. Answer: TRUE Diff: 2 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 15) If real equilibrium GDP is above potential GDP, expansionary fiscal policy should be pursued. Answer: FALSE Diff: 2 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Reflective Thinking 16) What are the key differences between how we illustrate an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model? Answer: In the basic aggregate demand and aggregate supply model, expansionary fiscal policy is illustrated by a rightward shift of the aggregate demand curve, with the short-run aggregate supply curve and long-run aggregate supply curve remaining stationary. The dynamic aggregate demand and aggregate supply model takes into account the economy experiencing continuing inflation from year to year and the economy experiencing long-run growth. In the dynamic model, expansionary fiscal policy is illustrated by a rightward shift of the aggregate demand curve, a rightward shift of the short run aggregate supply curve, and a rightward shift of the long run aggregate supply curve. Diff: 2 Type: ES Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

17) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and shortrun aggregate supply such that the condition of the economy will induce Parliament to conduct expansionary fiscal policy. Briefly explain the condition of the economy and what Parliament is attempting to do. Answer: The Parliament conduct expansionary fiscal policy to increase real GDP to potential real GDP. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any expansionary fiscal policy. At point B, real GDP is below potential real GDP. Parliament would increase government purchases or decrease taxes to stimulate aggregate demand, trying to push the economy to potential.

Diff: 3 Type: ES Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Table 12.1 Year 1 2

Potential Real GDP $11.0 trillion 11.5 trillion

Real GDP $11.0 trillion 11.7 trillion

Price Level 100 109

18) Refer to Table 12.1. Suppose the economy is in the state described by the table above. What problem will occur in the economy if no policy is pursued? What fiscal policy tools could be used to combat the problem? Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the appropriate fiscal policy to use in this situation. Answer:

The economy begins in equilibrium at point A, at potential real GDP of $11 trillion and a price level of 100. Without government policy, aggregate demand will shift from AD1 to AD2 (without policy). Because long-run aggregate supply shifted from LRAS1 to LRAS2, the economy is pushed above potential real GDP. The economy will be at a short-run equilibrium at point B, with real GDP of $11.7 trillion and a price level of 109. The government should pursue contractionary fiscal policy by decreasing government purchases or raising taxes to shift aggregate demand to AD2 (without policy). The economy will be in equilibrium at point C with real GDP of $11.5 trillion and a price level of 105. The price level is lower than it would have been if expansionary fiscal policy had not been used. Diff: 3 Type: ES Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 36 Copyright © 2024 Pearson Canada Inc.

Figure 12.7

19) Refer to Figure 12.7. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP? A) increase taxes B) increase government spending C) contractionary fiscal policy D) decrease interest rates E) increase the exchange rate Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 20) Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP. A) decreases; increases B) increases; decreases C) increases; increases D) decreases; decreases E) decreases; does not change Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 37 Copyright © 2024 Pearson Canada Inc.

21) If policymakers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to A) increase taxes. B) increase government spending. C) use expansionary fiscal policy. D) increase interest rates. E) increase transfers to other levels of government. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills Figure 12.8

22) Refer to Figure 12.8. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the federal government use to move the economy to point C? A) increase government purchases B) decrease government purchases C) increase income taxes D) sell Government of Canada bonds E) sell crown corporations Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 38 Copyright © 2024 Pearson Canada Inc.

Figure 12.9

23) Refer to Figure 12.9. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP? A) increase taxes B) increase government spending C) decrease the money supply D) increase interest rates E) increase transfers people Answer: A Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 24) To combat inflation, the federal government could A) decrease government spending. B) decrease taxes. C) raise interest rates. D) increase transfer payments. E) decrease the value of the Canadian dollar. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Figure 12.10

25) Refer to Figure 12.10. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the federal government use to move the economy to point C? A) increase income taxes B) increase government spending C) buy Treasury bills D) decrease the discount rate E) increase employment insurance payments Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Table 12.2 Year 2022 2023

Potential Real GDP $1.8 trillion 1.9 trillion

Real GDP $1.8 trillion 1.85 trillion

Price Level 128 129

26) Refer to Table 12.2. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the federal government does not use fiscal policy. If the federal government wants to keep real GDP at its potential level in 2023, it should A) decrease income taxes. B) decrease government purchases. C) decrease the money supply. D) increase the level of interest rates. E) increase employment insurance payments. Answer: A Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills Table 12.3 Year 2022 2023

Potential Real GDP $1.8 trillion 1.85 trillion

Real GDP $1.8 trillion 1.9 trillion

Price Level 128 132

27) Refer to Table 12.3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the federal government does not use fiscal policy. If the federal government wants to keep real GDP at its potential level in 2023, it should A) buy Government of Canada bonds. B) conduct expansionary fiscal policy. C) decrease government purchases. D) decrease the discount rate. E) increase infrastructure investment. Answer: C Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Table 12.4 Year 2022 2023

Potential Real GDP $1.8 trillion 1.9 trillion

Real GDP $1.8 trillion 1.85 trillion

Price Level 130 131

28) Refer to Table 12.4. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the federal government does not use fiscal policy. If the federal government uses fiscal policy successfully to keep real GDP at its potential level in 2023, which of the following will be higher than if the federal government had taken no action? A) real GDP and the unemployment rate B) real GDP and the inflation rate C) real GDP and potential GDP D) potential GDP and the inflation rate E) potential GDP and the unemployment rate Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills Table 12.5 Year 2022 2023

Potential Real GDP $1.8 trillion 1.85 trillion

Real GDP $1.8 trillion 1.9 trillion

Price Level 130 135

29) Refer to Table 12.5. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the federal government does not use fiscal policy. If the federal government uses fiscal policy successfully to keep real GDP at its potential level in 2023, which of the following will be lower than if the federal government had taken no action? A) real GDP and the unemployment rate B) real GDP and the inflation rate C) real GDP and potential GDP D) potential GDP and the inflation rate E) interest rates and the participation rate Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

30) An appropriate fiscal policy response when aggregate demand is growing at a faster rate than aggregate supply is to decrease the money supply. Answer: FALSE Diff: 2 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 31) To complement actions by the Bank of Canada to reduce inflation, the federal government can cut spending and/or raise taxes. Answer: TRUE Diff: 2 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 32) What are the key differences between how we illustrate a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model? Answer: In the basic aggregate demand and aggregate supply model, contractionary fiscal policy is illustrated by a leftward shift of the aggregate demand curve, with the short-run aggregate supply curve and long-run aggregate supply curve remaining stationary. The dynamic aggregate demand and aggregate supply model takes into account the economy experiencing continuing inflation from year to year and the economy experiencing long-run growth. In the dynamic model, contractionary fiscal policy is illustrated by a rightward shift of the aggregate demand curve that is less than the rightward shifts of the short-run aggregate supply curve and the long-run aggregate supply curve. Diff: 2 Type: SA Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

33) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and shortrun aggregate supply such that the condition of the economy will induce the federal government to conduct contractionary fiscal policy. Briefly explain the condition of the economy and what the federal government is attempting to do. Answer: The federal government conducts contractionary fiscal policy to reduce inflation. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any contractionary fiscal policy. At point B, inflation is higher than it would be if real GDP equaled potential real GDP. The federal government would decrease government purchases or increase taxes to slow down aggregate demand, trying to keep the economy at potential.

Diff: 3 Type: SA Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Table 12.6 Year 1 2

Potential Real GDP $10.2 trillion 10.8 trillion

Real GDP $10.2 trillion 10.6 trillion

Price Level 100 103

34) Refer to Table 12.6. The economy is in the state described by the table above. Draw the dynamic aggregate demand and aggregate supply diagram to illustrate the state of the economy in year 1 and year 2, assuming that no policy is pursued. Then illustrate and explain the appropriate fiscal policy to use in this situation. Assume that the policy results in the economy producing potential GDP. Answer:

The economy begins in equilibrium at point A, at potential real GDP of $10.2 trillion and a price level of 100. Without policy, aggregate demand will shift from AD1 to AD2 (without policy). Because long-run aggregate supply shifts from LRAS1 to LRAS2, this increase in aggregate demand pushes the economy to equilibrium GDP below potential GDP. The economy will be at a short-run equilibrium at point B, with real GDP of $10.6 trillion and a price level of 103. Some firms will be operating at less than their full capacity, incomes and profits will be falling, firms will lay off workers, and the unemployment rate will rise. Increasing government purchases or lowering taxes will shift aggregate demand to AD2 (with policy). The economy will be in equilibrium at point C with real GDP of $10.8 trillion and a price level of 107. The price level is higher than it would have been if expansionary fiscal policy had not been used. Diff: 3 Type: SA Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 45 Copyright © 2024 Pearson Canada Inc.

12.4

Explain how the government purchases and tax multipliers work

1) Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect. A) multiplier B) expenditure C) consumption D) aggregate demand E) Keynes Answer: A Diff: 1 Type: MC Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 2) The multiplier effect refers to the series of A) autonomous increases in consumption spending that result from an initial increase in induced expenditures. B) induced increases in consumption spending that result from an initial increase in autonomous expenditures. C) autonomous increases in investment spending that result from an initial increase in induced expenditures. D) induced increases in investment spending that result from an initial increase in autonomous expenditures. E) induced increases in net exports that result from an initial increase in autonomous expenditures. Answer: B Diff: 1 Type: MC Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 3) The aggregate demand curve will shift to the right ________ the initial increase in government purchases. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than E) None of the above. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

4) The aggregate demand curve will shift to the left ________ the initial decrease in government purchases. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than E) None of the above. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 5) The aggregate demand curve will shift to the right ________ the initial decrease in taxes. A) by less than B) by more than C) by the same amount D) sometimes by more than and other times by less than E) None of the above. Answer: B Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

Figure 12.11

6) Refer to Figure 12.11. In the graph above, the shift from AD1 to AD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion. A) would be equal to B) would be greater than C) would be less than D) may be greater than or less than E) None of the above. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 7) A change in consumption spending caused by income changes is ________ change in spending, and a change in government spending that occurs to improve roads and bridges is ________ change in spending. A) an induced; an autonomous B) an expansionary; a contractionary C) an autonomous; an induced D) a contractionary; an expansionary E) a discretionary; an automatic Answer: A Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

8) The government purchases multiplier equals the change in ________ divided by the change in ________. A) government purchases; equilibrium real GDP B) equilibrium real GDP; government purchases C) government purchases; consumption spending D) consumption spending; government purchases E) government purchases; investment spending Answer: B Diff: 1 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 9) The tax multiplier equals the change in ________ divided by the change in ________. A) taxes; equilibrium real GDP B) equilibrium real GDP; taxes C) taxes; consumption spending D) consumption spending; taxes E) marginal tax rates; government revenue Answer: B Diff: 1 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 10) Which of the following would increase the size of the government purchases multiplier? A) an increase in the tax rate B) an increase in the quantity of imports purchased by households from an increase in income C) a decrease in the amount of consumption spending by households from an increase in income D) a decrease in the amount saved by households from an increase in income E) an increase in the importance of government spending to the economy Answer: D Diff: 3 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

11) If the tax multiplier is -1.5 and a $20 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $30 billion decrease in GDP B) a $30 billion increase in GDP C) a $300 billion increase in GDP D) a $13.33 billion decrease in GDP E) a $13.33 billion increase in GDP Answer: A Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 12) Suppose the government spending multiplier is 2. The federal government cuts spending by What is the change in GDP if the price level is not held constant? A) an increase of less than $8 billion B) an increase equal to $8 billion C) an increase of greater than $8 billion D) a decrease of less than $8 billion E) a decrease of more than $8 billion Answer: D Diff: 3 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 13) The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the A) decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods. B) decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods. C) increase in government purchases will be saved by households and not spent, and some portion will be spent on imported goods. D) increase in government purchases will be saved by households and not spent, and some portion will be spent on consumer durable goods. E) decrease in government spending will be recaptured by government as taxes. Answer: A Diff: 3 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

14) A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) increase; not change Answer: A Diff: 1 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 15) Suppose the federal government increased spending by $10 billion and raised taxes by $10 billion to keep the budget balanced. What will happen to real equilibrium GDP? A) Real equilibrium GDP will fall. B) Real equilibrium GDP will rise. C) There will be no change in real equilibrium GDP. D) Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value. E) Real equilibrium GDP will fall in proportion to the rise in the price level. Answer: B Diff: 3 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 16) Suppose real GDP is $1.6 trillion and potential GDP is $1.4 trillion. To move the economy back to potential GDP, the federal government should A) lower government purchases by an amount less than $200 billion. B) lower government purchases by $200 billion. C) raise taxes by $200 billion. D) lower taxes by $200 billion. E) raise taxes by an amount more than $200 billion. Answer: A Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers

17) Suppose real GDP is $1.4 trillion and potential GDP is $1.9 trillion. To move the economy back to potential GDP, the federal government should A) lower taxes by an amount less than $500 billion. B) raise government purchases by $500 billion. C) raise government purchases by more than $500 billion. D) lower taxes by $500 billion. E) lower government purchases by $500 billion. Answer: A Diff: 3 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 18) The multiplier effect following an increase in expenditure is generated by induced increases in consumption expenditure as income rises. Answer: TRUE Diff: 2 Type: TF Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 19) In absolute value, the tax multiplier is greater than the government purchases multiplier. Answer: FALSE Diff: 2 Type: TF Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 20) If government increases taxes by the same amount it increases government spending, there will be no effect on aggregate demand: the increase in government spending is offset by an equal decrease in consumption spending by households. Answer: FALSE Diff: 3 Type: TF Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

21) Suppose Political Party A proposes a tax cut on business income to stimulate the economy. Political Party B opposes the tax cut on business income asserting that it would only help businesses, not the average working man and woman. If you were hired as an economist for Political Party A, explain how the tax cut on business income would help the average working man and woman. Answer: The multiplier effect would spread the effect of the tax cut in business income across average working men and women. First, the business income tax cut would increase the after-tax expected profitability of capital investment, leading businesses to purchase more capital goods, like factories, computers and machine tools. These capital goods are produced by businesses that employ average working men and women. Second, the increase in income to the owners and workers of the businesses that produce the capital goods would lead to additional spending across many other businesses, increasing the income of these owners and workers. Their increase in income would lead to still more spending and the multiplier effect would spread across businesses and average working men and women. Diff: 2 Type: ES Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 22) If real GDP is $300 billion below potential GDP and the tax multiplier equals -1.5, then how much would the government need to change taxes to bring the economy to equilibrium at potential? Answer: The government would need to cut taxes by $200 billion. Plugging the values into the tax multiplier equation yields: -1.5 =

. The change in taxes equals

, or -$200

billion. Diff: 3 Type: ES Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 23) Suppose real GDP is currently $1.25 trillion and potential real GDP is $1.3 trillion. If the federal government increased government purchases by $50 billion, what would be the result on the economy? Answer: The economy would go from a short-run equilibrium below potential GDP to a short-run equilibrium above potential GDP. The increase in government purchases, which equals the shortfall in real GDP from potential real GDP, is too large. The increase in government purchases needs to be less than the shortfall in real GDP because of the multiplier effect. Diff: 2 Type: ES Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

24) Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier? Answer: The tax rate affects how much of the additional income that results from the initial increase in government purchases is available to be consumed. A higher tax rate decreases the amount of disposable income that can be consumed at each round of the multiplier process. Diff: 3 Type: ES Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 25) The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures. A) induced; investment; autonomous B) induced; consumption; autonomous C) autonomous; consumption; induced D) autonomous; investment; induced E) discretionary; government; gdp Answer: B Diff: 2 Type: MC Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 26) The government purchases multiplier is defined as A) . B) . C) . D) . E) . Answer: A Diff: 1 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

27) An increase in government purchases of $20 billion will shift the aggregate demand curve to the right by A) $5 billion. B) $10 billion. C) $20 billion. D) less than $20 billion. E) more than $20 billion. Answer: E Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Figure 12.12

28) Refer to Figure 12.12. If government purchases increase by $10 billion and lead to an ultimate increase in aggregate demand as shown in the graph above, the difference in real GDP between point A and point B will be A) $3 billion. B) $5 billion. C) $10 billion. D) less than $10 billion. E) more than $10 billion. Answer: E Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

Figure 12.13

29) Refer to Figure 12.13. An increase in government purchases of $20 billion causes aggregate demand to shift ultimately from AD1 to AD2. The difference in real GDP between point A and point B will be ________ $20 billion. A) equal to B) less than C) greater than D) not change at E) There is insufficient information given here to draw a conclusion. Answer: C Diff: 3 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 30) Cutting taxes A) will lower disposable income and lower spending. B) will raise disposable income and lower spending. C) will lower disposable income and raise spending. D) will raise disposable income and raise spending. E) will raise disposable income and raise net exports. Answer: D Diff: 1 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

31) The tax multiplier A) is negative. B) is larger in absolute value as compared to the government spending multiplier. C) is a measure of how much taxes will fall when income is falling. D) is always less than one. E) increases with the size of the economy. Answer: A Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 32) A change in tax rates A) has a less complicated effect on GDP than does a tax cut of a fixed amount. B) has a larger multiplier effect the smaller the tax rate. C) will not affect disposable income. D) will not affect the size of the multiplier. E) will be exactly offset by a change in consumption spending. Answer: B Diff: 3 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 33) A cut in tax rates affects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect. A) decreasing; increasing B) decreasing; decreasing C) increasing; increasing D) increasing; decreasing E) None of the above is correct. Answer: C Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 34) If the federal government wanted to counteract the effects of a recession, it could A) increase tax rates. B) increase taxes by a fixed amount. C) increase government purchases. D) decrease defense spending. E) reduce the money supply. Answer: C Diff: 1 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 57 Copyright © 2024 Pearson Canada Inc.

35) An equal increase in government purchases and taxes will cause A) an increase in real GDP. B) no change in real GDP. C) an increase in the budget surplus. D) a reduction in cyclically adjusted budget surplus. E) a reduction in interest rates. Answer: A Diff: 3 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 36) Suppose real GDP is $1.7 trillion, potential real GDP is $1.8 trillion, and the federal government plans to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, the federal government would need to increase government purchases by A) $50 billion. B) $100 billion. C) less than $100 billion. D) more than $100 billion. E) None of the above is correct. The federal government must decrease government purchases in this case. Answer: C Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 37) Suppose real GDP is $1.7 trillion, potential real GDP is $1.75 trillion, and the federal government plans to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, the federal government would need to decrease taxes by A) $50 billion. B) $100 billion. C) less than $50 billion. D) more than $50 billion. E) None of the above is correct. The federal government should raise taxes in this case. Answer: C Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers

38) Suppose real GDP is $1.7 trillion and potential real GDP is $1.74 trillion. An increase in government purchases of $40 billion would cause real GDP to ________ potential real GDP (assuming a constant price level). A) equal B) be less than C) be more than D) There is insufficient information given here to draw a conclusion. E) None of the above is correct. Answer: C Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 39) If the government purchases multiplier equals 2, and real GDP is $1.7 trillion with potential real GDP of $1.75 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP. A) $1.75 trillion B) $500 billion C) $100 billion D) $50 billion E) $25 billion Answer: E Diff: 3 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 40) If the absolute value of the tax multiplier equals 1.6, real GDP is $1.3 trillion, and potential real GDP is $1.34 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP. A) $15 billion B) $25 billion C) $40 billion D) $64 billion E) $134 billion Answer: B Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers

41) A tax rebate by the government would A) increase your pretax income, but not your disposable income. B) increase your disposable income, but not your pretax income. C) decrease your pretax income, but not your disposable income. D) decrease your disposable income, but not your pretax income. E) increase your pretax income and increase your disposable income. Answer: B Diff: 1 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $1200 More? 42) A government tax rebate of $1,000 would ________ your disposable income by ________. A) increase; less than $1,000 B) increase; $1,000 C) decrease; less than $1,000 D) decrease; $1,000 E) increase; $500 Answer: B Diff: 1 Type: MC Topic: Tax Rebates Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $1200 More? 43) A one-time tax rebate, which is not expected to be extended in future years, will A) have a small positive effect on consumption and aggregate demand. B) have no effect on consumption and aggregate demand. C) have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate. D) increase aggregate supply and aggregate demand. E) have a significant negative effect on aggregate demand as people will expect taxes to rise in the future. Answer: A Diff: 2 Type: MC Topic: Tax Rebates Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $1200 More?

44) A tax rebate, which is expected to be offered in this and all future years, will A) have a small positive effect on consumption and aggregate demand. B) have no effect on consumption and aggregate demand. C) have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate. D) increase aggregate supply and aggregate demand. E) have a significant effect on aggregate supply, with firms expanding by a multiple of the increased tax take. Answer: C Diff: 2 Type: MC Topic: Tax Rebates Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $1200 More? 45) The tax multiplier is calculated as one minus the government purchases multiplier. Answer: FALSE Diff: 2 Type: TF Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 46) Suppose real GDP is $1.8 trillion and potential real GDP is $1.85 trillion. If the federal government increases government purchases by $50 billion, then the economy will be brought to equilibrium at potential real GDP. Answer: FALSE Diff: 3 Type: TF Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 47) In the case of an upward-sloping aggregate supply curve, the change in real GDP brought about by a change in government spending will be less than that predicted by the simple government purchases multiplier. Answer: TRUE Diff: 2 Type: TF Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

48) Describe the differences (in sign and relative magnitude) between the government purchases multiplier and the tax multiplier. Answer: First, changes in government purchases affect GDP in the opposite direction as changes in taxes. As a result, the government purchases multiplier is positive, and the tax multiplier is negative. Second, the government purchases multiplier is larger in magnitude than the tax multiplier. This means that a dollar change in government purchases will have a larger effect on GDP as compared to a dollar change in the taxes. Diff: 1 Type: SA Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 49) What economic impact would the closing of a nearby government office have on a town? Would people and businesses that did not directly deal with the government employees or the government office be affected? Answer: Through the multiplier effect, the closing of the government office would have a large effect on the town. The businesses that sold directly to the government employees would lose sales, resulting in declining profits and layoffs. With less income, these business owners and workers would buy less goods and services from other businesses in town, which would drop the income of the owners and workers in the other businesses. With less income, they would also decrease their spending and the multiplier effect would spread through the town. Diff: 3 Type: SA Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 50) Explain why the tax multiplier is different from the government purchases multiplier, in both sign and relative magnitude. Answer: A dollar change in government purchases has the opposite impact of a dollar change in taxes. For example, an increase in government purchases increases income, spending, and GDP in the economy. In contrast, an increase in taxes lowers income, spending, and GDP in the economy. As a result, the government purchases multiplier is positive, and the tax multiplier is negative. A dollar change in government purchases will have a larger effect on GDP as compared to a dollar change in the tax multiplier. A change in government purchases affects overall spending directly. The first round GDP change in the multiplier process will be equal to this change in spending. In contrast, a change in taxes affects income first and then spending. For example, a tax cut will increase income, but not all of that income will be spent (some of it is saved). The fraction of income that is spent is the MPC times the income change. The first round GDP change in the multiplier process will be equal to this smaller change in spending. Hence, a decrease in taxes will have a smaller impact on equilibrium than would an increase in government purchases. Diff: 2 Type: SA Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

51) Suppose that the current equilibrium GDP is $1.85 trillion and that potential GDP is $1.83 trillion. Will decreasing government purchases by $20 billion, or raising taxes by $20 billion, restore the economy to potential GDP? Explain. Answer: Neither policy is appropriate because they ignore the multiplier effect. The multiplier effect multiplies each dollar of government purchases into larger changes in equilibrium GDP. This means that it will take a much smaller decrease in government purchases to close the gap between equilibrium GDP and potential GDP. Since the multiplier effect of a dollar change in taxes is smaller than the multiplier effect of government purchases, the absolute value of the tax increase will have to be larger than the change in government purchases. This is clearly shown by assuming the value of the government purchase multiplier is equal to 2.5 and a tax multiplier equal to -1.5. The necessary increase in government purchases is government purchases multiplier = 2.5 = change in government purchases =

= -$8 billion

and the necessary change in taxes: tax multiplier = -1.5 = change in taxes =

= $13.3333

33 billion Diff: 2 Type: SA Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers

12.5

Discuss the difficulties that can arise in implementing fiscal policy

1) The Bank of Canada plays a larger role than Parliament and the Prime Minister in stabilizing the economy because A) the Bank of Canada can more quickly change monetary policy than the Parliament can change fiscal policy. B) the Bank of Canada can immediately recognize when real GDP is below or above potential GDP. C) changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. D) changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time. E) the Bank of Canada has more authority than parliament. Answer: A Diff: 2 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 2) The use of fiscal policy to stabilize the economy is limited because A) changes in government spending and tax rates have a small effect on aggregate demand. B) changes in government spending and tax rates have a small effect on interest rates. C) the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. D) the Canada Revenue Agency (CRA) resists changes in tax rates because of all the changes they would have to make to the tax code. E) the federal government has very limited authority to engage in taxation and spending under the Constitution Act of 1982. Answer: C Diff: 2 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 3) Crowding out refers to a decline in ________ as a result of an increase in ________. A) tax revenues; unemployment B) government purchases; tax rates C) government purchases; private expenditures D) private expenditures; government purchases E) exports; tariffs Answer: D Diff: 1 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

4) The crowding out of private spending by government spending will be greater the A) less sensitive consumption, investment, and net exports are to changes in interest rates. B) more sensitive consumption, investment, and net exports are to changes in interest rates. C) less sensitive consumption, investment, and net exports are to changes in the price level. D) more sensitive consumption, investment, and net exports are to changes in the price level. E) more sensitive consumption, investment, and net exports are to changes in the marginal tax rate. Answer: B Diff: 3 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 5) An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier. A) will decrease B) will increase C) will not change D) may increase or may decrease E) None of the above is correct. Answer: A Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 6) The impact of crowding out may be the least A) during a deep recession. B) when real GDP is above but close to potential GDP. C) during an expansion. D) when real GDP is below but close to potential GDP. E) when technological progress is slow. Answer: A Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

7) In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending. A) no B) partial C) complete D) insufficient E) excessive Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 8) Expansionary fiscal policy A) can be effective in the short run. B) causes complete crowding out in the short run. C) is never effective because of crowding out. D) can be effective in the long run. E) is only effective in the long run. Answer: A Diff: 2 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 9) In the long run, most economists agree that a permanent increase in government spending leads to A) no decrease in private spending. B) a decrease in private spending by less than the amount that government spending increased. C) a decrease in private spending by the same amount that government spending increased. D) a decrease in private spending by more than the amount that government spending increased. E) an increase in private spending by more than the amount that government spending increased. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

10) Assume that in 2021 aggregate demand in Canada begin to grow much faster than aggregate supply. What policy would you recommend to Parliament? A) The Bank of Canada should raise its target for the target for the overnight rate. B) There should be a decrease in government spending. C) Provincial governments should increase health care spending. D) Income taxes should be lowered to reduce the federal budget surplus and raise interest rates. E) Local governments should increase spending on water treatment systems to offset the damage of extra economic activity on the environment. Answer: B Diff: 1 Type: MC Topic: Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 11) In 2009, the federal government introduced Canada's Economic Action Plan, an expansionary fiscal policy, to try to pull the economy out of the recession, which was A) the largest fiscal policy action in Canadian history. B) second in size only to the fiscal policy action taken during the Great Depression. C) small in comparison to the actions taken during the recession of 1974-1975. D) roughly equal to the spending increases and tax cuts implemented during the recession of 1981-1982. E) the largest increase in interest rates in living memory. Answer: A Diff: 1 Type: MC Topic: Fiscal Policy Multipliers Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 12) Crowding out refers to a decrease in government purchases as a result of an increase in private expenditures. Answer: FALSE Diff: 1 Type: TF Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 13) As spending on government purchases increases, income rises and money demand falls. Answer: FALSE Diff: 2 Type: TF Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills

14) Recessions are bad for all aspects of personal health. Answer: FALSE Diff: 1 Type: TF Topic: Recessions and Personal Health Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 15) Why will there be less crowding out of private spending by government spending the less sensitive consumption, investment, and net exports are to changes in interest rates? Answer: Crowding out occurs when the increase in government spending increases real GDP and income which increases money demand, pushing up interest rates. The higher interest rates decrease (crowd out) private spending — consumption, investment, and net exports. The less sensitive consumption, investment, and net exports are to interest rates, the less they decrease as a result of the higher interest rates. Diff: 3 Type: ES Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 16) If the federal government pursues an expansionary fiscal policy at the same time as the Bank of Canada pursues an expansionary monetary policy, how might the expansionary monetary policy affect the extent of crowding out in the short run? Answer: An expansionary fiscal policy will cause the equilibrium rate of interest to increase. An expansionary monetary policy will cause the equilibrium rate of interest to decrease. An expansionary monetary policy will therefore lessen the effect of crowding out in the short run. Diff: 3 Type: ES Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 17) Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally A) less difficult than with monetary policy. B) far less difficult than with monetary policy. C) more difficult than with monetary policy. D) about the same difficulty as with monetary policy. E) impossible due to the interference from the Bank of Canada. Answer: C Diff: 1 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

18) It is ________ difficult to effectively time fiscal policy than monetary policy because ________. A) more; fiscal policy can be quickly decided and changed B) more; fiscal policy takes longer to implement C) less; monetary policy takes longer to decide and change D) less; monetary policy takes longer to implement E) not; monetary policy is precise Answer: B Diff: 2 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 19) A(n) ________ in private expenditures as a result of ________ in government purchases is called crowding out. A) increase; a decrease B) decrease; a decrease C) decrease; an increase D) increase; an increase E) increase; no change Answer: C Diff: 1 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 20) If government spending and the price level increase, then A) the interest rate increases, consumption declines, and investment spending declines. B) the interest rate decreases, consumption declines, and investment spending declines. C) the interest rate increases, consumption increases, and investment spending increases. D) the interest rate decreases, consumption increases, and investment spending increases. E) the interest rate decreases, consumption increases, and investment spending declines. Answer: A Diff: 3 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills 21) Crowding out, following an increase in government spending, results from A) higher interest rates and a lower exchange rate. B) higher interest rates and a higher exchange rate. C) lower interest rates and a lower exchange rate. D) lower interest rates and a higher exchange rate. E) a higher exchange rate and higher tax rates. Answer: B Diff: 3 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 69 Copyright © 2024 Pearson Canada Inc.

22) Crowding out will be greater A) the less sensitive consumption spending is to changes in the interest rate. B) the further equilibrium GDP is below potential GDP. C) the more sensitive investment spending is to changes in the interest rate. D) if the economy is in recession, rather than at full employment. E) the more sensitive consumers are to changes in the tax rate. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills 23) If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to A) be at potential GDP. B) be above potential GDP. C) be below potential GDP. D) not affect GDP. E) There is insufficient information given here to draw a conclusion. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills 24) Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ________ and investment to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) remain constant; increase Answer: B Diff: 3 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills

25) An increase in government spending may expedite recovery from a recession in the short run, but in the long run, this policy may A) reduce investment in new capital. B) make domestic businesses less competitive in international markets as the dollar appreciates in value. C) raise interest rates and reduce consumer expenditures on automobiles and new houses. D) reduce future consumption spending due to higher tax rates in the future. E) All of the above are correct. Answer: E Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 26) Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run. A) partial crowding out; partial crowding out B) partial crowding out; complete crowding out C) complete crowding out; complete crowding out D) complete crowding out; partial crowding out E) no crowding out; complete crowding out Answer: B Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 27) Alberta suffered large declines in employment throughout 2015 and 2016. If the federal and provincial governments increased spending at the same time, the most likely effect (of those below) would be A) an increase in people's incomes but declining health. B) a reduction in people's incomes and declining health. C) an increase in people's incomes and an improvement in their health. D) a reduction in people's incomes and an improvement in their health. E) an increase in people's incomes and no change in their health. Answer: A Diff: 1 Type: MC Topic: Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

28) Research by Christopher Ruhm shows that people's health ________ on average during an economic ________. A) gets worse; recession B) improves; expansion C) stays the same; expansion D) improves; recession E) gets worse; expansion Answer: D Diff: 1 Type: MC Topic: Health Care Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 29) What impact would you expect an increase of $63 billion in federal government spending to have on the economy? A) Consumer spending would fall and investment spending would rise. B) Net exports would rise and consumer spending would rise. C) Consumer spending would fall and investment spending would fall. D) Savings would rise and taxation would fall. E) Consumer spending would rise and potential GDP would rise. Answer: C Diff: 2 Type: MC Topic: Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 30) Many economists who would normally argue against government spending increases due to "crowding out" were in favour of the large economic stimulus during COVID-19. Why would these economists change their mind? A) Research had shown that crowding out does not occur. B) Crowding out only occurs when the economy is overheating. C) Crowding out only occurs when the federal government is running a budgetary surplus. D) Crowding out is less likely during recessions due to low interest rates and falling prices. E) Crowding out is more likely during a recession due to a lack of investment opportunities. Answer: D Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

31) In preparing their estimates of the economic impact of a new football stadium in the City of Regina, proponents argued that building the stadium would create twice as much economic activity in the city as the stadium was projected to cost (essentially arguing that the local multiplier was 2). This is likely to be an overestimate of the multiplier because A) construction projects generate no additional economic activity. B) Regina's marginal propensity to consume is too great. C) imports and income taxes will reduce the impact of new spending. D) the price level in the local economy is likely to be insensitive to a major construction project. E) the marginal propensity to save in Saskatchewan is much higher than in other parts of the country. Answer: C Diff: 1 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Overestimate the Size of the Multiplier 32) An increase in government spending will force an appreciation of the dollar, which causes net exports to fall. Answer: TRUE Diff: 2 Type: TF Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 33) An increase in government spending lowers interest rates and increases the rate of investment in new capital. Answer: FALSE Diff: 2 Type: TF Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 34) Long lags associated with the legislative process in implementing fiscal policy make it more difficult to use than monetary policy. Answer: TRUE Diff: 2 Type: TF Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 35) Recessions may actually reduce health care spending. Answer: TRUE Diff: 2 Type: TF Topic: Recessions and Personal Health Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

36) Explain why the timing of fiscal policy may be more difficult than the timing of monetary policy. Answer: Accurately timing fiscal policy may be more difficult to accomplish than accurately timing monetary policy for two reasons. First, the time it takes to come to a decision is much longer for fiscal policy because the decision making body is large and diverse. The Prime Minister and Parliament have to agree upon fiscal policy changes. Comparatively, the body that decides monetary policy is the Governing Council of the Bank of Canada, which has 6 members. The smaller group has the ability to come to decisions more quickly. Second, it can take longer to implement fiscal policy relative to monetary policy. If the fiscal policy change is a government purchase, it takes time to plan the purchase, bid the purchase, and to begin implementing the project. Monetary policy implementation begins with a directive to buy or sell Government of Canada Bonds. Diff: 2 Type: SA Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 37) What is meant by crowding out? Explain the difference between crowding out in the short run and in the long run. Answer: Crowding out refers to a decline in private expenditures—consumption, investment, and net exports—as a result of an increase in government purchases. In the short run, an increase in government purchases results in partial crowding out of private expenditures, but in the long run, a permanent increase in government purchases results in the complete crowding out of private expenditures. Diff: 3 Type: SA Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer 1) To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the A) absolute size of the budget deficit or surplus. B) budget deficit or surplus as a percentage of GDP. C) budget deficit or surplus as a percentage of tax revenues. D) budget deficit or surplus as a percentage of government spending. E) budget deficit or surplus per capita. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 2) The largest Canadian federal budget deficits as a percentage of GDP in the last 50 years occurred during A) the mid-1980s. B) the early 1970s. C) the late 1990s. D) the early 2000s. E) the late 1960s. Answer: A Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 3) During 1970-1980, the federal government was A) in surplus every year. B) balanced every year. C) in deficit every year. D) in deficit most of those years. E) in surplus most of those years. Answer: C Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

4) A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) increase; rise; falls B) increase; fall; rises C) decrease; rise; falls D) decrease; fall; rises E) increase; rise; rises Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 5) An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) increase; rise; falls B) increase; fall; rises C) decrease; rise; falls D) decrease; fall; rises E) decrease; fall; falls Answer: C Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 6) The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was A) in a recession. B) in an expansion. C) at potential GDP. D) at potential tax revenue. E) achieving its maximum potential growth. Answer: C Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

7) Suppose the federal budget deficit for the year was $10 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $6 billion higher and government spending on transfer payments $5 billion lower. Using these estimates, the cyclically adjusted budget A) deficit was $21 billion. B) deficit was $11 billion. C) surplus was $1 billion. D) surplus was $11 billion. E) deficit was $1 billion. Answer: C Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 8) The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle A) destabilize the economy. B) stabilize the economy. C) decrease potential GDP. D) increase potential GDP. E) destabilize the debt to GDP ratio. Answer: B Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 9) The austerity plan required of the Greek government is a(n) ________ policy, when normally a recession would suggest ________ policy. A) expansionary; contractionary B) contractionary; expansionary C) contractionary; contractionary D) contractionary; cyclically adjusted E) expansionary; pro-cyclical Answer: B Diff: 3 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

10) The best time to correct a structural budget deficit is A) during a boom. B) during a recession. C) during an election. D) during a recovery from recession. E) during an economic slowdown. Answer: A Diff: 3 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 11) For the federal deficit to be lowered, A) the federal government must decrease its spending and increase net exports. B) the federal government's expenditures must be lower than its tax revenue. C) the Bank of Canada must raise interest rates and lower the required reserve ratio. D) the Bank of Canada must reduce the money supply. E) the federal government must reduce expenditures and increase taxes. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 12) The federal government debt equals A) tax revenues minus government spending. B) government spending minus tax revenues. C) the accumulation of past budget deficits. D) the total value of Canadian bonds outstanding. E) the total value of Canadian assets held by foreigners. Answer: D Diff: 1 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

13) The federal government debt fell during the period A) 2008-2016. B) 1980-1992. C) during World War I and World War II. D) 2000-2008. E) the Great Depression. Answer: D Diff: 2 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 14) Which of the following is a reason why we should consider the federal national debt a problem? A) The federal government is in danger of defaulting on its debt. B) If the debt drives up interest rates, crowding out will occur. C) If the debt was incurred to finance improvements in infrastructure, crowding out will occur. D) If the debt was incurred to finance research and development, crowding out will occur. E) If the debt increases private consumption, less investment will occur. Answer: B Diff: 2 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 15) The budget deficit increases during wars and recessions. Answer: TRUE Diff: 2 Type: TF Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 16) Increasing the federal budget deficit will contribute to increasing the federal government debt. Answer: TRUE Diff: 2 Type: TF Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

17) If the federal budget goes from a budget deficit in Year 1 to a budget surplus in Year 2, does it follow that the federal government acted to raise taxes or cut government spending in Year 2? Answer: No, the economy could have been in an expansion in Year 2 with GDP growing faster than anticipated. The faster growth in GDP would raise tax revenues and decrease government spending on transfer payments, decreasing the budget deficit (in this case, moving it to a budget surplus). Diff: 3 Type: ES Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking Special Feature: Solved Problem: The Effect of Economic Fluctuations on the Budget Deficit 18) In Year 1 suppose the economy is at potential GDP and that the federal budget deficit equals $100 billion. In Year 2 the federal budget deficit rises to $150 billion, but the cyclically adjusted budget deficit falls to $75 billion. How can the actual budget deficit rise and the cyclically adjusted budget deficit fall? Answer: The rise in the actual budget deficit with a decline in the cyclically adjusted budget deficit indicates that the economy grew less than anticipated in Year 2, perhaps falling into a recession. The decline in the cyclically adjusted budget deficit indicates that the budget deficit would have fallen if the economy had been at potential GDP in Year 2. Diff: 3 Type: ES Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 19) Assume a country is required by law to balance the budget every year. Suppose aggregate demand falls, causing a recession and a budget deficit. To balance the budget, what would the government need to do with the level of government spending and taxes? How would these changes in government spending and taxes affect aggregate demand and the economy? Answer: To balance the budget, the government would need to lower government spending and raise taxes, both of which would decrease aggregate demand, making the recession worse. Diff: 2 Type: ES Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills

20) If the federal government's expenditures are less than its tax revenues, then A) a budget surplus results. B) a budget deficit results. C) the budget is balanced. D) a cyclical deficit results. E) No conclusion can be drawn. Answer: A Diff: 1 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 21) Since 1965, the largest federal budget deficit (as a percentage of GDP) occurred A) during the 1990s. B) during the 1980s. C) during the oil price shocks of the 1970s. D) during the global financial crisis of the 2000s. E) during the recession of 2015. Answer: B Diff: 1 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 22) Government deficits tend to increase during A) recessions and booms. B) periods of war and recession. C) periods of below- or above-average growth. D) periods of increased financial uncertainty. E) periods immediately following elections. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

23) Since 1975, the federal government budget was in surplus during A) 1981 through 1985. B) 1990 through 1997. C) 1998 through 2008. D) 1980 through 1989. E) 2009 through 2016. Answer: C Diff: 1 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 24) The federal budget deficit acts as an automatic stabilizer because A) government tax revenues decrease during a recession. B) employment insurance payments decrease during a recession. C) employment insurance payments increase during expansionary periods. D) health care spending increases during expansionary periods. E) governments are required to balance their budgets during expansions. Answer: A Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 25) During recessions, government expenditure automatically A) falls because of programs such as employment insurance. B) rises because of programs such as employment insurance. C) falls because of the progressive income tax system. D) rises because of the progressive income tax system. E) rises because of transfers to provincial governments. Answer: B Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

26) The cyclically adjusted budget deficit calculates the budget surplus or deficit at A) real GDP. B) potential GDP. C) nominal GDP. D) average GDP. E) maximum GDP. Answer: B Diff: 1 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 27) If the federal budget has an actual budget deficit of $35 billion and a cyclically adjusted budget deficit of $30 billion, then the economy A) must be at potential real GDP. B) must be below potential real GDP. C) must be above potential real GDP. D) will not be impacted. E) could be below or above potential real GDP. Answer: B Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 28) Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential, A) this will result in a current budget deficit. B) the cyclically adjusted budget will be balanced. C) government transfer payments will be rising and tax receipts will be falling. D) government receipts from social security premiums will be falling. E) All of the above are correct. Answer: E Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

29) The nation of Hyperbole is in a recession, and the government decides to increase taxes and reduce government spending to reduce the growing deficit. This will ________ aggregate demand and will likely ________ real GDP and employment. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking Special Feature: Solved Problem: The Italian Government Confronts a Budget Deficit 30) Suppose the government wants to maintain a balanced budget. To achieve this goal, when the economy falls into recession government would need to ________ taxes, which would cause aggregate demand to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) increase; remain constant Answer: C Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 31) The government budget for the country of Economia is in surplus in 2019, and in deficit in the following year, 2020. We can conclude that A) the government must have raised tax rates or cut spending. B) the government must have cut tax rates or increased spending. C) the government fiscal policy did not change between 2015 and 2016. D) the government is not making use of automatic stabilizers. E) none of the above Answer: E Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Economic Fluctuations on the Budget Deficit

32) Some economists argue that the federal government should normally run a deficit at potential GDP, with the borrowed funds applied to A) consumption goods. B) investment goods. C) social security benefits. D) health care costs. E) imported goods. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 33) Borrowing to pay for long-lived capital expenditures makes sense as A) the benefits are received in the current year so the burden of paying for them should be spread over many years. B) the benefits are received over many years so the burden of paying for them should be spread over many years. C) the benefits are received in the current year so the burden of paying for them should be paid in the current year. D) the benefits are received over many years so the burden of paying for them should be paid in the current year. E) the benefits received are received over many years so the extra burden of interest payments are always justified. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 34) The total value of Government of Canada bonds outstanding equals A) the federal government deficit. B) the federal government surplus. C) the federal government debt. D) the cyclically adjusted budget deficit. E) the total of federal government assets. Answer: C Diff: 1 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

35) The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus. A) increases; increases B) decreases; increases C) increases; decreases D) decreases; decreases E) does not change; does not change Answer: C Diff: 1 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 36) The federal government debt as a percentage of GDP did not rise A) during the Global Financial Crisis. B) during late 1990s and early 2000s. C) during the 1960s. D) during the 1980s. E) from 2009 to 2016. Answer: C Diff: 1 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 37) Accumulating debt poses a problem for the Canadian federal government because A) it is currently in danger of defaulting on the debt. B) a large debt-to-GDP ratio causes crowding out. C) building roads and bridges do not yield enough benefits to justify their cost. D) the debt has to ultimately be paid off. E) a large debt-to-GDP ratio discourages imports. Answer: B Diff: 2 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 38) The cyclically adjusted budget is calculated at potential GDP. Answer: TRUE Diff: 2 Type: TF Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

39) A law requiring the government to balance its budget in each year would serve as an automatic destabilizer. Answer: TRUE Diff: 3 Type: TF Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 40) If the federal budget has an actual budget surplus of $7.5 billion, but a cyclically adjusted budget surplus of $5.0 billion, then the economy must be above potential real GDP. Answer: TRUE Diff: 2 Type: TF Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 41) When does the Government of Canada borrow? Why would the government have to borrow more than it estimated? When would the government repay what it borrowed, and who is it repaying? Answer: When tax revenues are not sufficient to pay the federal government's bills, the government borrows the necessary funds. The government would need to borrow more than it estimated if the federal budget deficit is larger than was estimated. The government would repay borrowed funds if the federal budget is in surplus, and it is repaying the investors who had bought its bonds. Diff: 2 Type: SA Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 42) How could the existence of an employment insurance system or other transfer programs have reduced the severity of the Great Depression? Answer: If these programs existed during the Great Depression, they would have mitigated its severity. In our economy today, workers laid off during a recession receive employment insurance payments. This extra income results in these workers spending more than they would have without these payments. In addition, households whose incomes fall below certain levels during recessions become eligible for welfare and other programs. These transfers also help increase spending by these households. The increased spending happens automatically, stimulates aggregate demand, and helps stabilize the economy. These programs did not exist during the Great Depression. Workers who lost their jobs had their incomes drop to zero and had to rely on savings, charity, and borrowing to survive. These workers dramatically cut back on their spending. This contributed to making the economic slowdown worse. Diff: 2 Type: SA Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills

43) The federal budget exhibited a surplus equal to 0.6 percent of GDP in 2008, but moved to a deficit of 0.4 percent of GDP in 2009. Some people want to blame the deficit solely on tax cuts, but others argued that the deficit grew because of the recession suffered in 2008-2009. Evaluate the validity of the second argument. Answer: Recessions increase the federal budget deficit because of automatic stabilizers in the economy. When GDP declines because of a recession, incomes and profits decline, causing tax revenues to decline. This will lower a budget surplus or increase a budget deficit. Falling GDP usually means rising unemployment, which increases government expenditures on unemployment insurance and other transfer programs. Increased government expenditures also lower a surplus or increase a deficit. Therefore, not all of the increase in the deficit was due to discretionary fiscal policy. Part of the increase in the deficit was a consequence of automatic stabilizers in the economy. Diff: 2 Type: SA Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 44) An article in the Wall Street Journal in 2019 noted that (1) Italy's government budget "deficit will be 2.4 percent of GDP rather than 2 percent as agreed with the EU", and (2) "Italy's economy has been in recession since late 2018." Is there a connection between the two points? Briefly explain. Answer: Deficits occur automatically during recessions because falling wages and profits cause government tax revenues to fall and because government spending on transfer payments, such as Employment Insurance payments, increases. So, it's not surprising that when the Italian economy is in recession, the government's budget deficit would be increasing. Diff: 3 Type: SA Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills Special Feature: Solved Problem: The Italian Government Confronts a Budget Deficit

12.7

Discuss the effects of fiscal policy in the long run

1) Which of the following best describes supply-side economics? A) Labour productivity affects aggregate supply. B) Education affects labour productivity which affects aggregate supply. C) Education affects the incentive to work, save, and invest and, therefore, aggregate supply. D) Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply. E) Government spending on products produced by private firms increases aggregate supply. Answer: D Diff: 2 Type: MC Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 2) The tax wedge is the difference between the A) amount of taxes needed to balance the federal budget and the actual amount of taxes. B) amount of taxes needed to pay off the national debt and the actual amount of taxes. C) pretax and posttax returns to an economic activity. D) nominal and real interest rates. E) nominal and real GDP. Answer: C Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 3) Assume your marginal income tax rate is 25%. If you earn a wage rate of $ 30 working in the campus bookstore, the tax wedge you face will be A) $ 7.5. B) $ 22.5. C) 75%. D) 4. E) 25%. Answer: A Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills Special Feature: Algorithmic Question

4) A decrease in which of the following would decrease the tax wedge? A) marginal tax rate B) money supply C) national debt D) federal budget deficit E) property taxes Answer: A Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 5) Economists who believe the supply-side effects of tax cuts are small essentially believe that A) tax cuts mainly affect aggregate demand. B) tax cuts mainly affect aggregate supply. C) tax cuts will increase the quantity of labour supplied. D) tax cuts will result in relatively small changes in the price level. E) tax rates play a key role in determining the decisions of suppliers. Answer: A Diff: 2 Type: MC Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 6) Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side effect versus no supply-side effect. Compared to no supply-side effect, including a supply-side effect for the decrease in tax rates will cause the price level to ________ and real GDP to ________. A) increase less; increase less B) increase less; increase more C) increase more; increase less D) decrease more; increase less E) increase more; decrease less Answer: B Diff: 2 Type: MC Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 7) An increase in the tax wedge associated with a given economic activity will decrease the level of that activity. Answer: TRUE Diff: 2 Type: TF Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking

8) The level of crowding out associated with a tax cut will be smaller if the tax change has a supply-side effect than it will be if it only has a demand-side effect. Answer: TRUE Diff: 3 Type: TF Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 9) The double taxation problem occurs because households pay taxes on dividends and capital gains from stock and corporations pay taxes on corporate profits. Answer: TRUE Diff: 1 Type: TF Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 10) What is the "tax wedge"? Answer: The "tax wedge" is the difference between the pretax and post tax return to an economic activity. Diff: 1 Type: ES Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 11) How can tax simplification be beneficial to the economy? Answer: Tax simplification would free up resources in the economy. The complexity of the tax code has created an entire industry to assist taxpayers in preparing their tax forms. If tax simplification reduces the need for tax preparation assistance, the resources used in this industry could be allocated to some other productive endeavor. This is beneficial, as it would reduce wasted resources. Simplifying the tax code would increase economic efficiency by reducing the time and trouble firms and households spend solely to reduce their tax payments. Diff: 2 Type: ES Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking

12) Show the impact of tax reduction and simplification using the dynamic aggregate demand and aggregate supply model. Clearly show and identify the impact of the tax change. Assume that aggregate demand and short-run aggregate supply shift as they typically do in the dynamic model. Show what happens to the price level and real GDP because of the tax change. Answer:

The economy's initial equilibrium is at point A. The movement from point A to point B illustrates the new long-run equilibrium that would exist in the economy with no tax change. This is an illustration of the economy that we'd typically expect in the dynamic model if the economy and aggregate demand were growing. The long-run aggregate supply will shift to the right from LRAS1 to LRAS2. Aggregate demand shifts to the right from AD1 to AD2. SRAS also shifts to the right from SRAS1 to SRAS2. The new longrun equilibrium in the economy is point B with a higher price level at P2 and a greater level of GDP at Y2. (The graph shows the AD shift relatively larger than the LRAS shift so the price level rises. This is arbitrary. The student could show the AD shift to be smaller relative to LRAS. The focus in this analysis is the movement from B to C.) With the tax change, LRAS will shift by an even greater amount from LRAS2 to LRAS3. This shift in LRAS assumes that the tax reduction is effective and the economy experiences increases in labour supply, saving, investment and the formation of new firms. Because of the tax change, the new equilibrium will be at point C rather than point B. The tax change lowers the price level from P2 to P3. This is a lower price level than what would have existed without the tax change. The tax change also increases output from Y2 to Y3. Diff: 3 Type: ES Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills

13) Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________. A) aggregate demand; government spending B) aggregate supply; taxes C) aggregate demand; taxes D) aggregate supply; government spending E) aggregate supply; wage rates Answer: B Diff: 1 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 14) As the tax wedge associated with a given economic activity gets smaller, we would expect A) more of that economic activity to occur. B) the distortions caused by taxes on that activity to be greater. C) people to engage in less of that particular activity. D) no change in the practice of that activity until the tax wedge ultimately disappears. E) people will spend more on that economic activity. Answer: A Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 15) Reducing the marginal tax rate on income will A) reduce the tax wedge faced by workers and increase labour supplied. B) raise the return to entrepreneurship and encourage the opening of new businesses. C) increase the after-tax return on saving, and encourage saving. D) shift the aggregate supply curve to the right. E) All of the above are correct. Answer: A Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 16) Double taxation refers to A) corporations paying taxes on profits and individuals paying taxes on wage income. B) individuals paying taxes on wage income and individuals paying taxes on dividends. C) corporations paying taxes on profits and individuals paying taxes on dividends. D) corporations paying taxes on capital gains and individuals paying taxes on wage income. E) individuals paying both federal and provincial income taxes. Answer: C Diff: 2 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 93 Copyright © 2024 Pearson Canada Inc.

17) If tax reduction and simplification are effective, then A) real wages will rise as labour supply and demand increase. B) saving and investment in new capital will increase. C) interest rates will rise in financial markets and demand for financial assets will fall. D) fewer new firms will be established, since existing firms will make more profit. E) government revenue will increase. Answer: B Diff: 2 Type: MC Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 18) Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) decrease; leave unchanged Answer: A Diff: 2 Type: MC Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 19) If we consider the potential effects of a proposed new government spending program supported by a tax increase, we would expect crowding out to be A) greater than it would be without the supply-side effects. B) increased as aggregate real income and output rise in the long run. C) unaffected by the shifting long-run aggregate supply curve. D) dependent upon the impact of this tax change on consumer disposable income. E) greater than if it were not supported by a tax increase. Answer: A Diff: 3 Type: MC Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills

20) Consider a tax cut that affects not only consumer disposable income, but also after-tax earnings from labour supplied to labour markets and from financial assets acquired through saving. In the long run, we would expect this tax cut to A) decrease the price level and increase real GDP. B) increase both the price level and the level of real GDP. C) increase the level of real GDP. D) increase the price level. E) decrease both the price level and real GDP. Answer: C Diff: 3 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 21) Based on supply-side effects, lower marginal tax rates in Canada result in a ________ tax wedge and a(n) ________ labour supply. A) higher; larger B) lower; larger C) higher; smaller D) lower; smaller E) lower; unchanged Answer: B Diff: 2 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 22) The case for austerity is different in Canada than in Greece because A) Canada's government debt is low and there is little danger of the government defaulting on its debt. B) the Canadian banking sector was bailed out by the federal government in 2009. C) Canada's federal government hasn't stimulated the economy in 20 years. D) Canada's government is currently running a structural budget deficit. E) Canada has more trade links with the rest of the world. Answer: A Diff: 2 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking

23) A study by Edward Prescott found that the ________ marginal tax rates in the United States compared with Europe ________ the return to working and result in a ________ supply of labour. A) lower; increase; smaller B) lower; increase; larger C) higher; increase; smaller D) higher; increase; larger E) higher; decrease; smaller Answer: B Diff: 2 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 24) Raising taxes on interest and dividend income will increase the level of investment and economic growth. Answer: FALSE Diff: 2 Type: TF Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 25) The level of crowding out associated with a tax cut will be larger if the tax change has a supply-side effect than it will be if it only has a demand-side effect. Answer: FALSE Diff: 3 Type: TF Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 26) The double taxation problem occurs because households pay taxes on dividends and capital gains from stock, and they pay taxes on income. Answer: FALSE Diff: 1 Type: TF Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 27) The federal government increased income tax deductions (effectively lowered taxes) in 2009. Explain how this might increase aggregate supply. Answer: Increasing this after-tax rate of return will increase the household's willingness to save and raise the supply of loanable funds. This will lower the interest rate and encourage firms to purchase new capital. This increases the capital stock and aggregate supply. Lower income taxes also increase the gain from supplying labour (workers get to keep more of the wages they receive), which is likely to increase the supply of labour and increase aggregate supply. Diff: 2 Type: SA Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 96 Copyright © 2024 Pearson Canada Inc.

28) What is the "tax wedge"? Answer: The "tax wedge" is the difference between the pretax and posttax return to an economic activity. Diff: 1 Type: SA Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 29) Illustrate and explain the effects of tax reduction and simplification using the dynamic aggregate demand and supply model. To simplify the analysis, assume that aggregate demand is not affected by the tax cut. Answer:

The economy's initial equilibrium is at point A. The movement from point A to point B illustrates the new long-run and short-run equilibrium that would exist in the economy with no tax change. The long-run aggregate supply will shift to the right from LRAS1 to LRAS2 due to normal growth. The short-run aggregate supply curve will shift with the LRAS curve. The new long-run and short-run equilibrium in the economy is point B with a lower price level at P2 and a greater level of GDP at Y2. With the tax change, LRAS will shift by an even greater amount from LRAS2 to LRAS3. The short-run aggregate supply curve shifts from SRAS2 to SRAS3. These shifts in LRAS and SRAS assume that the tax reduction is effective and the economy experiences increases in labour supply, saving, investment and the formation of new firms. Because of the tax change, the new equilibrium will be at point C rather than point B. The tax change lowers the price level from P2 to P3. This is a lower price level than what would have existed without the tax change. The tax change also increases output from Y2 to Y3. This is a greater level of output than what would have existed without the tax change. Diff: 2 Type: SA Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 97 Copyright © 2024 Pearson Canada Inc.

12.8

Apply the multiplier formula

1) In an open economy, the government purchases multiplier will be smaller the A) smaller the marginal propensity to import. B) larger the tax rate. C) larger the marginal propensity to consume. D) smaller the level of lump sum taxes. E) All of the above are correct. Answer: B Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 2) Assume a closed economy with fixed taxes and the marginal propensity to consume is equal to 0.9. What is the government spending multiplier? A) 10 B) 9 C) 5 D) 1 E) 0.1 Answer: A Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 3) Suppose that the federal government allocates $5 billion to an "energy-efficient appliance rebate" program. It also raises taxes by $5 billion to keep the deficit from growing. If the marginal propensity to consume is 0.8, what is the effect on equilibrium GDP? A) GDP does not change. B) GDP increases by $25 billion. C) GDP increases by $4 billion. D) GDP increases by $5 billion. E) GDP increases by $2.5 billion. Answer: D Diff: 2 Type: MC Topic: Balanced Budget Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

4) Suppose the federal government imposes a $10 billion tax increase. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.8. What happens to equilibrium GDP? A) There is a $50 billion increase in equilibrium GDP. B) There is a $50 billion decrease in equilibrium GDP. C) There is a $40 billion increase in equilibrium GDP. D) There is a $40 billion decrease in equilibrium GDP. E) There is a $10 billion decrease in equilibrium GDP. Answer: D Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 5) What is the government purchases multiplier if the tax rate is 0.2 and the marginal propensity to consume is 0.8? Assume the economy is closed. A) 1 B) 2.78 C) 5 D) 6.25 E) 100 Answer: B Diff: 2 Type: MC Topic: Tax Rates and Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 6) In an open economy, the government purchases multiplier will be A) larger as the marginal propensity to import decreases. B) smaller as the marginal propensity to import decreases. C) smaller as the marginal propensity to tax decreases. D) larger as the marginal propensity to consume decreases. E) larger as lump sum taxes fall. Answer: A Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking

7) Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75, the tax rate is 0.2, and the marginal propensity to import equals 0.3. A) 1.43 B) 1.6 C) 3.33 D) 4 E) 5 Answer: A Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 8) The government purchases multiplier will be larger if the marginal income tax rate decreases. Answer: TRUE Diff: 2 Type: TF Topic: Tax Rates and Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 9) The larger the marginal propensity to import, the larger the government purchases multiplier. Answer: FALSE Diff: 2 Type: TF Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 10) In a closed economy with fixed or autonomous (non-income dependent) taxes, the balanced budget government purchases multiplier is negative. Answer: FALSE Diff: 2 Type: TF Topic: Balanced Budget Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 11) Assuming a fixed amount of taxes and a closed economy, calculate the value of the government purchases multiplier, the tax multiplier, and the balanced budget multiplier if the marginal propensity to consume equals 0.5. Answer: Government purchases multiplier = Tax multiplier =

= −1

12) Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.9, the tax rate equals 0.25, and the marginal propensity to import equals 0.15. Answer: Government purchases multiplier = 1 / 1 - (0.9(1 - 0.25) - 0.15) = 2.11 Diff: 3 Type: ES Topic: Fiscal Policy Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 13) In an open economy, the government purchases multiplier will be larger the A) smaller the marginal propensity to import. B) smaller the marginal income tax rate. C) larger the marginal propensity to consume. D) smaller the marginal propensity to save. E) All of the above are correct. Answer: E Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 14) Assume a closed economy, that taxes are fixed, and the marginal propensity to consume is equal to 0.6. What is the government spending multiplier? A) 10 B) 5 C) 4 D) 3 E) 2.5 Answer: E Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 15) Assume a closed economy, that taxes are fixed, and the marginal propensity to consume is equal to 0.8. What is the government spending multiplier? A) 10 B) 5 C) 4 D) 3 E) 2.5 Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

16) Assume a closed economy, that taxes are fixed, and the marginal propensity to consume is equal to 0.9. What is the government spending multiplier? A) 10 B) 5 C) 4 D) 3 E) 2.5 Answer: A Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 17) Suppose that the federal government allocates $100 million to clean up after a record snowfall bury the Maritimes. It also raises taxes by $100 million to keep the deficit from growing. If the marginal propensity to consume is 0.9, what is the effect on equilibrium GDP? A) GDP does not change. B) GDP increases by $10 million. C) GDP increases by $90 million. D) GDP increases by $100 million. E) GDP decreases by $10 million. Answer: D Diff: 2 Type: MC Topic: Balanced Budget Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 18) Suppose the federal government increases taxes by $500 million. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.75. What happens to equilibrium GDP? A) There is a $2 billion increase in equilibrium GDP. B) There is a $2 billion decrease in equilibrium GDP. C) There is a $1.5 billion increase in equilibrium GDP. D) There is a $1.5 billion decrease in equilibrium GDP. E) There is a $500 million decrease in equilibrium GDP. Answer: D Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

19) What is the government purchases multiplier if the tax rate is 0.1 and the marginal propensity to consume is 0.9? Assume the economy is closed. A) 2.5 B) 5.3 C) 10 D) 11.1 E) 100 Answer: B Diff: 2 Type: MC Topic: Tax Rates and Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 20) In an open economy, the government purchases multiplier will be A) larger as the marginal propensity to import increases. B) smaller as the marginal propensity to import increases. C) larger as the marginal propensity to tax increases. D) smaller as the marginal propensity to consume increases. E) smaller as the marginal tax rate falls. Answer: B Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 21) Calculate the government purchases multiplier if the marginal propensity to consume equals 0.8, the tax rate is 0.1, and the marginal propensity to import equals 0.2. A) 2.1 B) 1.9 C) 1.7 D) 1.4 E) 5 Answer: A Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

22) Calculate the impact of a $ 96 billion increase in government spending on equilibrium GDP when the marginal propensity to consume is 0.8, the marginal tax rate is 15% and the marginal propensity to import is 0.15. A) 204.26 B) 480 C) 30.72 D) 274.29 E) -0.10 Answer: A Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 12.8 Appendix: Apply the multiplier formula AACSB: Analytic Skills Special Feature: Algorithmic Question 23) The government purchases multiplier will be larger if the marginal income tax rate increases. Answer: FALSE Diff: 2 Type: TF Topic: Tax Rates and Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 24) The larger the marginal propensity to import, the smaller the government purchases multiplier. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 25) In a closed economy with fixed or autonomous (non-income dependent) taxes, the balanced budget government purchases multiplier equals one. Answer: TRUE Diff: 2 Type: TF Topic: Balanced Budget Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 26) Assuming a fixed amount of taxes and a closed economy, calculate the value of the government purchases multiplier, the tax multiplier, and the balanced budget multiplier if the marginal propensity to consume equals 0.75. Answer: government purchases multiplier = 1 / (1 - 0.75) = 4 tax multiplier = -0.75 / (1 - 0.75) = −3 balanced budget multiplier = 1 Diff: 2 Type: SA Topic: Fiscal Policy Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

27) Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.8, the tax rate equals 0.2, and the marginal propensity to import equals 0.05. Answer: government purchases multiplier = 1 / 1 - (0.8(1 - 0.2) - 0.05) = 2.44 Diff: 3 Type: SA Topic: Fiscal Policy Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 13 Inflation, Unemployment, and Bank of Canada Policy 13.1 Describe the Phillips curve and the nature of the short-run tradeoff between unemployment and inflation 1) During COVID-19 recession, the Bank of Canada cut its target overnight rate to 0.25% and it remained there until the end of 2021. The result of this policy was an increase in CPI inflation rate by June 2022 to A) 8.1%. B) 7.9%. C) 6.3%. D) 5.8%. E) 4.7%. Answer: A Diff: 1 Type: MC Topic: Monetary Policy Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Chapter Opener: Inflation and Unemployment Always Move in Opposite Directions — Or Do They? 2) Based on the current situation of inflation and unemployment in Canada, Bank of Canada's decision to engage in contractionary monetary policy is useful because of the tradeoff between A) inflation and unemployment rates. B) monetary policy and government budget deficits. C) monetary policy and fiscal policy. D) monetary policy and recessions. E) inflation and the exchange rate. Answer: D Diff: 1 Type: MC Topic: Monetary Policy Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Chapter Opener: Inflation and Unemployment Always Move in Opposite Directions — Or Do They?

3) Evidence shows that many people who delay searching for a job for a year or longer after they are laid off A) find it more difficult to find new employment than if they had searched for a new job soon after they were laid off. B) find it easier to find new employment than if they had searched for a new job soon after they were laid off. C) find that they have little to no chance to find new employment after being unemployed for so long. D) find that the extra unemployment benefits they receive during their extended period of unemployment more than make up for the difficulty in finding a job once they decide to re-enter the workforce. E) find they are more likely to get a job they like. Answer: A Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Are There Benefits to Delaying a Job Search? 4) The curve showing the short-run relationship between the unemployment rate and the inflation rate is called A) the monetary policy curve. B) the Phillips curve. C) the Sargent curve. D) the unemployment curve. E) the Keynes' Cross. Answer: B Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 5) According to the short-run Phillips curve, the unemployment rate and the inflation rate are A) unrelated. B) positively related. C) negatively related. D) unaffected by money supply. E) unaffected by interest rates. Answer: C Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

Figure 13.1

6) Refer to Figure 13.1. What should the Bank of Canada do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above? A) buy treasury bills B) sell treasury bills C) lower the discount rate D) increase the money supply E) lower taxes Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 7) Refer to Figure 13.1. Suppose that the economy is currently at point A. If the Bank of Canada engaged in contractionary monetary policy, where would the economy end up in the short run? A) It would remain at point A. B) point B C) point C D) point D E) point E Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

8) Refer to Figure 13.1. Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Bank of Canada pursue if it wanted the economy to move to point B in the long run? A) Buy Canada bonds. B) Sell Canada bonds. C) Raise the discount rate. D) Decrease the money supply. E) No policy will move the economy to point B in the long run. Answer: E Diff: 3 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 9) Refer to Figure 13.1. Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point C, which of the following must be true? A) The economy is producing a level of GDP equal to potential GDP. B) Aggregate demand must have decreased. C) Equilibrium GDP at point C must be above potential GDP. D) The Bank of Canada conducted contractionary policy to cause the move. E) The Bank of Canada sold Canada bonds to cause the move. Answer: C Diff: 3 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 10) According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following? A) an increase in the unemployment rate to 3.4% B) a decrease in the unemployment rate to 3.0% C) a decrease in the demand for labour in the economy D) a return to the original inflation rate of 1.3% E) permanently higher inflation and an unemployment rate of 3.2% Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

11) Which of the following best explains the negative slope of the short-run Phillips curve? A) Weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but the rate of inflation falls. B) Aggregate demand grows so quickly that the inflation rate rises as unemployment rises. C) Long-run aggregate supply increases quickly enough that inflation falls as unemployment also falls. D) Short-run aggregate supply increases at the same pace as aggregate demand increases so that inflation and unemployment do not change. E) Strong growth in technology causes the short-run aggregate supply curve to shift rightward faster than aggregate demand, so unemployment falls and the inflation rate falls. Answer: A Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 12) If the Phillips curve represents a "structural relationship," then A) the trade-off between unemployment and inflation is permanent. B) the trade-off between unemployment and inflation holds only for the short run. C) the trade-off between unemployment and inflation holds in the long run, but not in the short run. D) the Phillips curve will be vertical in the long run. E) there will be no trade-off between unemployment and inflation. Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 13) According to the short-run Phillips curve, which of the following would result in low rates of unemployment? A) weak increases in aggregate supply B) a lower inflation rate C) weak increases in aggregate demand D) a higher inflation rate E) strong increases in long-run aggregate supply Answer: D Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

14) What is a "structural" relationship? A) a relationship that depends on the size of firm investments in capital such as buildings and other structures B) a relationship that depends on the basic behaviour of consumers and firms and remains unchanged over long periods C) a relationship between any two variables that is temporary D) any relationship that cannot be anticipated E) a relationship based on the institutions of the economy Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 15) What is the natural rate of unemployment? A) the unemployment rate that exists when the economy is at potential GDP B) the unemployment rate that exists when the economy is at a trough in a business cycle C) an unemployment rate of 0% D) any unemployment rate that is above the inflation rate E) when only cyclical unemployment exists Answer: A Diff: 2 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 16) In the long run, the Phillips curve is a ________ at ________. A) horizontal line; 0% inflation B) negatively sloped line; the intersection of aggregate demand and short-run aggregate supply C) vertical line; the natural rate of unemployment D) vertical line; the expected rate of inflation E) positively sloped line; the current rate of GDP growth Answer: C Diff: 2 Type: MC Topic: The Long-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

17) Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 4 percent over the next year, which of the following will occur? A) Unemployment of university employees will fall. B) Real wages for university employees will rise. C) Inflation will be 5 percent the following year. D) The decrease in inflation is expected. E) Employees of the university will be worse off than they expected. Answer: B Diff: 1 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 18) Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 6 percent over the next year, which of the following will occur? A) Unemployment of university employees will rise. B) Real wages for university employees will fall. C) Inflation will be 5 percent the following year. D) The increase in inflation is expected. E) Employees of the university will be better off than they expected. Answer: B Diff: 1 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 19) If actual inflation is less than expected inflation, which of the following will be true? A) Real wages will rise. B) Real wages will fall. C) The Phillips curve will be a vertical line. D) The unemployment rate will fall. E) The aggregate demand curve will become steeper. Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

20) Gretchen expects the price level to rise from 104 this year to 108 next year, and she is able to incorporate these expectations into her wage contract. If the price level rises to 106 next year instead of 108, which of the following will occur? A) Gretchen's real wage will be unchanged. B) Gretchen's real wage will fall. C) Gretchen's real wage will rise. D) Gretchen's real wage may rise or fall, depending on the unemployment rate. E) Gretchen is much less likely to become unemployed. Answer: C Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 21) Matt's real wage in 2022 is $26.80. If the price level is 104, what is Matt's nominal wage? A) $30.80 B) $27.87 C) $26.80 D) $25.77 E) $24.30 Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 22) If workers and firms expect that inflation will be 3 percent next year, and real wages are not changing over time, by how much will nominal wages increase? A) 3 percent B) more than 3 percent C) less than 3 percent D) the real wage rate divided by the expected inflation rate E) depends on actual inflation for next year Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

23) If actual inflation is less than expected inflation, actual real wages will be ________ expected real wages and unemployment will ________. A) greater than; rise B) greater than; fall C) less than; rise D) less than; fall E) equal to; remain constant Answer: A Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 24) The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms. A) unexpected B) expected C) perfectly predicted D) ignored E) undetected Answer: A Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 25) If the long-run aggregate supply curve is vertical, A) the economy stays at the natural rate of inflation in the long run. B) the short-run Phillips curve must be vertical. C) unemployment and inflation are positively related in the long run. D) the trade-off between unemployment and inflation cannot be permanent. E) any changes in the unemployment rate will be permanent. Answer: D Diff: 2 Type: MC Topic: The Long-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

26) The price level in the economy between 2020 and 2021 rose from 130 to 135. Between 2021 and 2022, the price level rose from 135 to 140.19. How does the short-run Phillips curve predict the unemployment rate will change as a result? A) The unemployment rate will decrease since inflation decreased. B) The unemployment rate will decrease since inflation increased. C) The unemployment rate will increase since inflation increased. D) The unemployment rate would not change since there is no change in the rate of inflation. E) The unemployment rate would increase since inflation decreased. Answer: D Diff: 3 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 27) A higher inflation rate can lead to lower unemployment if ________ mistakenly expect the inflation rate to be lower than it turns out to be. A) workers, but not employers B) employers, but not workers C) both workers and employers D) neither workers nor employers E) government, but not banks Answer: D Diff: 2 Type: MC Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation? 28) In 2023 the small country of Notrealia's had a price level expected to rise from 145 to 149.35. In 2018 the price level was 145. Expected inflation rate is 3%. If the average Notrealian earns a wage rate of $ 29 an hour in 2017, what is their expected real wage in 2023? A) $19.42 B) $ 29.87 C) $ 43.31 D) $ 20.00 E) $ 28.13 Answer: A Diff: 2 Type: MC Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills Special Feature: Algorithmic Question

29) The natural rate of unemployment is the rate that exists when the economy is producing at potential GDP. Answer: TRUE Diff: 1 Type: TF Topic: The Natural Rate of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 30) Ceteris paribus, in the short run following a decrease in the rate of growth in Aggregate Demand, we would expect to see an increase in the rate of unemployment and a decrease in the rate of inflation. Answer: TRUE Diff: 2 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 31) A study conducted by Robert Shiller, a Yale Economist, found that a large majority of the public thinks that increases in inflation will not quickly lead to an increase in wages. Answer: TRUE Diff: 1 Type: TF Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation? 32) An increase in the inflation rate increases employment only if the increase in inflation is unexpected. Answer: FALSE Diff: 1 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 33) Workers at a local mining company are paid $25.60 per hour, and they have incorporated a 3 percent annual raise in their contracts to account for expected inflation. Explain how unexpected inflation of 5 percent will affect the real wage and the unemployment rate. Answer: If actual inflation is 3%, a 3% increase in wages will allow workers to maintain their real wage. However, if inflation is higher than expected (5% instead of 3%), the 3% increase in wages will reduce the real wage, and firms will hire more workers than they had planned. As a result, unemployment will fall. Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

34) If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not? Answer: If workers accurately predict the rate of inflation, then they will incorporate wage adjustments into their contracts that will take inflation into account. The result is no change in the real wage, and no change in the unemployment rate, indicating that there is no trade-off between inflation and unemployment. Instead, the Phillips curve would be vertical. Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 35) Does the short-run Phillips curve have a positive or negative slope? Explain how this slope is derived. Answer: The short-run Phillips curve has a negative slope, indicating that there is a trade-off between inflation and unemployment. When aggregate demand rises, inflation and real GDP both rise in the short run. As real GDP rises above potential GDP, unemployment begins to fall below its natural rate. The result is higher inflation and a lower rate of unemployment. Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 36) When will an increase in aggregate demand not result in lower unemployment rates in the short run? Answer: An increase in aggregate demand will not result in lower unemployment rates in the short run if there is no change in the level of output relative to potential GDP as a result of the increase in aggregate demand. If, for example, aggregate supply increases and potential GDP increases at the same time that aggregate demand is increasing, the unemployment rate (and inflation) may remain unchanged. Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

37) If the rate of inflation in the economy is steady at 5 percent per year, how does the short-run Phillips curve predict that the unemployment rate will be changing, if at all? Does your answer change if inflation in the economy is 0 percent? Illustrate your answer with a Phillips curve. Answer: If the rate of inflation is constant at 5 percent per year, then the price level is rising, but the unemployment rate should remain constant, as shown in the graph below (as long as inflation is at 5 percent, the unemployment rate does not change). If inflation is 0 percent, then the Phillips curve would predict that unemployment will be higher than it was when inflation was 5 percent (assuming no change in inflation expectations), but as long as inflation is constant at 0 percent, there will be no change in the unemployment rate.

Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 38) Canadians have loaded up on debt to historic levels; per capita debt is over 165 percent of disposable income, mirroring that of the United States prior to the subprime financial crisis. The primary cause for this is A) the historically low interest rates the Bank of Canada has maintained to speed up recovery following the "Great Recession." B) the reduced regulations around borrowing in Canada. C) all-time high levels of disposable income. D) the availability of government securities, like Canada Savings Bonds. E) falling incomes of the middle class. Answer: A Diff: 1 Type: MC Topic: Monetary Policy Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Chapter Opener: Can the Bank of Canada Balance the Risks in the Canadian Economy 13 Copyright © 2024 Pearson Canada Inc.

39) Evidence shows that for many people, delaying searching for a job for a year or longer after they are laid off will contribute to a deterioration of their job skills, making it harder for them to find employment. This deterioration in job skills and the subsequent retraining that is necessary to obtain employment relates to which type of unemployment? A) cyclical B) frictional C) seasonal D) structural E) natural Answer: D Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Are There Benefits to Delaying a Job Search? 40) In the ________, A.W. Phillips plotted data for Great Britain that revealed a relationship between rates of change in wages versus unemployment rates. Economists later discovered other "Phillips curve" relationships between rates of inflation versus unemployment rates. A) 1880s B) 1930s C) 1940s D) 1950s E) 1960s Answer: D Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 41) The curve showing the short-run relationship between ________ and the ________ is called the Phillips curve. A) nominal interest rate; real interest rate B) the unemployment rate; the inflation rate C) price level; real GDP D) exchange rate; real interest rate E) the interest rate; government budget deficits Answer: B Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

42) According to the ________ Phillips curve(s), the unemployment rate and the inflation rate are negatively related. A) long-run B) short-run C) long-run and short-run D) rational expectations E) aggregate Answer: B Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 43) In a graph of unemployment rates (on the horizontal axis) versus inflation rates (on the vertical axis), the short-run Phillips Curve is A) downward sloping. B) horizontal. C) vertical. D) upward sloping. E) infinite. Answer: A Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

Figure 13.1

44) Refer to Figure 13.1. What should the Bank of Canada do if it wants to move from point A to point C in the short-run Phillips curve depicted in the figure above? A) buy government securities B) sell government securities C) raise the discount rate D) decrease the money supply E) raise taxes Answer: A Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 45) Refer to Figure 13.1. Suppose that the economy is currently at point A. If the Bank of Canada engaged in expansionary monetary policy, where would the economy end up in the short run? A) It would remain at point A. B) point B C) point C D) point D E) point E Answer: C Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

46) Refer to Figure 13.1. Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Bank of Canada pursue if it wanted the economy to move to point C in the long run? A) buy government securities B) sell government securities C) lower the discount rate D) increase the money supply E) No policy will move the economy to point C in the long run. Answer: E Diff: 3 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 47) Refer to Figure 13.1. Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point B, which of the following must be true? A) The economy is producing a level of GDP equal to potential GDP. B) Aggregate demand must have increased. C) Equilibrium GDP at point B must be below potential GDP. D) The Bank of Canada conducted expansionary policy to cause the move. E) The Bank of Canada purchased government securities to cause the move. Answer: C Diff: 3 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 48) According to the short-run Phillips curve, if unemployment is 2.4% and inflation is 3.7%, a decrease in the inflation rate might result in which of the following? A) an increase in the unemployment rate to 3.4% B) a decrease in the unemployment rate to 3.0% C) a decrease in the demand for labour in the economy D) Both A and C are correct answers. E) Both B and C are correct answers. Answer: D Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

49) Assume weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls. This explains the ________ slope of the short-run Phillips curve. A) positive B) negative C) zero D) infinite E) vertical Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 50) According to the short-run Phillips curve, which of the following would result in high rates of unemployment? A) strong increases in short-run aggregate supply B) a lower inflation rate C) strong increases in aggregate demand D) a higher inflation rate E) strong increases in long-run aggregate supply Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 51) Employees at the hospital have negotiated a 3 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 5 percent over the next year, which of the following will occur? A) Unemployment of hospital employees will rise. B) Real wages for hospital employees will fall. C) Inflation will be 3 percent the following year. D) The increase in inflation is expected. E) Employees will be better off than they expected. Answer: B Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

52) If actual inflation is greater than expected inflation, A) real wages rise. B) real wages fall. C) the Phillips curve is a vertical line. D) the unemployment rate rises. E) there is a transfer from borrowers to lenders. Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 53) Alejandro expects the price level to rise from 105 this year to 108 next year. If the price level rises to 110 next year instead of 108, which of the following will occur? A) Alejandro's real wage will remain unchanged. B) Alejandro's real wage will fall. C) Alejandro's real wage will rise. D) Alejandro's real wage may rise or fall, depending on the unemployment rate. E) Alejandro's real wage may rise or fall, depending on the interest rate. Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 54) Shondra's real wage in 2022 is $18.50. If the price level is 106, what is Shondra's nominal wage? A) $19.61 B) $18.61 C) $18.50 D) $17.44 E) $16.50 Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

55) If workers and firms expect that inflation will be 5 percent next year, and real wages are not changing over time, by how much will nominal wages increase? A) zero B) 5 percent C) more than 5 percent D) less than 5 percent E) depends on actual inflation for next year Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 56) The price level in the economy between 2020 and 2021 rose from 100 to 110. Between 2020 and 2021, the price level rose from 110 to 121. How would the short-run Phillips curve predict the unemployment rate would change as a result? A) The unemployment rate would decrease since inflation decreased. B) The unemployment rate would decrease since inflation increased. C) The unemployment rate would increase since inflation increased. D) The unemployment rate will initially rise and then fall as inflation rises and falls. E) The unemployment rate would not change since there is no change in the rate of inflation. Answer: E Diff: 3 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 57) If the Phillips curve represents a "________ relationship," then the trade-off between unemployment and inflation is permanent. A) structural B) frictional C) cyclical D) dynamic E) stochastic Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

58) A relationship that depends on the basic behaviour of consumers and firms and remains unchanged over long periods is called a ________ relationship. A) frictional B) structural C) cyclical D) dynamic E) transitory Answer: B Diff: 1 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 59) What is the natural rate of unemployment? A) the unemployment rate that exists when the economy is at potential GDP B) the unemployment rate that exists when the economy is at a trough in a business cycle C) an unemployment rate of 0% D) any unemployment rate that is above the inflation rate E) the unemployment rate that occurs when frictional unemployment is 0% Answer: A Diff: 2 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 60) All other factors held constant, increased growth in aggregate demand will A) increase inflation. B) reduce unemployment. C) move the economy to a higher point on the short-run Phillips curve. D) increase real interest rates. E) All of the above are correct. Answer: E Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

61) If actual inflation is greater than expected inflation, what is the relationship between the actual real wage and the expected real wage? A) The actual real wage will be lower than the expected real wage. B) The actual real wage will be higher than the expected real wage. C) The actual real wage will be equal to the expected real wage. D) The relationship between the actual real wage and the expected real wage cannot be predicted. E) All of the above are correct. Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 62) If General Motors negotiates a wage contract with the Canadian Auto Workers (CAW) union of $35 per hour to be paid during 2023, the current price level is 110, and expected inflation is 5%, what is the expected real wage in 2023? A) $30.30 B) $31.19 C) $29.46 D) $35 E) $36.75 Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 63) If General Motors negotiates a wage contract with the Canadian Auto Workers (CAW) union of $35 per hour to be paid during 2023, the current price level is 110, and actual inflation is 2%, what is the actual real wage in 2023? A) $30.30 B) $31.19 C) $29.46 D) $35 E) $36.75 Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

64) If General Motors negotiates a wage contract with the Canadian Auto Workers (CAW) union of $35 per hour to be paid during 2023, the current price level is 110, and actual inflation is 8%, what is the actual real wage in 2023? A) $30.30 B) $31.19 C) $29.46 D) $35 E) $36.75 Answer: C Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 65) If changes in inflation are higher than expected, A) the short-run Phillips curve will be positively sloped, but not vertical. B) the short-run Phillips curve will be negatively sloped. C) the short-run Phillips curve will be vertical. D) the long-run Phillips curve will be negative sloped. E) the short-run Phillips curve will be horizontal. Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 66) In an effort to discover whether or not workers understand inflation, economist Robert Shiller conducted a survey. When asked about the effect of general inflation on their wages or salary, the most popular response coming from workers was: A) "My wages usually catch up to rising prices within a year." B) "The price increase will create extra profit for my employer.... There will be no affect on my pay." C) "My wages have always increased by more than the rate of inflation." D) "The price increase will force my employer to reduce my pay." E) "The price increase will force my employer to increase my pay." Answer: B Diff: 1 Type: MC Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation?

67) Robert Shiller posed the following question to workers: "Imagine that next year the inflation rate unexpectedly doubles. How long would it probably take, in these times, before your income is increased enough so that you can afford the same things as you do today?" Shiller found that ________ percent of the workers he interviewed reported that it would take several years to restore the purchasing power of their wages or that this power would never be restored. A) 25 B) 42 C) 64 D) 81 E) 95 Answer: D Diff: 1 Type: MC Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation? 68) If the long-run aggregate supply curve is vertical A) the economy stays at the natural rate of inflation in the long run. B) the short-run Phillips curve must be vertical. C) unemployment and inflation are positively related in the long run. D) the trade-off between unemployment and inflation cannot be permanent. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytical Thinking 69) Ceteris paribus, in the short run following an increase in the rate of growth in aggregate demand, we would expect to see an increase in the rate of inflation and an increase in the rate of unemployment. Answer: FALSE Diff: 2 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 70) If the actual rate of inflation exceeds the expected rate of inflation, the actual real wage is greater than the expected real wage and unemployment falls. Answer: FALSE Diff: 3 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

71) In a survey, Robert Shiller found that most workers believe that an increase in inflation will lead quickly to an increase in wages. Answer: FALSE Diff: 3 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation? 72) In the 1960s, many economists and policymakers believed the trade-off between inflation and unemployment was permanent. Answer: TRUE Diff: 1 Type: TF Topic: The Long-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 73) Workers at a local construction company are paid $32.50 per hour, and they have incorporated a 4 percent annual raise in their contracts to account for expected inflation. Explain how unexpected inflation of 2 percent will affect the real wages earned by these workers and the unemployment rate of these workers. Answer: If actual inflation is 4%, a 4% increase in wages will allow workers to maintain their real wage. However, if inflation is lower than expected (2% instead of 4%), the 4% increase in wages will increase the real wage, and firms will hire fewer workers than they had planned. As a result, unemployment will rise. Diff: 2 Type: SA Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 74) What action should the Bank of Canada take if it wants to move from a point on the short-run Phillips curve representing low unemployment and high inflation to a point representing higher unemployment and lower inflation? Answer: The Bank of Canada would undertake a contractionary monetary policy. This would decrease aggregate demand, causing real GDP and the price level to both decrease. A decrease in real GDP will decrease employment, raising the unemployment rate. Diff: 2 Type: SA Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

75) When will a decrease in aggregate demand not result in a lower inflation rate in the short run? Answer: A decrease in aggregate demand will not result in a lower inflation rate in the short run if there is no change in the price level as a result of the decrease in aggregate demand. If, for example, aggregate supply decreases and potential GDP decreases at the same time that aggregate demand is decreasing, the inflation rate may remain unchanged. Diff: 2 Type: SA Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 76) If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion. Answer: If the unemployment rate is constant at 4 percent per year, the inflation rate should remain constant, as shown in the graph below (as long as the unemployment rate is 5 percent, the inflation rate does not change). If the unemployment rate rises to 7 percent, then the Phillips curve would predict that the inflation rate will be lower than it was when unemployment was 4 percent.

Diff: 2 Type: SA Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

13.2

Explain the relationship between the short-run and long-run Phillips curves

1) The expansionary monetary and fiscal policies of the 1960s resulted in A) high inflation rates and high rates of unemployment. B) low inflation rates and low rates of unemployment. C) low inflation rates and high rates of unemployment. D) high inflation rates and low rates of unemployment. E) high inflation rates and low rates of interest. Answer: D Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Figure 13.2

2) Refer to Figure 13.2. Suppose the economy is at point B in the figure above. Which of the following is true? A) The expected rate of inflation is 3%. B) The natural rate of unemployment is 3.8%. C) The current unemployment rate is 5%. D) The economy is producing at potential GDP. E) Expected inflation and actual inflation are the same. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

3) Refer to Figure 13.2. Suppose the economy is at point A in the figure above. Which of the following is true? A) The expected rate of inflation is 5.5%. B) The current unemployment rate is equal to the natural rate of unemployment. C) The current unemployment rate is 3.8%. D) Actual inflation is 1%. E) The economy will move from A to B. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 4) Refer to Figure 13.2. Suppose the economy is at point C in the figure above. If workers adjust their expectations of inflation, which of the following will be true? A) The short-run Phillips curve will shift to the right. B) The short-run Phillips curve will shift to the left. C) The economy will move from C to A. D) Workers and firms expect inflation to be 1%. E) The natural rate of unemployment is 6%. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 5) Refer to Figure 13.2. Suppose the economy is at point A in the figure above. Which of the following is true? A) The short-run Phillips curve will shift to the right. B) The short-run Phillips curve will shift to the left. C) The long-run Phillips curve will shift to the left. D) Actual inflation and expected inflation are the same. E) The long-run Phillips curve will shift to the right. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

6) Refer to Figure 13.2. Suppose the economy is at point B. If the Bank of Canada increases the money supply so that inflation increases, the economy will ________ in the short run, holding all else constant. A) eventually move to point A B) stay at point B C) eventually move to point C D) move to point A and then back to point B E) move to point B and then back to point A Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 7) Refer to Figure 13.2. Suppose the economy is at point C. If the Bank of Canada decreases the money supply so that inflation falls, the economy will ________ in the long run, holding all else constant. A) eventually move to point A B) eventually move to point B C) stay at point C D) move to point A and then back to point B E) move to point B and then back to point A Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 8) Refer to Figure 13.2. Suppose the economy is at point A. The Bank of Canada uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A. Which of the following will occur? A) Inflation will accelerate in the long run. B) Inflationary expectations will decline. C) Unemployment will rise above the natural rate. D) Unemployment will accelerate in the long run. E) Inflation will be permanently lower in the long run. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

9) Refer to Figure 13.2. At which point is the unemployment rate equal to the natural rate of unemployment? A) A B) B C) C D) all of the above E) There is insufficient information on the graph to answer this question. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 10) Refer to Figure 13.2. At which point are inflation expectations equal to the actual inflation rate? A) A B) B C) C D) all of the above E) There is insufficient information on the graph to answer this question. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 11) Refer to Figure 13.2. The nonaccelerating inflation rate of unemployment, or NAIRU, is associated with which point rate in the figure above? A) A B) B C) C D) all of the above E) There is insufficient information on the graph to answer this question. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

12) An increase in the expected inflation rate will A) shift the short-run Phillips curve to the right. B) shift the short-run Phillips curve to the left. C) cause the short-run Phillips curve to become flatter. D) reduce the natural rate of unemployment. E) cause the long-run Phillips curve to shift to the right. Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 13) If workers and firms raise their inflation expectations, A) unemployment will fall. B) actual inflation will fall to match expected inflation. C) the short-run Phillips curve will be vertical. D) the short-run Phillips curve will shift upward. E) the short-run Phillips curve will become flatter. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 14) Where does the short-run Phillips curve intersect the long-run Phillips curve? A) at the point where the rate of inflation and the unemployment rate are equal B) at the natural rate of inflation C) at the point where actual inflation is equal to expected inflation D) at the short-run equilibrium inflation rate E) There is no intersection between the short-run and long-run Phillips curves. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 15) If expected inflation rises, the long-run Phillips curve will A) shift to the right. B) not be affected. C) shift to the left. D) become negatively sloped. E) become steeper. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

16) A decrease in expected inflation will A) reduce real wages. B) increase the natural rate of unemployment. C) shift the long-run Phillips curve to the left. D) shift the short-run Phillips curve to the left. E) increase nominal wages. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 17) Which of the following would increase the natural rate of unemployment? A) an increase in the number of younger, less skilled workers in the economy B) a reduction in the generosity of unemployment insurance programs C) restrictions on the ability of unions to negotiate wage changes with companies D) an increase in government-sponsored programs that train unemployed workers so they can find new jobs quickly E) an increase in the number firms going out of business due to a recession Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 18) What can the Bank of Canada do to reduce the natural rate of unemployment? A) nothing B) enter into purchase and resale agreements C) enter into sale and repurchase agreements D) reduce the policy rate target E) raise the required reserve ratio Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change?

19) What is the NAIRU? A) the natural accelerating inflation rate of unemployment B) the nonaccelerating inflation rate of unemployment C) the nongovernmental agency of inflationary rate unions D) the new accrual index of real unemployment E) the normal aggregate investment rate of unilateral investment Answer: B Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 20) The long-run aggregate supply curve is ________, while the long-run Phillips curve is ________. A) positively sloped; negatively sloped B) vertical; negatively sloped C) vertical; also vertical D) positively sloped; also positively sloped E) vertical; horizontal Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 21) If the economy is producing at potential GDP, A) unemployment is at its natural rate. B) the Phillips curve must be positively sloped. C) the short-run aggregate supply curve must be vertical. D) inflation in the economy is at its natural rate. E) expectations of inflation must be accurate. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 22) The long-run Phillips curve is ________ than the short-run Phillips curve. A) flatter B) steeper C) less stable D) more volatile E) more curved Answer: B Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

23) What impact does monetary policy have on the long-run Phillips curve? A) Monetary policy can only shift the long-run Phillips curve to the left. B) Monetary policy shifts the long-run Phillips curve to the right or left, depending on whether monetary policy is expansionary or contractionary. C) Monetary policy can only shift the long-run Phillips curve to the right. D) Monetary policy has no impact on the long-run Phillips curve. E) Active monetary policy will make the long-run Phillips curve flatter. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 24) When unemployment is below its natural rate, the inflation rate will eventually A) increase. B) decrease. C) move to its natural rate. D) become equal to the natural rate of unemployment. E) fall to meet expected inflation. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 25) If the Bank of Canada attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see? A) The Bank of Canada will follow deflationary monetary policies. B) The Bank of Canada will follow inflationary monetary policies. C) The rate of inflation will fall as the Bank of Canada tries to reduce the unemployment rate. D) The Bank of Canada will reduce the natural rate of unemployment. E) The Bank of Canada will have to target inflation rates. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

26) Growth in aggregate demand will A) cause deflation. B) increase unemployment. C) move the economy to a higher point on the short-run Phillips curve. D) cause the short-run Phillips curve to shift to the left. E) cause the short-run Phillips curve to become flatter. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 27) If weak aggregate demand is pushing the economy into recession, which of the following must be true? A) The economy is at an equilibrium that is on the long-run aggregate supply curve. B) The economy is at an equilibrium that is on the long-run Phillips curve. C) The economy is at an equilibrium that is not on the long-run Phillips curve. D) Contractionary monetary policies will push the economy back to the long-run Phillips curve. E) Expansionary fiscal policy will be required to restore equilibrium. Answer: C Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 28) In the long run, the Bank of Canada can control which of the following? A) the inflation rate B) the unemployment rate C) the growth rate of real GDP in the economy D) the natural rate of unemployment E) the federal budget deficit Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 29) The short-run Phillips curve will shift if there is A) an increase in the unemployment rate. B) an increase in inflation that is unanticipated. C) a decrease in inflation that is unanticipated. D) a change in inflation expectations. E) a rise in cyclical unemployment. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 35 Copyright © 2024 Pearson Canada Inc.

30) A "long-run exploitable Phillips curve" refers to a Phillips curve that in the long run is ________ rather than ________. A) vertical; horizontal B) upward sloping; vertical C) horizontal; upward sloping D) downward sloping; vertical E) vertical; backward bending Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Solved Problem: Changing Views of the Phillips Curve 31) The natural rate of unemployment is fixed and unchanging. Answer: FALSE Diff: 2 Type: TF Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 32) A decrease in the level of cyclical unemployment will shift the long-run Phillips curve. Answer: FALSE Diff: 2 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 33) If unemployment persists for a long period of time, the natural rate of unemployment rises. Answer: TRUE Diff: 2 Type: TF Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 34) If inflationary expectations on the part of the public increase, the trade-off between inflation and unemployment becomes worse. Answer: TRUE Diff: 2 Type: TF Topic: Expectations of Inflation Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

35) What is the relationship between the short-run Phillips curve and the long-run Phillips curve? Answer: Along the short-run Phillips curve, the expected inflation rate is constant. When the expected inflation rate changes, the short-run Phillips curve shifts. The long-run Phillips curve is a vertical line at the natural rate of unemployment. The short-run Phillips curve intersects the long-run Phillips curve at the expected inflation rate. Diff: 2 Type: ES Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 36) Suppose a candidate for Prime Minister makes a statement in a debate whereby he promises that he would encourage the Bank of Canada to permanently lower the unemployment rate to 3%. His opponents claim that this type of policy idea is mired in the 1960s and would only cause inflation. Explain what the opponent means. Answer: An increase in the money supply will raise GDP above potential GDP and lower the unemployment rate below the natural rate in the short run. To attempt to keep the level of GDP above potential continuously in the long run, and subsequently keep the unemployment rate permanently below the natural rate, the Bank of Canada would have to continuously keep raising the money supply. This would be inflationary. Diff: 2 Type: ES Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Solved Problem: Changing Views of the Phillips Curve 37) The expansionary monetary and fiscal policies of the 1960s resulted in ________ inflation rates and ________ rates of unemployment. A) high; high B) low; low C) low; high D) high; low E) high; stable Answer: D Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

38) The natural rate of unemployment equals A) the rate of structural unemployment. B) structural plus frictional unemployment. C) structural plus frictional plus cyclical unemployment. D) the rate of unemployment we observe in any given period of measurement. E) seasonal plus cyclical unemployment. Answer: B Diff: 1 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 39) The natural rate of unemployment will not change following an increase in ________ unemployment. A) cyclical B) frictional C) structural D) seasonal E) all of the above Answer: A Diff: 2 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 40) What can the Bank of Canada do to reduce the natural rate of unemployment? A) nothing B) reduce the required reserve ratio C) reduce the target for the overnight rate D) purchase additional government bonds E) enact more restrictive lending practices Answer: A Diff: 1 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change?

41) An increase in frictional unemployment will A) shift the long-run Phillips curve to the right. B) increase the natural rate of unemployment. C) shift the short-run Phillips curve to the right. D) All of the above are correct. E) None of the above is correct. Answer: D Diff: 3 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 42) A decrease in cyclical unemployment will A) shift the long-run Phillips curve to the left. B) decrease the natural rate of unemployment. C) shift the short-run Phillips curve to the left. D) All of the above are correct. E) None of the above is correct. Answer: E Diff: 3 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 43) Ceteris paribus, an increase in the current or actual rate of inflation will cause A) the short-run Phillips curve to shift upward. B) the unemployment rate to decrease (a movement along the short-run Phillips curve). C) the long-run Phillips curve to shift leftward. D) expectations of future inflation rates to be revised downward. E) cause the Bank of Canada to enact expansionary monetary policy. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

44) What actions could the Bank of Canada take to achieve consistent growth in real GDP at 4 percent per year? A) The Bank of Canada could increase in the growth rate of the money supply by 1 percent each year until the inflation rate was exactly equal to 4 percent. B) The Bank of Canada could maintain a growth rate of the money supply of 4 percent, regardless of whether inflation was rising or falling in the economy. C) The Bank of Canada could follow contractionary monetary policy that would reduce the overnight interest rate to zero so investment would rise consistently. D) The Bank of Canada has no direct control over real GDP in the long run, so there are no actions it could take to achieve this goal. E) The Bank of Canada could relax lending standards for the banking system. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 45) In the 1960s, many economists and policy makers considered the trade-off between inflation and unemployment revealed in the Phillips curve to be permanent. This belief was challenged by ________, who argued that there is no trade-off between inflation and unemployment in the long run. A) Robert Lucas and Thomas Sargent B) Finn Kydland and Edward Prescott C) Paul Samuelson and James Tobin D) Milton Friedman and Edmund Phelps E) Paul Krugman and Joseph Stiglitz Answer: D Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 46) In the long run, the Phillips curve is a ________ at ________. A) horizontal line; 0% inflation B) negatively sloped line; the intersection of aggregate demand and short-run aggregate supply C) vertical line; the natural rate of unemployment D) positively sloped; the intersection of the short and long-run Phillips curves E) None of the above is correct. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

47) An increase in the expected inflation rate will A) shift the short-run Phillips curve to the right. B) shift the short-run Phillips curve to the left. C) reduce the inflation rate. D) reduce the unemployment rate. E) shift the long-run Phillips curve to the left. Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 48) If workers and firms raise their inflation expectations, A) unemployment will fall. B) actual inflation will fall to match expected inflation. C) the short-run Phillips curve will be vertical. D) the short-run Phillips curve will shift upward. E) the long-run Phillips curve will shift to the left. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 49) If the long-run aggregate supply curve is vertical, A) the economy stays at the natural rate of inflation in the long run. B) the short-run Phillips curve must be vertical. C) unemployment and inflation are positively related in the long run. D) the trade-off between unemployment and inflation cannot be permanent. E) any change in the unemployment rate must be permanent. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 50) Where does the short-run Phillips curve intersect the long-run Phillips curve? A) at the point where the rate of inflation and the unemployment rate are equal B) at the natural rate of inflation C) at the point where actual inflation is equal to expected inflation D) at equilibrium between unemployment and inflation E) There is no intersection between the short-run and long-run Phillips curves. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

Figure 13.3

51) Refer to Figure 13.3. The shifts shown in the short-run and long-run Phillips curves between period 1 and period 2 could be explained by A) an increase in the expected inflation rate from 4.0 to 5.5 percent. B) an increase in the natural rate of unemployment from 5.5 to 6.8 percent. C) either an increase in expected inflation from 4.0 to 5.5 percent or an increase in the natural rate of unemployment from 5.5 to 6.8 percent. D) a drop in the price of a key input such as oil. E) None of the above is correct. Answer: B Diff: 3 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 52) If expected inflation falls, the long-run Phillips curve will A) shift to the right. B) not be affected. C) shift to the left. D) become negatively sloped. E) become positively sloped. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

53) An increase in expected inflation will A) increase real wages. B) decrease the natural rate of unemployment. C) shift the long-run Phillips curve to the right. D) cause the short-run Phillips curve to become vertical. E) None of the above is correct. Answer: E Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Figure 13.4

54) Refer to Figure 13.4. Consider the shift in the short-run Phillips curve shown in the above graph. This shift may be explained by A) an increase in the natural rate of unemployment from 5.0 to 6.2 percent. B) an increase in the expected rate of inflation from 4.0 to 5.5 percent. C) either an increase in the natural rate of unemployment from 5.0 to 6.2 percent or an increase in the expected rate of inflation from 4.0 to 5.5 percent. D) a decrease in the natural rate of unemployment. E) None of the above is correct. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

55) Which of the following would decrease the natural rate of unemployment? A) a decrease in the number of younger, less skilled workers in the economy B) an increase in the generosity of employment insurance programs C) fewer restrictions on unions to negotiate wage changes with companies D) a decrease in government-sponsored programs that train unemployed workers so they can find new jobs quickly E) a sudden drop in net exports which causes many firms to fail Answer: A Diff: 2 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? Figure 13.5

56) Refer to Figure 13.5. Consider the Phillips curves shown in the above graph. We can conclude from this graph that A) the natural rate of unemployment in this economy is 5.5 percent. B) the expected rate of inflation in this economy is 10 percent. C) ceteris paribus, a fall in the rate of inflation to 5 percent will increase unemployment to 7.5 percent in the short run. D) All of the above are correct. E) None of the above is correct. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

57) A decrease in aggregate demand will A) cause inflation. B) decrease unemployment. C) move the economy to a lower point on the short-run Phillips curve. D) cause the short-run Phillips curve to shift to the right. E) cause the long-run Phillips curve to shift to the right. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 58) Monetary policy has ________ impact on the long-run Phillips curve. A) a positive B) a negative C) an unpredictable D) zero E) a constant Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 59) In the short run, the Bank of Canada can affect which of the following? A) the inflation rate B) the unemployment rate C) the growth rate of real GDP in the economy D) the nominal interest rate E) all of the above Answer: E Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 60) The ________ curves are both vertical. A) aggregate demand and short-run Phillips B) long-run aggregate supply and short-run Phillips C) long-run aggregate supply and long-run Phillips D) short-run aggregate supply and short-run Phillips E) money demand and short-run aggregate supply Answer: C Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

61) If the economy is producing ________, unemployment is at its natural rate. A) at potential GDP B) above potential GDP C) at an inflation rate of zero D) at an unemployment rate of zero E) additional output each period Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 62) The short-run Phillips curve is ________ than the long-run Phillips curve. A) flatter B) steeper C) less stable D) steeper and less stable E) more curved Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 63) When unemployment is above its natural rate, the inflation rate will eventually A) increase. B) decrease. C) move to its natural rate. D) become equal to the natural rate of unemployment. E) accelerate toward hyperinflation. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

64) If strong aggregate demand is pushing the economy beyond potential real GDP, which of the following must be true? A) The economy is at an equilibrium that is on the long-run aggregate supply curve. B) The economy is at an equilibrium that is on the long-run Phillips curve. C) The economy is at an equilibrium that is not on the long-run Phillips curve. D) Expansionary monetary policies will push the economy back to the long-run Phillips curve. E) The economy is at an equilibrium that is at the intersection of the short-run Phillips curve and the longrun Phillips curve. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 65) The short-run Phillips curve will not shift unless there is A) an increase in the unemployment rate. B) an increase in inflation that is unanticipated. C) a decrease in inflation that is unanticipated. D) a change in inflation expectations. E) a change in cyclical unemployment. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 66) An increase in expected inflation will shift the short-run Phillips Curve. Answer: TRUE Diff: 1 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 67) An increase in the level of structural unemployment will shift the long-run Phillips curve. Answer: TRUE Diff: 2 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change?

68) If the Bank of Canada attempts to reach and maintain very low rates of unemployment, we would expect the rate of inflation to rise. Answer: TRUE Diff: 2 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Solved Problem: Changing Views of the Phillips Curve 69) In the long run, the Bank of Canada may decrease the unemployment rate only if it is willing to increase the rate of inflation. Answer: FALSE Diff: 2 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Solved Problem: Changing Views of the Phillips Curve 70) Use the following information to draw a graph showing the short-run and long-run Phillips curves, and be sure your graph shows the point where the short-run and long-run Phillips curves intersect. Natural rate of unemployment = 4 percent Current rate of unemployment = 5 percent Expected inflation rate = 3 percent Current inflation rate = 2 percent Answer:

Diff: 2 Type: SA Topic: Expectations of Inflation Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

71) If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not? Answer: If workers accurately predict the rate of inflation, then they will incorporate wage adjustments into their contracts that will take inflation into account. The result is no change in the real wage, and no change in the unemployment rate, indicating that there is no trade-off between inflation and unemployment. Instead, the Phillips curve would be vertical. Diff: 2 Type: SA Topic: Expectations of Inflation Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

13.3

Discuss how expectations of the inflation rate affect monetary policy

1) During which of the following time periods did inflation remain above 5 percent every year? A) 1990 through 1999 B) 1973 through 1982 C) 1968 through 1971 D) 1958 through 1962 E) 2000 through 2007 Answer: B Diff: 1 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 2) When individuals use all available information about an economic variable to make a decision, expectations are A) underestimates of reality. B) accurate. C) rational. D) overestimates of reality. E) using adaptive expectations. Answer: C Diff: 1 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

3) When inflation is very low, how do workers and firms adjust their expectations of inflation? A) They rapidly adjust their expectations of inflation upward. B) They rapidly adjust their expectations of inflation downward. C) They tend to ignore inflation. D) They are more aggressive in asking for wage and price increases. E) They only slowly adjust their expectations in response to errors. Answer: C Diff: 1 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 4) If people assume that future rates of inflation will follow the pattern of inflation rates in the past, they are said to have A) rational expectations. B) adaptive expectations. C) unstable expectations. D) accommodative expectations. E) perfect foresight. Answer: B Diff: 1 Type: MC Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 5) According to economists Robert Lucas and Thomas Sargent, when are the gains to accurately forecasting inflation highest? A) when inflation is high and unstable B) when inflation is low C) when inflation is moderate but stable D) when inflation is high and stable E) when inflation is moderate but unstable Answer: A Diff: 1 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

6) If workers and firms know that the Bank of Canada is following an expansionary monetary policy, workers and firms will expect inflation to ________ and will adjust wages so that the real wage ________. A) increase; increases B) increase; remains unchanged C) decrease; decreases D) increase; decreases E) decrease; remains unchanged Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 7) If firms and workers have rational expectations, including knowledge of the policy being used by the Bank of Canada, the short-run Phillips curve will be A) negatively sloped. B) positively sloped. C) vertical. D) flatter in the long run than it is in the short run. E) steeper in the short run than it is in the long run. Answer: C Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 8) If firms and workers have rational expectations, including knowledge of the policy being used by the Bank of Canada, A) expansionary monetary policy is especially effective. B) expansionary monetary policy is ineffective. C) expansionary monetary policy is effective in the short run, but not the long run. D) expansionary monetary policy is effective in the short run and the long run. E) expansionary monetary policy is ineffective in the short but effective in the long run. Answer: B Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

Figure 13.6

9) Refer to Figure 13.6. If firms and workers have rational expectations, an expansionary monetary policy will cause the short-run equilibrium to move from A) point B to point C. B) point C to point A. C) point A to point B. D) point B to point A. E) point A to point C. Answer: E Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 10) Refer to Figure 13.6. If firms and workers have adaptive expectations, an expansionary monetary policy will cause the short-run equilibrium to move from A) point B to point C. B) point A to point C. C) point A to point B. D) point B to point A. E) point C to point B. Answer: C Diff: 2 Type: MC Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

11) In which of the following situations might you expect expansionary monetary policy to reduce the unemployment rate? A) if expectations are rational B) if changes in monetary policy are unanticipated C) if actual inflation is higher than expected D) if actual inflation is lower than expected E) if actual inflation is equal to expected inflation Answer: D Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 12) Some economists argue that the short-run Phillips curve is not vertical, and that monetary policy can be effective in the short run. Which one of the following is not one of the reasons for this skepticism? A) Empirical evidence shows workers and firms have rational expectations. B) Contracts with workers and suppliers may hinder firms' abilities to adjust to price changes. C) Wages and prices may not adjust rapidly enough to keep the short-run Phillips curve vertical. D) Individuals may not be able to use information of Bank of Canada policy to make a reliable forecast of inflation. E) Many workers and firms do not make forecasts of inflation at all. Answer: A Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 13) Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by A) workers and firms using Bank of Canada policy to predict inflation. B) workers and firms using all the information available to predict inflation. C) workers and firms rapidly adjusting wages and prices in response to changes in expectations. D) workers and firms being fooled by unexpected changes in monetary policy. E) workers and firms refusing to negotiate wages on a regular basis. Answer: D Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

14) If wages and prices adjust slowly, we would expect expansionary monetary policy to be A) less likely to reduce the natural unemployment rate. B) more likely to reduce inflation. C) more likely to affect the unemployment rate. D) more likely to result in a vertical short-run Phillips curve. E) less likely to affect investment spending. Answer: C Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 15) Models that focus on factors such as technology shocks rather than "monetary" explanations of fluctuations in real GDP are called A) nonmonetary business cycle models. B) real business cycle models. C) rational expectations models. D) short-run macroeconomic models. E) new Keynesian models. Answer: B Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 16) Which of the following would be the source of a "real" business cycle? A) changes in technology B) anticipated expansionary monetary policy C) unanticipated expansionary monetary policy D) unanticipated contractionary monetary policy E) anticipated expansionary fiscal policy Answer: A Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 17) According to real business cycle models, A) the long-run Phillips curve is negatively sloped. B) the economy is normally operating below the natural rate of unemployment. C) unexpected changes in monetary policy are the major source of fluctuations in real GDP. D) the economy is normally at potential GDP. E) the economy is normally experiencing cyclical unemployment. Answer: D Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 54 Copyright © 2024 Pearson Canada Inc.

18) The major criticism of real business cycle models is A) negative technology shocks are uncommon and can't explain all business cycle fluctuations. B) positive technology shocks actually push real GDP above the economy's potential GDP. C) negative technology shocks actually push real GDP below the economy's potential GDP. D) this model relies too heavily on monetary explanations for fluctuations in real GDP. E) this model does not offer an explanation of how shocks are transmitted from one sector to another. Answer: A Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 19) If workers and firms have rational expectations, they understand that ________ monetary policy will raise the inflation rate, so actual inflation ________ expected inflation. A) expansionary; will be equal to B) expansionary; will be greater than C) contractionary; will be equal to D) contractionary; will be less than E) expansionary; will be less than Answer: A Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 20) Proponents of the new classical macroeconomics do not believe which of the following? A) Expansionary monetary policy can be an effective policy tool. B) Workers and firms use information contained in Bank of Canada policy to form inflation expectations. C) Wages and prices will adjust rapidly in the economy. D) The economy will normally be at its potential level. E) The economy is generally stable. Answer: A Diff: 2 Type: MC Topic: The New Classical Macroeconomics Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 21) If changes in inflation are higher than expected, A) the short-run Phillips curve will be positively sloped, but not vertical. B) the short-run Phillips curve will be negatively sloped. C) the short-run Phillips curve will be vertical. D) the long-run Phillips curve will be negatively sloped. E) the short-run Phillips curve will shift to the left. Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 55 Copyright © 2024 Pearson Canada Inc.

22) With which of the following statements would a "real business cycle" theorist most closely agree? A) "Monetary policies have the greatest impact on real GDP when they are anticipated." B) "Expansionary monetary policy allows the central bank to control inflation and unemployment simultaneously." C) "Wages adjust rapidly to changes in inflation as long as expectations are formed rationally." D) "Technological shocks to the economy affect only aggregate demand in the short run." E) "Workers and firms are reluctant to adjust wages after a shock." Answer: C Diff: 3 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 23) Empirical evidence shows that the short-run Phillips curve was vertical during the 1950s and 1960s. Answer: FALSE Diff: 2 Type: TF Topic: The Short-Run Phillips Curve Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 24) Even if expectations of inflation are rational, sluggish adjustment of wages and prices will still create a short-run trade-off between inflation and unemployment. Answer: TRUE Diff: 2 Type: TF Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 25) If workers and firms ignore inflation or form their inflation expectations adaptively, expansionary monetary policy will lower unemployment permanently. Answer: FALSE Diff: 2 Type: TF Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

26) If firms and workers have adaptive expectations, what impact will expansionary monetary policy have on inflation, unemployment, and the Phillips curve? Answer: Adaptive expectations exist when firms and workers expect inflation in the current time period to be the same as inflation in the previous time period. If the Bank of Canada follows an expansionary monetary policy, inflation will rise. If expectations about inflation are adaptive, the expansionary monetary policy will increase actual inflation above expected inflation. With no adjustment in nominal wages, the real wage will fall, and the unemployment rate will be pushed below its natural rate. In other words, the inflation rate and the unemployment rate will be negatively related, as indicated by a shortrun Phillips curve. Diff: 2 Type: ES Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 27) If expectations are adaptive, how will the economy adjust to a new long-run equilibrium in response to contractionary monetary policy? Support your answer with a graph of the Phillips curve. Answer: Contractionary monetary policy reduces the inflation rate. With adaptive expectations, workers and firms will overestimate inflation, resulting in an increase in the real wage and an increase in the unemployment rate (move from A to B on the short-run Phillips curve below). Eventually, workers and firms will adjust to the fact that inflation is lower, shifting the short-run Phillips curve down and reducing the unemployment rate to its natural rate (move from B to C in the graph below).

Diff: 3 Type: ES Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

28) Workers and firms are currently expecting the price level to increase from 110 to 114. The Bank of Canada then announces that it will be reducing the growth rate of the money supply. If the Bank of Canada's announcement is credible, and firms and workers have rational expectations, describe how the expectations of firms and workers will be affected and how the change in expectations will affect the unemployment rate. Answer: Workers and firms were expecting an inflation rate of 3.6%, but when the Bank of Canada announces it will be reducing the money supply, workers and firms rationally expect this will reduce inflation. Based on the expectation that inflation will fall, workers are willing to accept lower nominal wages and firms will pay lower nominal wages so that the real wage is unchanged. If the real wage is unchanged, the level of employment remains the same, and there is no impact on the unemployment rate. Diff: 2 Type: ES Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 29) Last year, the unemployment rate was 4 percent and the inflation rate was 3 percent. If the natural rate of unemployment is 3 percent, how do you expect inflation to change? Answer: Inflation is only stable when the unemployment rate is equal to the natural rate of unemployment. Since last year's unemployment rate was above the natural rate of unemployment, the inflation rate will eventually increase as the economy moves up the short-run Phillips curve. Diff: 3 Type: ES Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 30) Explain why expansionary monetary policy would not result in reduced unemployment rates if workers and firms have rational expectations. Answer: If workers and firms have rational expectations, they anticipate that expansionary monetary policy will increase inflation. The increase in inflation expectations will be incorporated into wage contracts, resulting in no change in the real wage. If there is no change in the real wage, then there will be no change in unemployment and no change in real GDP. As a result, there will be no trade-off between unemployment and inflation. Inflation will rise, but the unemployment rate will not be affected. Diff: 2 Type: ES Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

31) Use the information below to explain adjustments that move the economy to a long-run equilibrium. Assume that firms and workers have adaptive expectations. The current unemployment rate = 4%. The natural rate of unemployment = 6%. Last year's inflation rate = 3%. This year's inflation rate = 4%. Answer: If firms and workers have adaptive expectations, they will expect inflation this year to be the same as last year (3%). Since workers are underestimating the actual rate of inflation, real wages will be declining, leading to an unemployment rate that is below its natural level (4% < 6%). As firms and workers adjust their inflation expectations, real wages will increase until the economy reaches its natural rate of unemployment. Diff: 3 Type: ES Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 32) Monetary policy can A) shift the short-run trade-off between inflation and unemployment if it affects expected inflation. B) shift the long-run trade-off between inflation and unemployment through changes in cyclical unemployment. C) shift neither the short-run nor long-run Phillips curve trade-offs between inflation and unemployment. D) shift both the short-run and long-run trade-offs between inflation and unemployment if changes in policy are credible. E) shift the short-run trade-off between inflation and unemployment if it affects the expected rate of unemployment. Answer: A Diff: 3 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 33) If the Bank of Canada attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see? A) The Bank of Canada's policies will be deflationary. B) The Bank of Canada's policies will be inflationary. C) The rate of inflation will fall as the Bank of Canada tries to reduce the unemployment rate. D) The Bank of Canada will reduce the natural rate of unemployment. E) The Bank of Canada will be become increasingly effective over time. Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

34) The actual real wage is lower than the expected real wage if A) actual inflation is less than expected inflation. B) expected inflation is less than actual inflation. C) actual unemployment is less than expected unemployment. D) actual unemployment is less than actual inflation. E) expected inflation is less than the NAIRU. Answer: B Diff: 1 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 35) According to economists Robert Lucas and Thomas Sargent, the apparent short-run trade-off between unemployment and inflation in the 1950s and 1960s was the result of A) unexpected changes in monetary policy. B) expected changes in monetary policy. C) unexpected changes in fiscal policy. D) expected changes in fiscal policy. E) unexpected changes in net exports. Answer: A Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 36) If rational workers and firms know that the Bank of Canada is following a contractionary monetary policy, they will expect inflation to ________ and will adjust wages so that the real wage ________. A) increase; remains unchanged B) decrease; remains unchanged C) decrease; increases D) increase; decreases E) remain unchanged; decreases Answer: B Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

37) According to the "rational expectations" school of thought in macroeconomics, the short-run Phillips curve is ________ in face of anticipated changes in monetary policy. A) negatively sloped B) positively sloped C) vertical D) horizontal E) convex Answer: C Diff: 3 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 38) According to the "rational expectations" school of thought in macroeconomics, the short-run Phillips curve is ________ in face of unanticipated changes in monetary policy. A) negatively sloped B) positively sloped C) vertical D) horizontal E) convex Answer: A Diff: 3 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

Figure 13.7

39) Refer to Figure 13.7. Consider the Phillips curves depicted in the graph above. The Bank of Canada announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If expectations of inflation are not altered by the Bank of Canada's announcement, the rate of unemployment will be ________ in the short run. A) less than 5.5 percent B) 5.5 percent C) between 5.5 and 7.5 percent D) 7.5 percent E) more than 7.5 percent Answer: D Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

Figure 13.8

40) Refer to Figure 13.8. Consider the Phillips curves depicted in the graph above. The Bank of Canada announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If expectations of inflation are reduced to 8 percent by the Bank of Canada's announcement, the rate of unemployment will be ________ in the short run. A) less than 5.5 percent B) 5.5 percent C) between 5.5 and 7.5 percent D) 7.5 percent E) more than 7.5 percent Answer: C Diff: 3 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

Figure 13.9

41) Refer to Figure 13.9. Consider the Phillips curves depicted in the graph above. The Bank of Canada announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If the assumptions of the rational expectations school hold true, and the Bank of Canada's announcement is credible, the rate of unemployment will be ________ in the short run. A) less than 5.5 percent B) 5.5 percent C) between 5.5 and 7.5 percent D) 7.5 percent E) more than 7.5 percent Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

Figure 13.10

42) Refer to Figure 13.10. A typical long-run Phillips curve would have the appearance of a curve running through points A) A and B. B) A and C. C) B and C. D) A, B, and C. E) 0, C, and B. Answer: C Diff: 2 Type: MC Topic: The Long-Run Phillips Curve Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 43) If wages and prices adjust rapidly, we would expect expansionary monetary policy to be A) more likely to reduce the natural rate of unemployment. B) more likely to affect the unemployment rate. C) less likely to affect the unemployment rate. D) less likely to result in a vertical short-run Phillips curve. E) less likely to affect the exchange rate. Answer: C Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

44) When individuals use ________ about an economic variable to make a decision, expectations are rational. A) only historical information B) only information announced by the Bank of Canada C) all available information D) only information garnered in the private sector E) only information from academic research Answer: C Diff: 1 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 45) If people assume that future rates of inflation will ________, they are said to have adaptive expectations. A) be higher than inflation rates of the past B) follow the pattern of inflation rates in the past C) be lower than inflation rates of the past D) not be related to inflation rates of the past E) be exactly as predicted by the Bank of Canada Answer: B Diff: 1 Type: MC Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 46) Models that focus on factors other than changes in the money supply to explain fluctuations in real GDP are called A) nonmonetary business cycle models. B) real business cycle models. C) rational expectations models. D) short-run macroeconomic models. E) new Keynesian models. Answer: B Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

47) ________ would be the source of a "real" business cycle. A) Technology shocks B) Anticipated changes in monetary policy C) Unanticipated changes in monetary policy D) Anticipated changes in fiscal policy E) All of the above Answer: A Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 48) According to ________, the economy is normally at potential GDP. A) the short-run Phillips curve B) the adaptive expectations theory C) new Keynesian economists D) real business cycle models E) dynamic AD-AS models Answer: D Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 49) With which of the following statements would a "real business cycle" theorist most closely agree? A) "Monetary policies have greatest impact on real GDP when they are anticipated." B) "Expansionary monetary policy allows the central bank to control inflation and unemployment simultaneously." C) "Wages adjust slowly to changes in inflation as long as expectations are formed rationally." D) "Technological shocks to the economy explain deviations of real GDP from its potential level." E) "Firms are typically less accurate than workers when it comes to predicting inflation." Answer: D Diff: 3 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

50) What impact does expansionary monetary policy have on the short-run Phillips curve if consumers and firms expect the expansionary monetary policy to increase inflation? A) The short-run Phillips curve shifts down. B) The short-run Phillips curve shifts up. C) The short-run Phillips curve becomes the long-run Phillips curve. D) The short-run Phillips curve is not affected by expansionary monetary policy. E) The short-run Phillips curve becomes flatter. Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 51) During the 1960s, in face of moderate and stable inflation, people tended to form adaptive expectations of future inflation rates. Answer: TRUE Diff: 1 Type: TF Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 52) If the public holds rational expectations regarding changes in monetary policy, the short-run Phillips curve may be vertical. Answer: TRUE Diff: 1 Type: TF Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 53) Real business cycle models argue that fluctuations in real GDP are caused by unanticipated changes in the money supply. Answer: FALSE Diff: 2 Type: TF Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 54) The "rational expectations" school of economists, including Robert Lucas and Thomas Sargent, argue that changes in monetary policy cannot affect unemployment rates in the short run or long run. Answer: FALSE Diff: 3 Type: TF Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

55) Suppose that last year the unemployment rate was 5 percent and the inflation rate was 2.5 percent. If the natural rate of unemployment is 5 percent, how do you expect inflation to change? Answer: Inflation is stable when the unemployment rate is equal to the natural rate of unemployment. Since last year's unemployment rate was equal to the natural rate of unemployment, the inflation rate should not change. Diff: 2 Type: SA Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 56) During a time when the inflation rate is increasing each year for a number of years, are adaptive expectations or rational expectations likely to give more accurate forecasts? Briefly explain. Answer: Rational expectations are likely to give the accurate forecasts. When inflation is increasing over time, adaptive expectations that rely only on past information will always lead to a lower inflation forecast than actual inflation. Diff: 2 Type: SA Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 57) If firms and workers have adaptive expectations, what impact will contractionary monetary policy have on inflation, unemployment, and the Phillips curve? Answer: Adaptive expectations exist when firms and workers expect inflation in the current time period to be the same as inflation in the previous time period. If the Bank of Canada follows a contractionary monetary policy, inflation will fall. If expectations about inflation are adaptive, the contractionary monetary policy will decrease actual inflation below expected inflation. With no adjustment in nominal wages, the real wage will rise, and the unemployment rate will be pushed above its natural rate. In other words, the inflation rate and the unemployment rate will be negatively related, as indicated by a shortrun Phillips curve. Diff: 2 Type: SA Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 58) What does it mean to say that workers and firms have rational expectations? Answer: Rational expectations means that workers and firms form current expectations using not only information from the past, but all available information. In forming expectations of inflation, rational expectations means that workers and firms use information on recent inflation rates, but also other information, such as the knowledge of current monetary policy. Diff: 2 Type: SA Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

59) Use the information below to explain adjustments that move the economy to a long-run equilibrium. Assume that firms and workers have adaptive expectations. The current unemployment rate = 7%. The natural rate of unemployment = 5.5%. Last year's inflation rate = 5%. This year's inflation rate = 4%. Answer: If firms and workers have adaptive expectations, they will expect inflation this year to be the same as last year (5%). Since workers are overestimating the actual rate of inflation, real wages will rise, leading to an unemployment rate that is above its natural level (7% > 5.5 %). As firms and workers adjust their inflation expectations, real wages will decrease until the economy reaches its natural rate of unemployment. Diff: 3 Type: SA Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 60) If expectations are adaptive, how will the economy adjust to a new long-run equilibrium in response to expansionary monetary policy? Support your answer with a graph of the Phillips curve. Answer: Expansionary monetary policy increases the inflation rate. With adaptive expectations, workers and firms will underestimate inflation, resulting in a decrease in the real wage and a decrease in the unemployment rate (move from A to B on the short-run Phillips curve below). Eventually, workers and firms will adjust to the fact that inflation is higher, shifting the short-run Phillips curve up and increasing the unemployment rate to its natural rate (move from B to C in the graph below).

Diff: 3 Type: SA Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate 1) Which of the following could increase unemployment and inflation simultaneously? A) an increase in oil prices B) expansionary monetary policy C) contractionary monetary policy D) a decrease in the real wage E) an increase in net exports Answer: A Diff: 2 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 2) A reduction in the rate of inflation is referred to as A) unemployment. B) recession. C) disinflation. D) deflation. E) revaluation. Answer: C Diff: 1 Type: MC Topic: Disinflation and Deflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 3) A falling price level is called ________ and a fall in the rate of inflation is called ________. A) disinflation; a contraction B) a contraction; disinflation C) disinflation; deflation D) deflation; disinflation E) deflation; under inflation Answer: D Diff: 1 Type: MC Topic: Disinflation and Deflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation

4) Contractionary monetary policy will result in A) higher interest rates. B) increased rates of inflation. C) an upward shift in the short-run Phillips curve. D) a leftward shift in the long-run Phillips curve. E) an increase in the slope of the short-run Phillips curve. Answer: A Diff: 1 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 5) What impact does expansionary monetary policy have on the short-run Phillips curve if consumers and firms expect the expansionary monetary policy to increase inflation? A) The short-run Phillips curve shifts down. B) The short-run Phillips curve shifts up. C) The short-run Phillips curve becomes the long-run Phillips curve. D) The short-run Phillips curve is not affected by expansionary monetary policy. E) The short-run Phillips curve becomes flatter. Answer: B Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 6) If the Bank of Canada chooses to fight high inflation with contractionary monetary policy and firms and consumers expect this policy to reduce inflation, which of the following would you expect to see? A) a downward shift of the short-run Phillips curve B) a reduction in the unemployment rate C) a decrease in the long-run aggregate supply curve D) an increase in inflationary expectations E) a rightward shift in the long-run Phillips curve Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills

7) The increases in oil prices in 1974 due to OPEC's actions caused the short-run aggregate supply curve to shift to the left. Canada saw increases in both unemployment and inflation as a result. The Bank of Canada could not address both increased unemployment and increased inflation because A) expansionary monetary policy which would lower unemployment would further increase inflation. B) contractionary monetary policy which would lower inflation would further increase unemployment. C) Canadians at the time preferred high unemployment to high inflation. D) Both A and B are correct answers. E) Both B and C are correct answers. Answer: D Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 8) In order to promote price stability as the long-term goal of monetary policy, Bank of Canada Governor John Crow and the minister of finance set inflation targets with a band of plus or minus one percentage point around them. Through the late 1980s and early 1990s Canada saw ________ and ________. A) disinflation; high unemployment B) steep inflation; low unemployment C) disinflation; low unemployment D) steep inflation; high unemployment E) deflation; high unemployment Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 9) If the current unemployment rate is 5%, under which of the following circumstances would you expect the Bank of Canada to use expansionary monetary policy? A) if the natural rate of unemployment is below 5% B) if the natural rate of unemployment is above 5% C) if the inflation rate is above 5% D) if the inflation rate is below 5% E) if the inflation rate is exactly 5% Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills

10) If the Bank of Canada's announcements about upcoming monetary policy decisions are not credible, which of the following would you expect to see? A) Inflation expectations will accurately reflect actual inflation. B) Expansionary monetary policy will result in lower rates of inflation. C) Firms and workers will be unable to accurately forecast changes in the rate of inflation. D) The Bank of Canada will have more control over the inflation rate. E) People will begin to ignore inflation all together. Answer: C Diff: 2 Type: MC Topic: Central Bank Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 11) Over the past two decades, whenever changes in Bank of Canada policy have been announced, A) the changes have actually taken place. B) a majority of lawmakers did not believe the changes would actually take place. C) the changes have rarely taken place. D) the government has taken steps to negate the changes more than 50 percent of the time. E) the changes have taken place without interference from parliament about 25 percent of the time. Answer: A Diff: 1 Type: MC Topic: Central Bank Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 12) If the Bank of Canada announces that its target for the overnight interest rate is rising from 4 percent to 4.25 percent, how do you expect workers and firms to react? A) As long as the Bank of Canada's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation. B) As long as the Bank of Canada's announcement is credible, workers and firms will reduce their consumption and investment spending, which will reduce aggregate demand and reduce inflation. C) If the Bank of Canada's announcement is not credible, workers and firms will not expect inflation to fall so they will reduce their consumption and investment spending, which will increase aggregate demand and reduce inflation. D) Workers and firms will incorporate the increase in interest rates into their expectations of inflation, and they will expect inflation to rise as a result of the Bank of Canada's policy announcement. E) Workers and firms will expect inflation to rise and increase nominal wages to offset the change. Answer: B Diff: 2 Type: MC Topic: Central Bank Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

Figure 13.11

13) Refer to Figure 13.11. A supply shock, such as rising oil prices, would be depicted as a movement from A) A to D to C. B) C to B to A. C) C to D to A. D) C to E to B. E) A to B to C. Answer: A Diff: 2 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 14) Refer to Figure 13.11. The Bank of Canada governor and the minister of finance's response to high inflation of the late 1980s is depicted in the figure above as a movement from A) A to D to C. B) C to B to A. C) C to D to A. D) C to E to B. E) A to B to C. Answer: C Diff: 2 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills

15) Refer to Figure 13.11. A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock, like that pursued by the Bank of Canada in 1989, would result in a movement from A) A to D to C. B) A to B. C) C to D to A. D) C to A. E) A to C. Answer: D Diff: 3 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 16) If the economy experiences a negative supply shock, which of the following will be true? A) Inflation will rise, and real GDP will fall. B) Inflation will rise, and real GDP will rise. C) Inflation will fall, and real GDP will fall. D) Inflation will fall, and real GDP will rise. E) Inflation will fall, and real GDP will remain constant. Answer: A Diff: 2 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 17) Which of the following is not an appropriate policy for a central bank to follow if the economy is plagued with deflation? A) increasing the target interest rate on overnight loans B) using expansionary monetary policy to drive down interest rates C) consistently pursuing policy to promote the credibility of the central bank D) explicitly and credibly targeting inflation E) raising the ratio of reserves commercial banks are required to hold Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

18) What actions could the Bank of Canada take to achieve consistent growth in real GDP at 4 percent per year? A) The Bank of Canada could increase in the growth rate of the money supply by 1% each year until the inflation rate was exactly equal to 4 percent. B) The Bank of Canada could maintain a growth rate of the money supply of 4 percent, regardless of whether inflation was rising or falling in the economy. C) The Bank of Canada could follow contractionary monetary policy that would reduce the overnight interest rate to zero so investment will rise consistently. D) The Bank of Canada has no direct control over real GDP in the long run, so there are no actions it could take to achieve that goal. E) The Bank of Canada could adopt a nominal GDP growth target; increasing inflation when the economy is growing slowly. Answer: D Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 19) In conducting monetary policy, how has the Bank of Canada enhanced its credibility? A) by not following through with changes it has announced B) by revealing the Bank of Canada's target for the overnight rate C) by keeping the minutes of the open market committee meetings confidential D) by marketing and increased expenditure on advertising E) by only meeting and making announcements on previously announced dates Answer: B Diff: 2 Type: MC Topic: Central Bank Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 20) Why has the short-term nominal interest rate been discredited as an indicator of monetary policy? A) due to the lack of a correlation with decreasing money supply to fight the possibility of disinflation B) due to the lack of correlation with volatility of central bank policies C) because it has been abandoned by the Riksbank (the central bank of Sweden) D) because it moves in tandem with the volatility of central bank policies E) due to the lack of publicly available data on short-term nominal interest rates Answer: B Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

21) When leverage is high, A) economic agents must have nearly all money in hand to purchase assets, causing asset prices to rise. B) economic agents can purchase assets with very little money down, causing asset prices to rise. C) economic agents must make down payments (known as the margin or haircut) in proportion to the value of the asset. D) major Wall Street investment banks will exceed historic leverage ratio levels. E) future asset prices become more certain inducing more purchases of financial assets. Answer: B Diff: 2 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 22) Many central banks around the world are implementing unconventional monetary policies combined with short-term nominal interest rates being zero or near zero, having excessive levels of reserves and unusually high leverage ratios. What is the consensus among economists on the outcome? A) permanently higher unemployment rates B) increased inflation rates in the long run C) amplified negative response of the economy to unfavourable shocks and damped positive response to favourable shocks D) lower inequality in the distribution of income E) There is no consensus. Answer: E Diff: 2 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 23) New monetary policy focusing on using quantitative measures of monetary policy is surrounded by uncertainty about the future path of money growth and inflation because this new monetary policy A) ignores the role of leverage. B) ignores the role of money measures. C) ignores the role of the global recession of 2007-2009. D) Both A and B. E) Both A and C. Answer: D Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

24) If the Bank of Canada chose to change its policy actions implemented during the heart of the recession faster than the timing suggested by the Government of Canada, this would be an indication of the Bank of Canada's A) lack of credibility. B) independence. C) changing its monetary policy target. D) frictional relationship with the Parliament. E) inability to conduct monetary policy. Answer: B Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 25) Assume the unemployment rate is currently at the natural rate of 7%. The actual inflation rate is 2% and has been 2% for year. Further workers and firms believe the inflation rate will remain 2% in the future. If the Bank of Canada decides to increase the inflation rate to 5%, how could the Bank of Canada achieve this objective? A) Reducing the target for the overnight rate, reducing unemployment below its natural rate until expectations of workers and firms adapt to the new objective. B) Increasing the target for the overnight rate, increasing unemployment above its natural rate until expectations of workers and firms adapt to the new objective. C) Entering into sale and repurchase agreements with savers. D) Expanding government spending to stimulate the stalled economy. E) Requiring commercial banks to hold a higher level of deposits as reserves and imposing stricter lending standards the Bank of Canada can increase the rate of inflation safely. Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 26) One problem with deflation is that it can raise the real value of debt. Answer: TRUE Diff: 2 Type: TF Topic: Disinflation and Deflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

27) If inflation falls from 11% to 5%, there is deflation. Answer: FALSE Diff: 2 Type: TF Topic: Disinflation and Deflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 28) As the leverage ratio increases, asset prices will also rise. Answer: TRUE Diff: 2 Type: TF Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

29) If the Bank of Canada wants to reduce inflation from 4 percent to 3 percent permanently, how can that goal be achieved, and what impact will that have on employment in the short run and the long run? Support your answer with a graph of the Phillips curve in the short run and the long run. Answer: If the Bank of Canada wants to reduce inflation, it must implement a contractionary monetary policy and make it credible. The reduction in the growth rate of the money supply will increase interest rates, reduce aggregate demand, and reduce real GDP and employment in the short run. In terms of the short-run Phillips curve, the economy will move from a point like A (high inflation and low unemployment) to a point like B (lower inflation and higher unemployment). Once firms and workers believe the Bank of Canada will continue to follow a contractionary monetary policy, they will begin to reduce their inflation expectations, and the short-run Phillips curve will shift downward. Equilibrium in the economy will be restored at the natural rate of unemployment but at a lower rate of inflation (move from point B on the short-run Phillips curve to point C on the long-run Phillips curve).

Diff: 3 Type: ES Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 30) How would you expect the Bank of Canada to respond to a negative supply shock in the economy? Answer: Given that the Bank of Canada is focused on reducing inflation, however, it will follow contractionary monetary policy, although employment and real GDP will be negatively affected. Diff: 2 Type: ES Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 81 Copyright © 2024 Pearson Canada Inc.

31) Can the Bank of Canada achieve both low inflation and low levels of unemployment? Explain. Answer: To reduce inflation, the Bank of Canada must reduce the money supply, which results in higher interest rates. When interest rates increase, consumption and firm investment fall, resulting in a decrease in aggregate demand and, as the short-run Phillips curve shows, an increase in the level of unemployment in the short run. This result indicates that the Bank of Canada cannot simultaneously reduce inflation and unemployment. However, if people immediately revise their inflation expectations once the Bank of Canada announces a change in monetary policy, the announcement on contraction in the money supply will move the economy down its long-run Phillips curve to a lower rate of inflation with no change in the unemployment rate. In that case, it would be possible to reduce inflation with no increase in unemployment. Diff: 2 Type: ES Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 32) Which of the following could decrease unemployment and inflation simultaneously? A) a decrease in oil prices B) expansionary monetary policy C) contractionary monetary policy D) an increase in the real wage E) an increase in income taxes Answer: A Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 33) The increase in oil prices in 1974 resulting from actions of ________ caused the short-run aggregate supply curve to shift to the left. A) the Bank of Canada B) the U.S. Federal Reserve C) the Department of Finance D) the Organization of the Petroleum Exporting Countries (OPEC) E) a shut down of the Canadian oil sands Answer: D Diff: 1 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

34) If the current unemployment rate is 5%, under which of the following circumstances would you expect the Bank of Canada to use contractionary monetary policy? A) if seasonal unemployment is 4 percent and structural unemployment is 3 percent B) if frictional unemployment is 3 percent and structural unemployment is 4 percent C) if structural unemployment is 4 percent and seasonal unemployment is 2 percent D) if cyclical unemployment is 0 percent and frictional unemployment 1.5 percent E) if frictional unemployment is 2 percent and structural is 3 percent Answer: B Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 35) Which of the following is an appropriate policy for a central bank to follow if the economy is plagued with deflation? A) increasing the target interest rate on overnight loans B) using contractionary monetary policy to drive up interest rates C) consistently pursuing policy to promote the credibility of the central bank D) gradually raising the required reserve rate E) sharply increasing the target for the overnight rate Answer: C Diff: 2 Type: MC Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

Figure 13.10

36) Refer to Figure 13.10. A response to persistent ________ due to ongoing expansionary monetary policy is depicted in the figure above as a movement from C to A to B. A) deflation B) high unemployment C) high inflation D) appreciation of the dollar E) falling expectations of inflation Answer: C Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills

Figure 13.11

37) Refer to Figure 13.11. A(n) ________ would be depicted as a movement from A to D to C. A) supply shock, such as rising oil prices, B) increase in aggregate demand C) implementation of contractionary monetary policy D) increase in short-run aggregate supply E) expansionary fiscal policy Answer: A Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 38) Refer to Figure 13.11. A follower of the new classical macroeconomics would argue that ________, like that pursued by the Bank of Canada in 1979, would result in a movement from C to A. A) expansionary monetary policy B) contractionary monetary policy C) expansionary fiscal policy D) contractionary fiscal policy E) strict inflation targeting Answer: B Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate

39) Deflation refers to A) a decrease in the rate of inflation. B) a falling price level. C) falling oil prices. D) Both A and B are correct. E) None of the above is correct. Answer: B Diff: 1 Type: MC Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 40) Disinflation refers to A) a decrease in the price level. B) a rapid increase in the price level. C) a reduction in the rate of inflation. D) an increase in the rate of inflation. E) a one time drop in the rate of inflation. Answer: C Diff: 1 Type: MC Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 41) Expansionary monetary policy will result in A) lower interest rates. B) decreased rates of inflation. C) a decrease in aggregate demand. D) a loss of central bank credibility. E) all of the above. Answer: A Diff: 1 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate

42) If the Bank of Canada chooses to fight high unemployment with expansionary monetary policy and firms and consumers expect this policy to increase inflation, which of the following would you expect to see? A) an upward shift of the short-run Phillips curve B) a downward shift of the short-run Phillips curve C) a decrease in the long-run aggregate supply curve D) the short-run Phillips curve will become flatter E) Both B and C are correct answers. Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 43) The short-run Phillips curve shifting down following the 1989 Bank of Canada announcement that they were adopting inflation targets shows that workers and firms A) had adaptive expectations. B) had rational expectations and that they trusted Bank of Canada announcements. C) preferred high unemployment to high inflation. D) consistently ignored inflation when setting nominal wages. E) Both A and B are correct answers. Answer: B Diff: 1 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 44) If the Bank of Canada's announcements about upcoming monetary policy decisions are credible, which of the following would you expect to see? A) Inflation expectations will not accurately reflect actual inflation. B) Expansionary monetary policy will result in lower rates of inflation. C) Firms and workers will be better able to accurately forecast changes in the rate of inflation. D) The Bank of Canada will have less control over the inflation rate. E) The Bank of Canada will be able to dictate the rate of economic growth. Answer: C Diff: 2 Type: MC Topic: Bank of Canada Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

45) If the Bank of Canada announces that its target for the overnight interest rate is falling from 3 percent to 2.25 percent, how would you expect workers and firms to react? A) As long as the Bank of Canada's announcement is credible, workers and firms will decrease their consumption and investment spending, which will decrease aggregate demand and inflation. B) As long as the Bank of Canada's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation. C) If the Bank of Canada's announcement is not credible, workers and firms will not expect inflation to rise so they will increase their consumption and investment spending, which will decrease aggregate demand and increase inflation. D) Workers and firms will incorporate the decrease in interest rates into their expectations of inflation, and they will expect inflation to fall as a result of Bank of Canada's policy announcement. E) Workers and firms will reduce their consumption and investment spending in expectation of higher interest rates in the future. Answer: B Diff: 2 Type: MC Topic: Bank of Canada Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 46) If the economy experiences a(n) ________, inflation will rise and real GDP will fall. A) negative supply shock B) positive supply shock C) increase in short-run aggregate supply D) negative demand shock E) positive demand shock Answer: A Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 47) Leverage is A) a measure of the level of investment in an economy. B) a measure of assets in terms of net worth to be used as a proxy of how much room for debt an investor has when making an investment. C) a measure of how successfully an investor can negotiate the amount of debt assumed in making an investment. D) a measure of how much debt an investor assumes in making an investment. E) a measure of how likely a firm is to be able to influence government policy due to past campaign donations. Answer: D Diff: 1 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 88 Copyright © 2024 Pearson Canada Inc.

48) In the aftermath of the global financial crisis, it is generally accepted that record ________ on Wall Street played a significant role. A) high levels of leverage B) low levels of leverage C) high levels of liabilities D) low levels of liabilities E) government intervention Answer: A Diff: 1 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 49) In the aftermath of the global recession, ________ has/have been discredited as an indicator of monetary policy, and central banks have been led to look elsewhere. A) quantitative measures B) the short-term nominal interest rate C) the money supply D) monetary aggregates E) reserve ratios Answer: B Diff: 2 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 50) The 1989-1993 Bank of Canada adoption of inflationary targets led to substantial reductions in the inflation rate, but it came at the cost of A) increases in disinflation. B) the risk of deflation. C) very high levels of interest. D) very high levels of unemployment. E) the credibility of the Bank of Canada. Answer: D Diff: 2 Type: MC Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

51) The Bank of Canada's inflation targeting policy has led to inflation ________ since 1996. A) remaining relative stable in the 1 to 3 percent band B) fluctuating wildly C) generally increasing D) generally decreasing E) continually decreasing Answer: A Diff: 1 Type: MC Topic: Inflation Targeting, 1989-Present Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 52) Along with a decrease in the overnight rate to its lowest possible level in response to COVID-19, Bank of Canada also began A) reducing reserve ratios for commercial banks. B) quantitative easing. C) reducing tax rates. D) selling large quantities of government securities. E) destroying currency previously in circulation. Answer: B Diff: 1 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 53) Which of the following would shift the short-run Phillips curve to the right? A) The Bank of Canada engaging in purchase and resale agreements B) The Bank of Canada raising the target for the overnight rate C) an increase in commercial bank lending standards D) a sudden and unexpected increase in the price of oil E) a sudden decrease in the labour force participation rate Answer: D Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

54) The current approach to monetary policy is based on the new Keynesian model and is expressed in terms of the short-term nominal interest rate, such as the overnight interest rate in Canada and the federal funds rate in the United States. Answer: TRUE Diff: 1 Type: TF Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 55) A fall in the inflation rate from 8 percent to 2 percent is an example of deflation. Answer: FALSE Diff: 2 Type: TF Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 56) In face of a negative supply shock, the Bank of Canada may avoid a rise in unemployment only if it is willing to increase the rate of inflation. Answer: TRUE Diff: 2 Type: TF Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 57) The Bank of Canada in 1989 and U.S. Federal Reserve Chairman Paul Volcker in 1979 both successfully used deflationary monetary policy once the short-run Phillips curve had shifted down. Answer: FALSE Diff: 2 Type: TF Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate

58) Suppose the current inflation rate and the expected inflation rate are both 3 percent. The current unemployment rate and the natural rate of unemployment are both 4 percent. Use a Phillips curve graph to show the effect on the economy of a severe supply shock. If the Bank of Canada keeps monetary policy unchanged, what will eventually happen to the unemployment rate? Show this on your Phillips curve graph. Answer: The supply shock will shift the short-run Phillips curve up as both the actual inflation rate and the expected inflation rate will increase. The unemployment rate will also increase as the economy moves into recession. If the Bank of Canada keeps monetary policy unchanged, the recession will cause workers and firms to lower their expectations of future inflation, and the short-run Phillips curve will shift back down to its previous position. Eventually the unemployment rate will return to the natural rate of 4 percent.

Diff: 2 Type: SA Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 59) Why is the credibility of the U.S. Federal Reserve's policy announcements around using quantitative easing to improve unemployment in the aftermath of the 2007-2009 recession particularly important? Answer: The credibility of policy announcements is important for the effectiveness of monetary policy because a more credible policy allows the U.S. Federal Reserve to be better able to balance the trade-off between the unemployment rate and the inflation rate. In particular, with a credible commitment to quantitative easing in the face of criticism from both sides of the political spectrum, the short-run Phillips curve will shift down more rapidly than if the policy is less credible, thereby making the increase in the inflation rate smaller and briefer. Diff: 2 Type: SA Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 92 Copyright © 2024 Pearson Canada Inc.

60) What lead some observers to declare there was a "crisis in monetary policy"? Answer: The 2007-2009 global recession led many central banks (including the Bank of Canada) to move well beyond the short-term nominal interest rate as the focus of monetary policy. The targets for shortterm nominal interest rates (the overnight interest rate in Canada) were driven to near zero and there was very little expansionary effect in the economy. This violated the centrally held tenets of monetary policy and discredited the short-term nominal interest rate as an indicator of monetary policy. Based on its experience from 2007-2009 recession, Bank of Canada started practicing quantitative easing along with reducing the overnight rate to near zero at the very beginning of COVID-19 pandemic. Diff: 2 Type: SA Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

Macroeconomics, 4Ce (Hubbard) Chapter 14 Macroeconomics in an Open Economy 14.1

Explain how the balance of payments is calculated

1) An economy that has interactions in trade or finance with other economies is referred to as A) an open economy. B) a closed economy. C) a trade-balanced economy. D) a net foreign investment economy. E) a market economy. Answer: A Diff: 1 Type: MC Topic: Closed vs. Open Economies Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 2) In 2020, global profit for Amazon was $820 million higher when measured in dollars than when measured in local currencies. The reason for this discrepancy is that value of the A) euro decreased relative to the British pound. B) British pound increased relative to the U.S. dollar. C) U.S. dollar increased relative to most other currencies. D) U.S. dollar decreased relative to the Japanese yen. E) Canadian dollar increased relative to the U.S. dollar. Answer: C Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills Special Feature: Chapter Opener: COVID-19 Disrupts the Global Economy 3) Although based in the United States, Amazon is a global company with about ________ of its sales outside of the United States. A) 20 percent B) 30 percent C) 50 percent D) 70 percent E) 80 percent Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills Special Feature: Chapter Opener: COVID-19 Disrupts the Global Economy

4) Many Canadian natural resource companies run mines in other countries. What impact would an expansionary monetary policy undertaken by the Bank of Canada have on these companies? A) Expansionary monetary policy would encourage these firms to borrow abroad. B) Expansionary monetary policy would make hiring in Canada easier for these firms. C) Expansionary monetary policy would raise the tax bill for these firms. D) Expansionary monetary policy would reduce the value of the profits earned in other countries. E) Expansionary monetary policy will make it more difficult for these firms to raise funds in Canada. Answer: D Diff: 1 Type: MC Topic: Monetary Policy Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 5) Suppose Norway decides to sell its large holdings of Canada bonds. If you are thinking of financing your new car, how would Norway's action affect your decision to refinance? A) You would want to finance as soon as possible as interest rates should rise. B) You would want to wait to finance as interest rates should rise. C) You would want to wait to finance as interest rates should fall. D) You would want to wait to finance as it will likely be easier to qualify for a loan. E) Norway's actions should not affect your decision to refinance in any way. Answer: A Diff: 2 Type: MC Topic: Changes in Bond Holdings and Interest Rates Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: The South Korean Central Bank and Your Car Loan 6) An open economy is an economy that has A) interactions in trade or finance with other countries. B) its own stock market. C) governmental regulations regarding public information that is included in corporate finance reports. D) governmental regulations regarding the number of hours retail establishments must remain open on a daily basis. E) imposes no tariffs on international trade. Answer: A Diff: 1 Type: MC Topic: Closed vs. Open Economies Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

7) Which of the following transactions would be included in Japan's current account? A) A Japanese citizen purchases 50 shares of Google stock. B) An American citizen purchases 50 shares of Toshiba stock. C) A Japanese citizen purchases a new Toyota made in Japan. D) An American citizen purchases a new Toyota made in Japan. E) Ford Motors purchases a patent from Toyota. Answer: D Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 8) The current account does not include which of the following? A) exports of maple syrup to Vermont B) income received by Canadians from foreign investments C) transfers made to residents of other countries by Canadians D) purchases of shares in Toyota by Canadians E) imports of Kia cars from South Korea Answer: D Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 9) Which of the following would increase net exports in Canada? A) A Canadian purchases 500 silver necklaces from Mexico. B) The government of Mexico purchases 500 Bombardier C Series aircraft from Canada. C) A Mexican citizen purchases 25 shares of stock in Bombardier. D) The Canadian government donates $5 million to Mexico to help victims of drought in Mexico. E) Blackberry sells several of its patents to Apple. Answer: B Diff: 1 Type: MC Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 10) The balance of payments includes which three accounts? A) the current account, the financial account, and the capital account B) the capital flows account, the financial account, and the trade account C) the net investment account, the net exports account, and the net transfers account D) the balance of trade account, the net foreign investment account, and statistical discrepancy E) the capital account, the official settlements account, and the current account Answer: A Diff: 1 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

11) A Canadian hospital hires radiology services from India to cut costs. If all else remains equal, this will A) decrease net exports. B) decrease the balance of trade. C) increase the current account balance. D) decrease the financial account. E) increase the balance in the capital account. Answer: A Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 12) If Ontarians increase their purchases of Italian wine, assuming all else remains constant, this will ________ of Canada. A) decrease the balance of trade B) increase net exports C) increase the current account balance D) decrease the trade deficit E) decrease the balance of payments Answer: A Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 13) Which of the following would increase the current account balance of Canada? A) an increase in imports B) an increase in the amount of money Canadian government sends in foreign aid to other countries C) an increase in the balance of trade D) an increase in the amount of income Canadian companies pay out to foreigners who own investments in Canada E) an increase in Canada's stock of intellectual capital (patents) Answer: C Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

14) Canada has a trade ________ with the U.S. and the U.K. and a trade ________ with its other major trading partners. A) deficit; deficit B) deficit; surplus C) surplus; deficit D) surplus; surplus E) deficit; balance Answer: C Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 15) When Canada sends money to Syria to help refugees from the civil war, in what account is this transaction recorded? A) the financial account B) the capital account C) the current account D) the foreign exchange account E) the balance of trade account Answer: C Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 16) Based on the following information, what is the balance on the current account? Exports of goods and services = $5 billion Imports of goods and services = $3 billion Net income on investments = -$2 billion Net transfers = -$2 billion Increase in foreign holdings of assets in Canada = $4 billion Increase in Canadian holdings of assets in foreign countries = -$1 billion A) -$2 billion B) $1 billion C) $2 billion D) $3 billion E) $4 billion Answer: A Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

17) Based on the following information, what is the balance on the financial account? Exports of goods and services = $5 billion Imports of goods and services = $3 billion Net income on investments = -$2 billion Net transfers = -$2 billion Increase in foreign holdings of assets in Canada = $4 billion Increase in Canadian holdings of assets in foreign countries = -$1 billion A) $3 billion B) $2 billion C) $1 billion D) -$1 billion E) -$3 billion Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 18) Which of the following is not included in the balance of the financial account of Canada? A) a purchase of Airbus stock by Bombardier B) a purchase of Potash Corporation of Saskatchewan stock by a firm in China C) a purchase of Canadian manufacturing plant by Toyota D) a purchase of a German brewery by the Canadian company, Moosehead E) a purchase of German financial services by Scotia Bank Answer: E Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 19) Suppose the majority of the shares of Bombardier stock were sold to an American firm. Assuming all else remains constant, this will A) increase the balance of the Canadian financial account. B) increase foreign direct investment in Canada. C) increase the balance of the Canadian current account. D) decrease net portfolio investment in Canada. E) create a capital outflow in Canada. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

20) The balance of trade is defined as A) the difference between the balance of the current account and the balance of the capital account. B) the difference between the value of the goods and services a country exports and the value of the goods and services a country imports. C) the difference between the value of the goods a country exports and the value of the goods a country imports. D) the difference between the balance of the current account and the balance of the financial account. E) the difference between the volume of goods sold to other countries and the volume of goods bought from other countries. Answer: C Diff: 1 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 21) An increase in capital outflows from Canada will A) decrease the balance on the financial account. B) increase the balance on the financial account. C) decrease the balance on the capital account. D) increase the balance on the current account. E) increase the balance on the capital account. Answer: A Diff: 1 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 22) When net capital flows are positive, A) capital inflows are greater than capital outflows. B) net foreign investment is negative. C) capital outflows are greater than capital inflows. D) financial flows must be positive. E) A and B are both correct. Answer: E Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

23) An increase in Canadian net foreign direct investment would occur if A) Canadian citizens have increased the value of foreign stocks and bonds they own. B) Canadian citizens have increased their building or purchasing of facilities in foreign countries. C) net foreign investment increases. D) net capital flows decrease. E) Canadians import more from other countries. Answer: B Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 24) Which of the following is an example of foreign direct investment in China? A) Canadian entrepreneur Kevin O'Leary buys stock in the Chinese auto company, Cherry Automobile Company. B) Chinese Shenzen Airlines company buys a small Canadian airline company, Porter. C) The Canadian company George Weston Ltd buys a warehouse in Shanghai. D) The Bank of China purchases Canadian government bonds. E) A Canadian foreign exchange speculator buys $200,000 worth of the Chinese currency, the yuan. Answer: C Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 25) Net foreign investment is equal to A) capital inflows minus capital outflows. B) foreign direct investment. C) the balance of trade. D) net foreign portfolio investment plus net foreign direct investment. E) the current account balance. Answer: D Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 26) When a foreign investor buys a bond issued in Canada, A) the balance on the capital account increases. B) the balance on the current account increases. C) the balance on the financial account increases. D) the balance of trade increases. E) the balance on the capital account decreases. Answer: C Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 8 Copyright © 2024 Pearson Canada Inc.

27) If foreign holdings of Canadian dollars increase, holding all else constant, A) the balance on the Canadian financial account will increase. B) the balance on the Canadian current account will increase. C) the balance on the Canadian capital account will increase. D) the Canadian balance of trade will increase. E) the value of the Canadian dollar will decrease. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 28) If the balance on the current account is $346 billion and the balance on the financial account is -$204 billion, what is the balance on the capital account? Assume no statistical discrepancy. A) $550 billion B) $142 billion C) $0 D) -$142 billion E) -$204 billion Answer: D Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 29) If the balance on the current account is $346 billion and the balance on the financial account is -$204 billion, what is the balance of payments? Assume a statistical discrepancy. A) $550 billion B) $142 billion C) $0 D) -$142 billion E) -$204 billion Answer: C Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

30) The capital account records A) transactions that affect net capital flows in the economy. B) relatively minor transactions, such as migrants' transfers, and sales and purchases of nonproduced, nonfinancial assets. C) transactions that affect the balance of trade or the balance of services. D) statistical discrepancy between the current account and the financial account. E) transactions between national governments located in each country's capital. Answer: B Diff: 2 Type: MC Topic: The Capital Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 31) Which of the following would result in a trade surplus for Canada? A) Exports of goods = $450 billion Imports of goods = $400 billion Exports of services = $200 billion Imports of services = $250 billion B) Exports of goods = $450 billion Imports of goods = $450 billion Exports of services = $200 billion Imports of services = $250 billion C) Exports of goods = $450 billion Imports of goods = $460 billion Exports of services = $200 billion Imports of services = $100 billion D) Exports of goods = $450 billion Imports of goods = $490 billion Exports of services = $200 billion Imports of services = $100 billion Answer: A Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 32) Which of the following would increase the balance on the current account? A) an increase in foreign direct investment B) an increase in the amount of aid money the government sends abroad C) an increase in imports D) an increase in the balance of trade E) an increase in the stock of Canadian patents Answer: D Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

33) If the balance of the current account in Canada is -$90 billion, which of the following is most likely to be true? A) The balance on the financial account is positive. B) The trade balance is positive. C) Net foreign investment is positive. D) The balance on the capital account is negative. E) The Canadian dollar will appreciate. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 34) China runs a current account surplus with the United States. Which of the following must be true about China's balance of payments with the United States? A) It must run a financial account deficit. B) Its balance of trade must be in deficit. C) Its net exports must be negative. D) Its balance of payments must run a deficit. E) China is the sole beneficiary of trade between the two countries. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 35) If the current account is in deficit and the capital account is zero, then A) the financial account must be in surplus. B) the balance of trade must be in surplus. C) the balance of payments must be in surplus. D) there is a capital outflow. E) the balance of services must be in surplus. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Balance of Trade, the Current Account Balance, and the Balance of Payments

36) Canada usually exports ________ goods than it imports and exports ________ services than it imports. A) more; more B) more; fewer C) fewer; more D) fewer; fewer Answer: C Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 37) The balance of trade includes trade in A) goods only. B) services only. C) both goods and services. D) financial assets only. E) fixed assets only. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Balance of Trade, the Current Account Balance, and the Balance of Payments 38) Canada has a closed economy. Answer: FALSE Diff: 1 Type: TF Topic: Closed vs. Open Economies Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 39) The current account balance equals the value of net exports. Answer: FALSE Diff: 2 Type: TF Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 40) A country which incurs a current account deficit will most likely have a financial or capital account surplus. Answer: TRUE Diff: 2 Type: TF Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

41) What is the relationship between the balance of trade and the current account balance? Answer: The balance of trade measures the difference between the value of the goods a country exports and the value of the goods a country imports. If a country's exports of goods are greater than its imports of goods, there is a trade surplus, which increases the current account balance. However, the balance of trade is not the only component of the current account balance. The balance of services (exports of services minus imports of services), net income on investments, and net transfers are also included in the current account balance. Diff: 2 Type: ES Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 42) Explain how "net capital flows" are related to "net foreign investment," "net foreign direct investment," and "net foreign portfolio investment." Answer: Net capital flows measure the difference between capital inflows and capital outflows. Capital inflows increase when assets flow into Canada from other countries. Capital outflows increase when assets flow from Canada into other countries. Net foreign investment is equal to net foreign direct investment (Canadian investment in facilities in other countries minus foreign investment in Canadian facilities) plus net foreign portfolio investment (Canadian investment in foreign stocks or bonds minus foreign investment in Canadian stocks or bonds). An increase in net foreign direct investment or an increase in foreign portfolio investment will result in an equal decrease in net capital flows. In other words, net capital flows will be equal to the negative of net foreign investment. Diff: 2 Type: ES Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 43) Why is the balance of payments always zero? Answer: If a country spends more on goods and services and other items in the current account than it receives, it must have received the income needed to buy those items from investments from foreigners. In other words, a current account deficit must be offset by a surplus in the financial account. Apart from measurement errors, the sum of the current account and the financial account must equal zero. Therefore, the balance of payments must also equal zero. Diff: 2 Type: ES Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 44) Explain why economies with financial account surpluses usually have current account deficits. Answer: An economy will have a current account deficit if it is importing more than it is exporting in goods and services. This deficit must be financed by foreign investment in the economy (capital inflows) that exceeds capital outflows. As a result, the current account deficit must be accompanied by a financial account surplus. Diff: 2 Type: ES Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

45) In 2020, the value of Amazon's global profits ________, because the U.S. dollar ________ in value relative to most other currencies. A) fell; rose B) rose; rose C) fell; fell D) rose; fell Answer: A Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Chapter Opener: COVID-19 Disrupts the Global Economy 46) Amazon is a global company with about ________ of its sales coming from foreign markets. A) one-fourth B) one-third C) one-half D) two-thirds E) three-quarters Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Chapter Opener: COVID-19 Disrupts the Global Economy 47) An economy that does not have interactions in trade or finance with other economies is referred to as A) an open economy. B) a closed economy. C) a trade-balanced economy. D) a net foreign investment economy. E) a mixed economy. Answer: B Diff: 1 Type: MC Topic: Closed vs. Open Economies Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

48) Which of the following transactions would be included in Germany's current account? A) A German citizen purchases 100 shares of Boeing stock. B) A Canadian citizen purchases 100 shares of BMW stock. C) A German citizen purchases a new Volkswagen made in Germany. D) A Canadian citizen purchases a new Volkswagen made in Germany. E) BMW purchases a patent from Ford. Answer: D Diff: 1 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 49) The current account includes records of a country's A) exports. B) net investment income. C) net transfers. D) imports. E) All of the above are included in an economy's current account. Answer: E Diff: 1 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 50) Which of the following would decrease net exports in Canada? A) A Canadian party planner purchases 350 piñatas from Mexico. B) The Televisa company in Mexico City purchases 200 episodes of children's programming from Nelvana in Toronto. C) A Mexican citizen purchases 100 shares of stock in BlackBerry. D) The Canadian government donates $2.5 million to Mexico to help victims of a hurricane in Mexico. E) Bombardier buys patents for aircraft engines from Airbus. Answer: A Diff: 1 Type: MC Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 51) The balance of payments includes all of the following accounts, except A) the current account. B) the financial account. C) the capital account. D) the national debt account. Answer: D Diff: 1 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

52) Which of the following would decrease the current account balance of Canada? A) a decrease in imports B) a decrease in the amount of money the Canadian government sends in foreign aid to other countries C) a decrease in the balance of trade D) a decrease in the amount of income Canadian companies pay out to foreigners who own investments in Canada E) a decrease in the amount of aid Canadians send to foreign countries Answer: C Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 53) When Canada sends money to Haiti to help hurricane survivors, the transaction is recorded in A) the capital account. B) the current account. C) the financial account. D) the foreign exchange account. E) the official settlements account. Answer: B Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 54) A Canadian oil company hires geological survey services from the United States. If all else remains equal, this will A) decrease net exports. B) decrease the balance of trade. C) increase the current account balance. D) decrease the financial account. E) decrease the capital account balance. Answer: A Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

55) If Québecers decrease their purchases of French champagne, assuming all else remains constant, this will A) increase Canada's balance of trade. B) decrease Canada's net exports. C) decrease Canada's current account balance. D) increase Canada's trade deficit. E) increase Canada's balance of payments. Answer: A Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 56) Based on the following information, what is the balance of the current account? Exports of goods and services = $12 billion Imports of goods and services = $14 billion Net income on investments = -$4 billion Net transfers = -$1 billion Increase in foreign holdings of assets in Canada = $6 billion Increase in Canadian holdings of assets in foreign countries = -$3 billion A) -$7 billion B) -$3 billion C) -$2 billion D) $1 billion E) $3 billion Answer: A Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

57) Based on the following information, what is the balance of the financial account? Exports of goods and services = $12 billion Imports of goods and services = $14 billion Net income on investments = -$4 billion Net transfers = -$1 billion Increase in foreign holdings of assets in Canada = $5 billion Increase in Canadian holdings of assets in foreign countries = -$3 billion A) $8 billion B) $2 billion C) $1 billion D) -$1 billion E) -$2 billion Answer: B Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 58) The difference between the value of the goods a country exports and the value of the goods a country imports is the country's A) financial account balance. B) current account balance. C) balance of trade. D) capital account balance. E) statistical discrepancy. Answer: C Diff: 1 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 59) A decrease in capital outflows from Canada will A) decrease the balance on the financial account. B) increase the balance on the financial account. C) increase the balance on the capital account. D) decrease the balance on the current account. E) increase the balance on the current account. Answer: B Diff: 1 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

60) If foreign holdings of Canadian dollars decrease, holding all else constant, A) the balance on the Canadian financial account will decrease. B) the balance on the Canadian current account will decrease. C) the balance on the Canadian capital account will decrease. D) the Canadian balance of trade will decrease. E) the statistical discrepancy will increase. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 61) When net capital flows are negative, A) capital inflows are less than capital outflows. B) net foreign investment is negative. C) the current capital account balance is negative. D) capital outflows are less than capital inflows. E) A and B are both correct. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 62) A decrease in Canadian net foreign direct investment would occur if A) Canadian citizens have decreased the value of foreign stocks and bonds they own. B) Canadian citizens have decreased their building or purchasing of facilities in foreign countries. C) net foreign investment decreases. D) net capital flows increase. E) will reduce the balance on the capital account. Answer: B Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 63) Net foreign investment minus net foreign portfolio investment is equal to A) capital outflows. B) net foreign financial investment. C) the balance of trade. D) net foreign direct investment. E) net national savings. Answer: D Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

64) When a Canadian investor buys a bond issued in a foreign country, A) the balance on the capital account decreases. B) the balance on the current account decreases. C) the balance on the financial account decreases. D) the balance of trade decreases. E) the statistical discrepancy decreases. Answer: C Diff: 1 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 65) Suppose the majority of the shares of British Airways stock were sold to a firm in Canada. Assuming all else remains constant, this will A) decrease the balance of the Canadian financial account. B) decrease foreign direct investment in Canada. C) decrease the balance of the Canadian current account. D) increase net portfolio investment in Canada. E) create a capital inflow in Canada. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 66) If the balance on the current account is $842 billion and the balance on the financial account is -$603 billion, what is the balance on the capital account, assuming no statistical discrepancy? A) $1,445 billion B) $842 billion C) $239 billion D) $0 E) -$239 billion Answer: E Diff: 2 Type: MC Topic: The Capital Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

67) The Canadian ________ account records relatively minor transactions, such as migrants' transfers; and sales and purchases of nonproduced, nonfinancial assets. A) current B) capital C) financial D) balance of trade E) official settlements Answer: B Diff: 2 Type: MC Topic: The Capital Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 68) Which of the following would result in positive net exports for Canada? A) Exports of goods = $725 billion Imports of goods = $790 billion Exports of services = $350 billion Imports of services = $260 billion B) Exports of goods = $625 billion Imports of goods = $625 billion Exports of services = $300 billion Imports of services = $375 billion C) Exports of goods = $550 billion Imports of goods = $575 billion Exports of services = $275 billion Imports of services = $300 billion D) All of the above will result in a trade surplus. Answer: A Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 69) Which of the following would decrease the balance on the current account? A) a decrease in foreign direct investment B) a decrease in the amount of aid money the government sends abroad C) a decrease in imports D) a sale of Canadian natural resource rights E) None of the above will increase the balance on the current account. Answer: E Diff: 3 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

70) If the current account is in surplus and the capital account is zero, then A) the financial account must be in deficit. B) the balance of trade must be in deficit. C) the balance of payments must be in deficit. D) there is a capital inflow. E) the balance of services must be in deficit. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Balance of Trade, the Current Account Balance, and the Balance of Payments 71) If the balance on the current account in Canada is $75 billion, which of the following is most likely to be true? A) The balance on the financial account is negative. B) The trade balance is negative. C) Net foreign investment is negative. D) The balance on the capital account is positive. E) The balance of trade is negative. Answer: A Diff: 1 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Solved Problem: Understanding the Arithmetic of Open Economies 72) The balance of payments can only be zero if Canada has incurred overall balance of payments deficits. Answer: FALSE Diff: 1 Type: TF Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 73) The purchase of foreign stocks and bonds by a Canadian brokerage firm is an example of capital inflows to Canada. Answer: FALSE Diff: 1 Type: TF Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

74) Net exports equals the balance of trade surplus. Answer: FALSE Diff: 1 Type: TF Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 75) Net foreign investment is a measure of net capital outflows, equal to capital outflows minus capital inflows in a given period of accounting. Answer: TRUE Diff: 1 Type: TF Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 76) What is the difference between net exports and the current account balance? Answer: The current account balance includes net exports plus net income on investments and net transfers. Diff: 1 Type: SA Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 77) Why would the Canadian trade deficit be larger than the Canadian current account deficit? Answer: The Canadian trade deficit would be larger than the Canadian current account deficit if Canada runs a surplus on the balance of services. Diff: 2 Type: SA Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 78) What is the relationship among the current account, the financial account, and the balance of payments? Answer: Leaving aside the statistical discrepancy and the capital account, both of which are small, the current account plus the financial account equals the balance of payments. Diff: 2 Type: SA Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Balance of Trade, the Current Account Balance, and the Balance of Payments

Table 14.1 Increase in foreign holdings of assets in Canada Exports of goods Imports of services Statistical discrepancy Net transfers Exports of service Imports of goods Income payments on investments Increase in Canadian holdings of assets in foreign countries Income received on investments

$2,560 925 -456 ? -77 623 -1,211 -444 -2,478 502

79) Refer to Table 14.1. Use the information in the table to prepare a balance of payments account and find the value of the statistical discrepancy. Assume that the balance on the capital account is zero. Answer: CURRENT ACCOUNT Exports of goods $925 Imports of goods -1,211 Balance of trade -286 Exports of services 623 Imports of services -456 Balance of services 167 Income received on investments 502 Income payments on investments -444 Net income on investments 58 Net transfers -77 Balance on current account -138 FINANCIAL ACCOUNT Increase in foreign holdings of assets in Canada 2,560 Increase in Canadian holdings of assets in foreign countries -2,478 Balance on financial account 82 BALANCE ON CAPITAL ACCOUNT 0 Statistical discrepancy 56 Balance of payments 0 Diff: 2 Type: SA Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports 1) How does an increase in a country's exchange rate affect its balance of trade? A) An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade. B) An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade. C) An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade. D) An increase in the exchange rate raises imports, reduces exports, and increases the balance of trade. E) A country's exchange rate has no effect on its balance of trade. Answer: A Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 2) If the nominal exchange rate between the Canadian dollar and the American dollar is 0.89 Canadian dollars per American dollar, how many American dollars are required to buy a product that costs 2.5 Canadian dollars? A) $1.32 B) $2.23 C) 2.5 D) $2.75 E) $2.81 Answer: E Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 3) You're traveling in Ireland and are thinking about buying a new digital camera. You've decided you'd be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the exchange rate is 0.85 euros per dollar, what's the highest price in euros you'd be willing to pay for a camera? A) 105 euros B) 106.25 euros C) 110.15 euros D) 143.75 euros E) 147 euros Answer: B Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

4) You're traveling in Ireland and are thinking about buying a new digital camera. You've decided you'd be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the camera you're looking at costs 115 euros, under which of the following exchange rates would you be willing to purchase the camera? (Assume no taxes or duties are associated with the purchase.) A) 0.56 euros per dollar B) 0.66 euros per dollar C) 0.76 euros per dollar D) 0.87 euros per dollar E) 0.92 euros per dollar Answer: E Diff: 3 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 5) If the dollar appreciates against the Mexican peso, A) Mexican imports to Canada become more expensive. B) Canadian exports to Mexico become less expensive. C) Canadian exports to Mexico become more expensive. D) Canada's current account balance is likely to rise. E) The value of Mexican imports to Canada does not change. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Solved Problem: Toyota Rides the Exchange Rate Rollercoaster

Table 14.2 Country Mexican peso British pound

Units of Foreign Currency per Canadian Dollars per Unit of Canadian Dollar Foreign Currency 10.00 0.50

6) Refer to Table 14.2. Given the following exchange rates in the above table, what are the exchange rates stated as Canadian dollars per Mexican peso and Canadian dollars per British pound respectively? A) 0.10 dollars per peso and 2.00 dollars per pound B) 1.00 dollars per peso and 20.00 dollars per pound C) 0.01 dollars per peso and 0.20 dollars per pound D) 0.10 dollars per peso and 5.00 dollars per pound E) 0.01 dollars per peso and 0.50 dollars per pound Answer: A Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 7) When the market value of the dollar rises relative to other currencies around the world, we say that A) the dollar has appreciated. B) the dollar has depreciated. C) the demand for dollars has increased. D) the supply of dollars has increased. E) the dollar has been revalued. Answer: A Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 8) Currency traders expect the value of the dollar to fall. What effect will this have on the demand for dollars and the supply of dollars in the foreign exchange market? A) Demand for dollars will increase, and supply of dollars will decrease. B) Demand for dollars will increase, and supply of dollars will increase. C) Demand for dollars will decrease, and supply of dollars will increase. D) Demand for dollars will decrease, and supply of dollars will decrease. E) Demand for dollars will decrease, and supply of dollars will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

Figure 14.1

9) Refer to Figure 14.1. The depreciation of the dollar is represented as a movement from A) B to A. B) D to C. C) B to C. D) A to C. E) A to B. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 10) Refer to Figure 14.1. The appreciation of the euro is represented as a movement from A) D to A. B) D to C. C) B to C. D) A to C. E) A to B. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

11) Refer to Figure 14.1. The French fall in love with British Columbian wines and triple their purchases of this beverage. Assuming all else remains constant, this would be represented as a movement from A) B to A. B) C to D. C) B to C. D) A to D. E) A to B. Answer: E Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 12) Refer to Figure 14.1. Europe suffers a recession. Assuming all else remains constant, this would be represented as a movement from A) D to A. B) C to D. C) B to C. D) A to D. E) A to B. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 13) Refer to Figure 14.1. Currency speculators believe that the value of the euro will increase relative to the dollar. Assuming all else remains constant, how would this be represented? A) Supply would decrease, demand would decrease and the economy moves from B to C to D. B) Supply would increase, demand would decrease and the economy moves from C to B to A. C) Supply would decrease, demand would increase and the economy moves from A to D to C. D) Supply would increase, demand would increase and the economy moves from D to A to B. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

14) Refer to Figure 14.1. Suppose that Canadian government deficits cause interest rates in Canada to rise relative to those in the European Union. Assuming all else remains constant, how would this be represented? A) Supply would decrease, demand would decrease and the economy moves from B to C to D. B) Supply would increase, demand would decrease and the economy moves from C to B to A. C) Supply would decrease, demand would increase and the economy moves from A to D to C. D) Supply would increase, demand would increase and the economy moves from D to A to B. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 15) If there is currently a surplus of dollars, which of the following would you expect to see in the foreign exchange market? A) The dollar will appreciate. B) The dollar will depreciate. C) There will be a decrease in the demand for dollars. D) There will be a decrease in the supply of dollars. E) There will be an increase in the quantity of dollars supplied. Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 16) Currency traders expect the dollar to appreciate. What impact will this have on equilibrium in the foreign exchange market? A) The dollar will appreciate, and the equilibrium quantity of dollars will decrease. B) The dollar will depreciate, and the equilibrium quantity of dollars exchanged will decrease. C) The dollar will appreciate, and the equilibrium quantity of dollars will increase. D) The dollar will appreciate, and the change in the equilibrium quantity of dollars exchanged cannot be determined. E) The dollar will depreciate, and the change in the equilibrium quantity of dollars exchange cannot be determined. Answer: D Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

17) Which of the following would cause the dollar to appreciate? A) an increase in the demand for dollars B) a decrease in the demand for dollars C) an increase in the supply of dollars D) an increase in the demand for imports from foreign countries E) an increase in demand for imports Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 18) An increase in the demand for Canadian-made goods will A) increase the supply of dollars on the foreign exchange market. B) decrease the supply of dollars on the foreign exchange market. C) increase the demand for dollars on the foreign exchange market. D) decrease the demand for dollars on the foreign exchange market. E) have no impact on the foreign exchange market. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 19) If the exchange rate changes from $2.00 = £1 to $2.01 = £1 then A) the dollar has depreciated. B) the dollar has appreciated. C) the British pound has depreciated. D) supply of pounds has increased. E) demand for dollars has increased. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse What Happens When a Currency Appreciates with What Happens When It Depreciates

20) If the exchange rate changes from $1.45 = 1 euro to $1.37 = 1 euro, then A) both the euro and dollar have appreciated. B) both the euro and dollar have depreciated. C) the euro has appreciated and the dollar has depreciated. D) the euro has depreciated and the dollar has appreciated. E) demand for dollars has decreased. Answer: D Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse What Happens When a Currency Appreciates with What Happens When It Depreciates 21) An increase in capital inflows will A) increase net foreign investment. B) increase capital outflows. C) decrease capital outflows. D) increase the equilibrium exchange rate. E) make the balance of payments positive. Answer: D Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 22) An expansionary monetary policy in Canada should A) decrease the foreign currency price of Canadian exports. B) cause the dollar to appreciate. C) decrease the dollar price of imports. D) decrease net exports. E) raise Canadian interest rates. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

23) How will an interest rate decrease in Canada affect equilibrium in the foreign exchange market? A) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded cannot be determined. B) The equilibrium exchange rate will decrease, and the equilibrium quantity of dollars traded cannot be determined. C) The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded will increase. D) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded will increase. E) The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded cannot be determined. Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 24) How will contractionary monetary policy in Japan affect the demand and supply of the yen in the foreign exchange market? A) The demand for the yen will fall, and the supply of the yen will increase. B) The demand for the yen will increase, and the supply of the yen will fall. C) The demand for the yen will fall, and the supply of the yen will fall. D) The demand for the yen will increase, and the supply of the yen will increase. E) The demand for the yen will remain unchanged, and the supply of the yen will remain unchanged. Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 25) Which of the following will not shift the demand for the euro to the right? A) an increase in interest rates in the European Union B) an increase in incomes in countries that buy goods from the European Union C) expectations among speculators that the price of the euro will rise in the future D) a decrease in the demand for European goods E) political instability in the United States Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

26) When Canadians increase their demand for Japanese goods, A) the demand for dollars will rise, and the demand for yen will rise. B) the demand for dollars will fall, and the demand for yen will rise. C) the supply of dollars will rise, and the demand for yen will rise. D) the supply of dollars will fall, and the demand for yen will fall. E) the demand for dollars will remain unchanged, and the supply of dollars will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 27) If the dollar appreciates, how will aggregate demand in Canada be affected? A) Aggregate demand will shift to the right as exports increase. B) Aggregate demand will shift to the right as imports increase. C) Aggregate demand will shift to the left as imports increase. D) Aggregate demand will shift to the left as exports increase. E) Aggregate demand will shift to the left as investment by foreign companies in Canada increases. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 28) What effect does a depreciation of the dollar have on real GDP in Canada in the short run? A) Real GDP will fall. B) Real GDP will rise. C) Real GDP will be unaffected by the depreciation of the dollar. D) Real GDP will be unchanged, but nominal GDP will rise. E) Real GDP will fall, but nominal GDP will rise. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

29) An appreciating yen makes Japanese products A) more expensive in foreign markets. B) less expensive in foreign markets. C) more expensive in the Japanese market. D) more expensive in both foreign markets and the Japanese market. E) more popular outside Japan. Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 30) Which of the groups below would benefit from a fall in the value of the Canadian dollar? A) Canadian consumers of imports B) Canadian firms selling to other countries C) Canadian firms with operations in other countries D) Canadian firms that have borrowed from savers in other countries E) Canadian families planning foreign vacations Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 31) Which of the groups below would benefit from a "strong" Canadian dollar? A) Canadian consumers of imports B) Canadian firms selling to other countries C) Foreign companies with operations in Canada D) Canadians who hold foreign assets E) Canadian firms offering tours to foreign tourists Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country?

32) If a country has a fixed exchange rate, A) the equilibrium exchange rate in that market does not respond to changes in supply and demand for currency. B) central banks have more control over real GDP in the economy. C) central banks must buy and sell their holdings of currencies to maintain a given exchange rate. D) the exchange rate is allowed to fluctuate in response to changes in the supply and demand for currency. E) the central bank sets a fixed amount of domestic currency that may be exchanged. Answer: C Diff: 3 Type: MC Topic: Fixed Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 33) When exchange rates are not determined in the market but are instead set by a country's central bank, we say that the country's exchange rate is A) flexible. B) fixed. C) a nominal exchange rate. D) a real exchange rate. E) non-convertible. Answer: B Diff: 1 Type: MC Topic: Fixed Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 34) If the price level in Canada is 110, the price level is 120 in Mexico, and the nominal exchange rate is 140 pesos per dollar, what is the real exchange rate from the Canadian perspective? A) 94 B) 115 C) 128 D) 141 E) 153 Answer: C Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

35) Assume Canada is the "domestic" country and China is the "foreign" country. Which of the following might increase the real exchange rate between Canada and China? A) an appreciation of the yuan B) a depreciation of the dollar C) an increase in the price level in Canada D) an increase in the price level of China E) an appreciation of both currencies with no effect on price levels Answer: C Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 36) Assuming Canada is the "domestic" country, if the real exchange rate between Canada and France increases from 1.5 to 1.8, A) the prices of Canadian goods and services have increased by 53% relative to France. B) the prices of Canadian goods and services have increased by 3% relative to France. C) the prices of Canadian goods and services have decreased by 16% relative to France. D) the prices of Canadian goods and services have increased by 20% relative to France. E) the prices of Canadian goods and services have decreased by 53% relative to France. Answer: D Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 37) The late Hugo Chavez, Venezuela's former president, proposed that the independence of the Venezuelan central bank be eliminated. Given the research on the relationship between central bank independence and inflation, we should expect this event to cause inflation to ________ and the real exchange rate to ________ between the two counties. (Assume the nominal exchange does not change, and that Canada is the "domestic" country). A) rise in Venezuela relative to Canada; fall B) fall in Venezuela relative to Canada; fall C) rise in Venezuela relative to Canada; rise D) fall in Venezuela relative to Canada; rise E) fall in Venezuela relative to Canada; remain unchanged Answer: A Diff: 3 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

38) Assuming no change in the nominal exchange rate, how will a higher rate of inflation in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.) A) The real exchange rate will rise. B) The real exchange rate will fall. C) The real exchange rate will be unaffected. D) The impact on the real exchange rate cannot be predicted. E) None of the above is correct. Answer: A Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 39) Assuming no change in the nominal exchange rate, how will a decrease in the price level in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.) A) The real exchange rate will rise. B) The real exchange rate will fall. C) The real exchange rate will be unaffected. D) The impact on the real exchange rate cannot be predicted. E) None of the above is correct. Answer: B Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 40) The price of domestic goods in terms of foreign goods is referred to as A) the nominal exchange rate. B) the relative inflation rate. C) the current account balance. D) the real exchange rate. E) the relative exchange rate. Answer: D Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

41) Holding all else constant, a rise in interest rates in Canada will cause the dollar to appreciate in international exchange markets. Answer: TRUE Diff: 2 Type: TF Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 42) Holding all else constant, an economic expansion in Mexico should decrease the demand for U.S. dollars. Answer: FALSE Diff: 2 Type: TF Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 43) If currency speculators decide that the value of the dollar should rise in the future relative to the yen, this will increase the demand for dollars and decrease the supply of dollars. Answer: TRUE Diff: 2 Type: TF Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 44) If the exchange rate between the Mexican peso and dollar expressed in terms of pesos per dollar is 13.5 pesos = 1 dollar, what is the exchange rate when expressed in terms of dollars per peso? Answer: If 13.5 pesos = 1 dollar, then 1 peso = 1 / 13.5 = 0.074 dollars. Diff: 1 Type: ES Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 45) What's the difference between the nominal exchange rate and the real exchange rate? Answer: The nominal exchange rate measures the value of one country's currency in terms of another country's currency. The real exchange rate measures the price of domestic goods in terms of foreign goods. Mathematically, the real exchange rate is equal to the nominal exchange rate times the ratio of the domestic price level to the foreign price level. Diff: 2 Type: ES Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

46) Explain and show graphically how an increase in incomes in Canada will affect equilibrium in the foreign exchange market. Answer: Higher incomes in Canada will increase demand for imports in Canada. The increased demand for imported goods will result in an increase in the supply of dollars (shift the supply curve to the right) as Canadians trade in their dollars for the currencies of the countries from which they wish to purchase goods. The increase in supply results in a decrease in the equilibrium exchange rate (the dollar depreciates), and an increase in the equilibrium quantity of dollars traded.

47) If Canadian demand for purchases of Mexican goods has increased, how would you expect the equilibrium exchange rate in the market for dollars to respond? Support your answer graphically. Answer: If Canadians are demanding more Mexican goods, they must trade their dollars in the foreign exchange market for pesos. This increase in the supply of dollars is represented by the shift to the right of the supply curve for dollars below. As the supply of dollars increases, the equilibrium exchange rate falls (the dollar depreciates).

Diff: 2 Type: ES Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 48) How does a decrease in value of a country's currency relative to other currencies affect its balance of trade? A) A decrease in value of a country's currency relative to other currencies raises imports, reduces exports, and reduces the balance of trade. B) A decrease in value of a country's currency relative to other currencies reduces imports, raises exports, and reduces the balance of trade. C) A decrease in value of a country's currency relative to other currencies reduces imports, raises exports, and increases the balance of trade. D) A decrease in value of a country's currency relative to other currencies raises imports, reduces exports, and increases the balance of trade. E) A decrease in value of a country's currency relative to other currencies reduces imports, reduces exports, and reduces the balance of trade. Answer: C Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 41 Copyright © 2024 Pearson Canada Inc.

49) In international exchange markets, a rise in interest rates in Canada will cause the demand for Canadian dollars to ________ and the supply of dollars to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) decrease; remain constant Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 50) Ceteris paribus, a rise in interest rates in Canada will cause the yen price of the dollar in international exchange markets to ________; that is, the Canadian dollar ________ in value against the yen. A) increase; appreciates B) increase; depreciates C) decrease; depreciates D) decrease; appreciates E) decrease; remain constant Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

Figure 14.2

51) Refer to Figure 14.2. Which of the events below would cause the shifts in the supply and demand curves in the market for Canadian dollars against the British pound shown in the graph above? A) Interest rates rise in England. B) Interest rates rise in Canada. C) Real income rises in Canada. D) Real income falls in England. E) The imposition of a tariff on English goods by Canada. Answer: A Diff: 3 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 52) Refer to Figure 14.2. Consider the market for Canadian Dollars against the British pound shown in the graph above. From this graph we can conclude that the dollar price of a British pound has ________ to ________ dollars per pound A) decreased; 0.46 B) increased; 2.17 C) decreased; 2.00 D) increased; 0.50 E) decreased; 0.04 Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

53) How does an increase in the relative price of a country's goods in terms of foreign goods, or real exchange rate, affect its balance of trade? A) An increase in the real exchange rate raises imports, reduces exports, and reduces the balance of trade. B) An increase in the real exchange rate reduces imports, raises exports, and reduces the balance of trade. C) An increase in the real exchange rate reduces imports, raises exports, and increases the balance of trade. D) An increase in the real exchange rate raises imports, reduces exports, and increases the balance of trade. E) An increase in the real exchange rate raises imports, raises exports, and increases the balance of trade. Answer: A Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Figure 14.3

54) Refer to Figure 14.3. Consider the market for Canadian dollars against the Japanese yen shown above. An event that could have caused the changes shown in the graph would be A) an increase in Canadian real income. B) speculators expecting the dollar to depreciate in value in the near future. C) an economic expansion in Canada. D) a decrease in Japanese interest rates. E) the imposition of a tax on foreign investment in Canada. Answer: D Diff: 3 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 44 Copyright © 2024 Pearson Canada Inc.

55) If the nominal exchange rate between the Canadian dollar and the New Zealand dollar is 1.36 New Zealand dollars per Canadian dollar, how many Canadian dollars are required to buy a product that costs 3.50 New Zealand dollars? A) $1.26 B) $2.14 C) $2.24 D) $2.57 E) $4.76 Answer: D Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 56) You're travelling in Japan and are thinking about buying a new kimono. You've decided you'd be willing to pay $175 for a new kimono, but kimonos in Japan are all priced in yen. If the exchange rate is 89 yen per Canadian dollar, what is the highest price in yen you'd be willing to pay for a kimono? (Assume no taxes or duties are associated with the purchase.) A) 1.97 yen B) 1,925 yen C) 330.75 yen D) 15,575 yen E) 19,425 yen Answer: D Diff: 1 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 57) You're travelling in Japan and are thinking about buying a new kimono. You've decided you'd be willing to pay $175 for a new kimono, but kimonos in Japan are all priced in yen. If the kimono you're looking at costs 14,000 yen, under which of the following exchange rates would you be willing to purchase the kimono? (Assume no taxes or duties are associated with the purchase.) A) 24.5 yen per Canadian dollar B) 45 yen per Canadian dollar C) 65 yen per Canadian dollar D) 80 yen per Canadian dollar E) You would purchase the new kimono at any of the above exchange rates. Answer: D Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

Table 14.3 Country Danish krone EU euro

Units of Foreign Currency per Canadian Dollar 5.00 0.70

58) Refer to Table 14.3. Given the exchange rates in the above table, what are the exchange rates stated as Canadian dollars per Danish krone and Canadian dollars per EU euro, respectively? A) 0.20 dollars per krone and 1.43 dollars per euro B) 2.00 dollars per krone and 7.14 dollars per euro C) 0.02 dollars per krone and 0.70 dollars per euro D) 0.05 dollars per krone and 1.30 dollars per euro E) 5.00 dollars per krone and 3.5 dollars per euro Answer: A Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 59) When the market value of the Canadian dollar falls relative to other currencies around the world, we say that A) the Canadian dollar has appreciated. B) the Canadian dollar has depreciated. C) the demand for Canadian dollars has decreased. D) the supply of Canadian dollars has decreased. E) the real exchange rate fell. Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

60) Currency traders expect the value of the Canadian dollar to rise. What effect will this have on the demand for Canadian dollars and the supply of Canadian dollars in the foreign exchange market? A) Demand for Canadian dollars will increase, supply of Canadian dollars will decrease, and the Canadian dollar will appreciate. B) Demand for Canadian dollars will increase, supply of Canadian dollars will increase, and the Canadian dollar may appreciate or depreciate. C) Demand for Canadian dollars will decrease, supply of Canadian dollars will increase, and the Canadian dollar will depreciate. D) Demand for Canadian dollars will decrease, supply of Canadian dollars will decrease, and the Canadian dollar may appreciate or depreciate. E) Demand for Canadian dollars will decrease, the supply of Canadian dollars will decrease, and the Canadian dollar will appreciate. Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 61) If there is currently a shortage of dollars, which of the following would you expect to see in the foreign exchange market? A) The dollar will appreciate. B) The dollar will depreciate. C) There will be an increase in the demand for dollars. D) There will be an increase in the supply of dollars. E) The quantity of dollars demanded will increase. Answer: A Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

62) Currency traders expect the Canadian dollar to depreciate. What impact will this have on equilibrium in the foreign exchange market? A) The Canadian dollar will appreciate and the equilibrium quantity of Canadian dollars will decrease. B) The Canadian dollar will depreciate and the equilibrium quantity of Canadian dollars exchanged will decrease. C) The Canadian dollar will appreciate and the equilibrium quantity of Canadian dollars will increase. D) The Canadian dollar will depreciate and the change in the equilibrium quantity of Canadian dollars exchanged cannot be determined. E) The Canadian dollar will depreciate and the equilibrium quantity of Canadian dollars exchanged will increase. Answer: D Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 63) Which of the following would cause the Canadian dollar to depreciate? A) an increase in the demand for Canadian dollars B) a decrease in the demand for Canadian dollars C) a decrease in the supply of Canadian dollars D) a decrease in the demand for imports from foreign countries E) an increase in the price of our natural resources Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 64) If the demand for the yen increases relative to the Canadian dollar, which of the following would occur? A) The Canadian dollar will appreciate. B) The yen will depreciate. C) The Canadian dollar will depreciate. D) The demand for the Canadian dollar will increase. E) The quantity of yen will decrease. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

65) All else equal, a depreciation of the British pound relative to currencies such as the euro and the Canadian dollar should ________ British exports and ________ imports to Great Britain. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) not affect; not affect Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 66) All else equal, a depreciation of the British pound relative to currencies such as the euro and the Canadian dollar should ________ the current account balance in Great Britain and therefore ________ the financial account balance in Great Britain. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) decrease; not affect Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 67) A decrease in the demand for Canadian-made goods will A) increase the supply of dollars in the foreign exchange market. B) decrease the supply of dollars in the foreign exchange market. C) increase the demand for dollars in the foreign exchange market. D) decrease the demand for dollars in the foreign exchange market. E) not affect the demand for dollars in the foreign exchange market. Answer: D Diff: 1 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

68) How will an interest rate increase in Canada affect equilibrium in the market for Canadian dollars against foreign currencies? (Assume the exchange rate is stated in terms of foreign currency per Canadian dollar.) A) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded cannot be determined. B) The equilibrium exchange rate will decrease, and the equilibrium quantity of dollars traded cannot be determined. C) The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded will increase. D) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded will increase. E) The equilibrium exchange rate and the equilibrium quantity of dollars traded cannot be determined. Answer: A Diff: 3 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 69) Which of the following will shift the demand for the euro to the right? A) an increase in interest rates in the European Union B) an increase in incomes in countries that buy goods from the European Union C) expectations among speculators that the price of the euro will rise in the future D) the issue of new shares in BMW to Canadians E) All of the above will shift the demand for the euro to the right. Answer: E Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 70) When Canadians decrease their demand for Japanese goods, A) the demand for Canadian dollars will rise, and the demand for yen will rise. B) the demand for Canadian dollars will fall, and the demand for yen will rise. C) the supply of Canadian dollars will rise, and the demand for yen will rise. D) the supply of Canadian dollars will fall, and the demand for yen will fall. E) the supply of Canadian dollars will fall, and the demand for yen will not change. Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

Figure 14.4

71) Refer to Figure 14.4. The appreciation of the Canadian dollar is represented as a movement from A) B to A. B) D to C. C) C to B. D) C to A. E) A to C. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 72) Refer to Figure 14.4. The depreciation of the euro is represented as a movement from A) D to A. B) C to D. C) B to C. D) B to A. E) A to C. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

73) Refer to Figure 14.4. Italians cut back on smoking and cut their demand for Canadian cigarettes in half. Assuming all else remains constant, this would be represented as a movement from A) B to A. B) D to C. C) B to C. D) A to D. E) A to C. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 74) Refer to Figure 14.4. Europe experiences an economic boom. Assuming all else remains constant, this would be represented as a movement from A) D to A. B) D to C. C) C to B. D) B to A. E) A to C. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 75) Refer to Figure 14.4. Currency speculators believe that the value of the euro will decrease relative to the Canadian dollar. Assuming all else remains constant, how would this be represented? A) Supply would decrease, demand would decrease and the economy would move from B to C to D. B) Supply would increase, demand would decrease and the economy would move from C to B to A. C) Supply would decrease, demand would increase and the economy would move from A to D to C. D) Supply would increase, demand would increase and the economy would move from D to A to B. E) Supply would increase, demand would increase and the economy would move from A to B to C. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

76) Refer to Figure 14.4. Suppose that the Canadian government deficit decreases, causing interest rates in Canada to fall relative to those in the European Union. Assuming all else remains constant, how would this be represented? A) Supply would decrease, demand would decrease and the economy would move from B to C to D. B) Supply would increase, demand would decrease and the economy would move from C to B to A. C) Supply would decrease, demand would increase and the economy would move from A to D to C. D) Supply would increase, demand would increase and the economy would move from D to A to B. E) Supply would increase, demand would increase and the economy would move from A to B to C. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 77) Canada's strong economic performance in the wake of the global financial crisis A) decreased the value of most foreign currencies relative to the Canadian dollar. B) increased the value of most foreign currencies relative to the Canadian dollar. C) did not significantly change the value of most foreign currencies relative to the Canadian dollar. D) decreased the value of the Canadian dollar relative to most foreign currencies. E) had no impact on the values of any currencies. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 78) If a country has a ________ exchange rate, its central bank must buy and sell its holdings of currencies to maintain a given exchange rate. A) floating B) flexible C) fixed D) managed E) all of the above Answer: C Diff: 3 Type: MC Topic: Fixed Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

79) When exchange rates are ________, we say that the country's exchange rate is fixed. A) determined in the market B) set by a country's central bank C) determined by supply and demand D) relatively stable E) set by a country's taxation authority Answer: B Diff: 1 Type: MC Topic: Fixed Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 80) If the exchange rate changes from $2.00 = 1 euro to $1.98 = 1 euro, then A) the Canadian dollar has depreciated. B) the Canadian dollar has appreciated. C) the euro has appreciated. D) the euro has stayed constant in value. E) the euro has depreciated. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse What Happens When a Currency Appreciates with What Happens When It Depreciates 81) If the exchange rate changes from $0.05 = 1 Mexican peso to $0.10 = 1 Mexican peso, then A) the peso has appreciated. B) the Canadian dollar has depreciated. C) the peso has appreciated and the Canadian dollar has depreciated. D) the peso has depreciated and the Canadian dollar has appreciated. E) both the peso and the Canadian dollar has depreciated. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse What Happens When a Currency Appreciates with What Happens When It Depreciates

82) If the Canadian dollar depreciates against the Indian rupee, A) Indian imports to Canada become less expensive. B) Canadian exports to India become less expensive. C) Canadian exports to India become more expensive. D) the value of Indian imports to Canada does not change. E) Canadian firms profits made in India fall in value. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 83) If the price level in Canada is 110, the price level is 135 in Mexico, and the nominal exchange rate is 12.5 pesos per Canadian dollar, what is the real exchange rate from the Canadian perspective? A) 8.8 B) 10.2 C) 10.8 D) 11.4 E) 15.3 Answer: B Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 84) Assume Canada is the "domestic" country and Switzerland is the "foreign" country. Which of the following might decrease the real exchange rate between the Canada and Switzerland? A) a depreciation of the franc B) an appreciation of the Canadian dollar C) a decrease in the price level in the Canada D) a decrease in the price level in Switzerland E) an increase in the price level in Canada Answer: C Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

85) Assuming Canada is the "domestic" country, if the real exchange rate between Canada and Russia decreases from 28 to 23, A) the prices of Canadian goods and services have decreased by 5 percent relative to Russia. B) the prices of Canadian goods and services have increased by 25.5 percent relative to Russia. C) the prices of Canadian goods and services have decreased by 18 percent relative to Russia. D) the prices of Canadian goods and services have increased by 22 percent relative to Russia. E) the prices of Canadian goods and services have increased by 4 percent relative to Russia. Answer: C Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 86) Assuming no change in the nominal exchange rate, how will a lower rate of inflation in the United States relative to Canada affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.) A) The real exchange rate will rise. B) The real exchange rate will fall. C) The real exchange rate will be unaffected. D) The impact on the real exchange rate cannot be predicted. E) None of the above is correct. Answer: A Diff: 1 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 87) The price of ________ in terms of ________ is referred to as the real exchange rate. A) foreign goods; foreign services B) domestic goods; the domestic currency C) domestic goods; domestic services D) domestic goods; foreign goods E) foreign currency; domestic currency Answer: D Diff: 1 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

88) An increase in capital inflows will A) increase net foreign investment. B) increase capital outflows. C) decrease capital outflows. D) increase the value of the domestic currency. E) increase the current account balance. Answer: D Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 89) If the Canadian dollar appreciates, how will aggregate demand in Canada be affected? A) Aggregate demand will increase as exports increase and imports decrease. B) Aggregate demand will increase as imports increase and exports decrease. C) Aggregate demand will decrease as imports increase and exports decrease. D) Aggregate demand will decrease as exports increase and imports decrease. E) Aggregate demand will become more sensitive to price level. Answer: C Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

Article Summary In August 2019, China's central bank lowered the exchange rate for its currency, the yuan, to its lowest level in 11 years. The devaluation changed the exchange rate to more than 7 yuan per U.S. dollar, a move some analysts believe is in retaliation to U.S. tariffs on Chinese goods. According to Andrew Collier, managing director of Orient Capital Research in Hong Kong, "The drop suggests that the central bank of China is willing to weaponize the currency in light of the trade war." The move could expand a growing U.S. trade deficit with China, which reached a 5-month high in June according to the U.S. Commerce Department. Source: Emily Feng "China's Currency Falls To Lowest Exchange Rate In 11 Years", npr.org, August 5, 2019. 90) Refer to the Article Summary. All else equal, a depreciation of the Chinese yuan relative to a currency such as the U.S. dollar should ________ foreign investment in China and ________ exports from China. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 91) Refer to the Article Summary. All else equal, a depreciation of the Chinese yuan relative to a currency such as the U.S. dollar should ________ the current account balance in China and therefore ________ the financial account balance in China. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country?

92) If the Japanese yen becomes stronger relative to other major currencies, what will happen to inflation in Japan? A) Inflation will increase as Japanese exports increase due to the stronger yen. B) Inflation will decrease as Japanese exports increase due to the stronger yen. C) Inflation will increase as Japanese exports decrease due to the stronger yen. D) Inflation will decrease as Japanese exports decrease due to the stronger yen. Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking Special Feature: Solved Problem: The Macroeconomic Effects of a Stronger Euro 93) If the value of Canadian dollar declined relative to the currencies of most of its major trading partners in the second half of 2021, this fall in the price of the dollar against the other currencies was ________ for companies that exported to Canada and ________ for Canadian companies that exported to other countries. A) good; good B) bad; good C) good; bad D) bad; bad Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking Special Feature: Apply the Concept: The Macroeconomic Effects of a Stronger Euro 94) If the value of the dollar declined in the second half of 2021, this would have resulted in ________ dollar prices for goods imported into Canada and ________ prices in foreign currencies for Canadian goods exported to other countries. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking Special Feature: Apply the Concept: The Macroeconomic Effects of a Stronger Euro

95) The relative price of a country's goods and services in terms of foreign goods and services is the real exchange rate. Answer: TRUE Diff: 1 Type: TF Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 96) A real appreciation of the Canadian dollar is caused by either a nominal appreciation of the Canadian dollar, a rise in the foreign price level, or a fall in the Canadian price level. Answer: FALSE Diff: 2 Type: TF Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 97) A rise in the Canadian dollar price of the Chinese yuan signals an appreciation of the yuan and a depreciation of the Canadian dollar. Answer: TRUE Diff: 1 Type: TF Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 98) Ceteris paribus, a real depreciation of the Canadian dollar will decrease net exports in Canada. Answer: FALSE Diff: 2 Type: TF Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 99) What are the three main sets of factors that cause the supply and demand curves in the foreign exchange market to shift? Answer: The three main sets of factors are changes in the demand for Canadian-produced goods and services and changes in the demand for foreign-produced goods and services; changes in the desire to invest in Canada and changes in the desire to invest in foreign countries; and changes in the expectations of currency traders about the likely future value of the Canadian dollar and the likely future value of foreign currencies. Diff: 2 Type: SA Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 60 Copyright © 2024 Pearson Canada Inc.

100) If Canadian demand for purchases of British goods has decreased, how would you expect the equilibrium exchange rate in the market for Canadian dollars to respond? Support your answer graphically. Answer: If Canadians are demanding fewer British goods, they will trade fewer Canadian dollars in the foreign exchange market for British pounds. This decrease in the supply of Canadian dollars is represented by the shift to the left in the supply of Canadian dollars below. As the supply of Canadian dollars decreases, the equilibrium exchange rate rises (the Canadian dollar appreciates).

Diff: 2 Type: SA Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 101) In December 2020, an article in the Wall Street Journal noted that "a stronger euro makes exports from the region less competitive overseas". What does the article mean by a "stronger euro"? Why would a stronger euro make European exports less competitive? Answer: A stronger euro is a euro that exchanges for more Canadian dollars; another way to state the same idea is that a stronger euro requires fewer euros to exchange for a Canadian dollar. A stronger euro results in Canadian consumers having to pay more dollars to buy goods and services imported from Europe. In other words, the prices of European exports to Canada will rise, making the exports less competitive with Canadian-produced goods or with other countries' exports to Canada. If the euro is also becoming stronger against currencies such as the British pound, Japanese yen, and Chinese yuan, then European exports will also be less competitive in those countries. Diff: 2 Type: SA Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Solved Problem: The Macroeconomic Effects of a Stronger Euro 61 Copyright © 2024 Pearson Canada Inc.

102) What three real-world complications keep purchasing power parity from being a complete explanation of exchange rate fluctuations in the long run? Explain. Answer: First, not all products are traded internationally. As a result, there is no way to take advantage of profit opportunities to buy in one country and sell in another country, so exchange rates will not reflect exactly the relative purchasing powers of currencies. Secondly, products and consumer preferences for products vary across countries. As a result, consumers in one country might be willing to pay different prices for products than consumers in another country, and exchange rates might not adjust for that difference in the long run. Finally, countries sometimes impose barriers to trade. If there are barriers to trade, it may not be possible to take advantage of profit opportunities to buy in one country and sell in another country, so, again, exchange rates will not reflect exactly the relative purchasing powers of currencies. Diff: 2 Type: SA Topic: Purchasing Power Parity Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking 103) The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In January 2021, The Economist reported that the average price of a Big Mac in the United States was $5.66. In South Korea, the average price of a Big Mac at that time was 4,500 Korean won. If the exchange rate between the dollar and the Korean won was 1,150 Korean won per dollar, how would purchasing power parity predict the exchange rate will change in the long run? Answer: The dollar in this example is "overvalued" while the Korean won is "undervalued." The relative price ratio of 4,500 Korean won per Big Mac to $5.66 per Big Mac (795 Korean won per dollar) is less than the current exchange rate of 1,150 Korean won per dollar. In other words, the dollar cost of a Big Mac in South Korea is $3.91 (4,500/1,150). This implies that the supply of dollars will rise as more Americans trade their dollars in for Korean won to buy Big Macs in South Korea. This increase in the supply of dollars will lower the exchange rate (decrease the value of the dollar). (Similarly, the demand for the Korean won is rising, indicating an increase in the value of the Korean won.) Adjustments will continue until the exchange rate is equal to 795 Korean won per dollar. Diff: 3 Type: SA Topic: Purchasing Power Parity Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking Special Feature: Apply the Concept: The Big Mac Theory of Exchange Rates

14.3

Discuss the three key features of the current exchange rate system

1) The gold standard is an example of A) a floating exchange rate system. B) a managed float exchange rate system. C) a fixed exchange rate system. D) a flexible exchange rate system. E) the Bretton Woods System. Answer: C Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 2) China's exchange rate system from 1994 through 2005 is an example of A) a floating exchange rate system. B) a managed float exchange rate system. C) a fixed exchange rate system. D) a flexible exchange rate system. E) the Bretton Woods System. Answer: C Diff: 1 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 3) During what period of time was the gold standard used? A) from the nineteenth century until the 1930s B) from the eighteenth century until the nineteenth century C) from 1914 until 1929 D) from 1944 until 1980 E) from 1970 until 1993 Answer: A Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

4) When the value of a currency is determined mostly by demand and supply, but with occasional government intervention, the exchange rate system is defined as A) fixed. B) floating. C) managed float. D) Bretton Woods. E) mixed economy. Answer: C Diff: 1 Type: MC Topic: Managed Float Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 5) Suppose an economy's exchange rate system is the gold standard and vast tracks of gold are discovered, as is what happened in the United States in 1849. If the economy is at full employment, what should this discovery do? A) It should raise the money supply but have no impact on the price level. B) It should raise the money supply and cause inflation. C) It should raise the money supply and cause disinflation. D) It should lower the money supply and cause deflation. E) It should not change the money supply. Answer: B Diff: 3 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 6) If a country's currency is determined only by the demand and supply for that country's currency, the country is said to have a A) floating exchange rate. B) fixed exchange rate. C) gold standard. D) managed float. E) Bretton Woods exchange rate. Answer: A Diff: 1 Type: MC Topic: Floating Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

7) Under the Bretton Woods exchange rate system, set up in 1944, which of the following was true? A) Americans could sell their dollars to the American government in exchange for gold. B) Americans could sell their dollars to the American government in exchange for silver. C) Americans could sell their dollars to foreign central banks in exchange for gold. D) Foreign central banks could sell their dollars to the American government in exchange for gold. E) Americans were required to pay for imports from other countries with gold. Answer: D Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 8) The Bretton Woods system of exchange rates was abandoned in A) the 1920s. B) the 1940s. C) the 1970s. D) the 1990s. E) the 2000s. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 9) The current exchange rate system in Canada is best described as a A) silver standard. B) managed float exchange rate system. C) fixed exchange rate system. D) gold standard. E) Bretton Woods system. Answer: B Diff: 1 Type: MC Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 10) In what year was the Bretton Woods system of currency exchange set up? A) 1912 B) 1924 C) 1929 D) 1944 E) 1969 Answer: D Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

11) Under which exchange rate system was a dollar redeemable for gold only if the dollar was presented by a foreign central bank? A) the gold standard B) a managed float exchange rate system C) the Bretton Woods System D) a fiat system E) the international monetary fund system Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 12) The exchange rate system agreed to in 1944, in which the U.S. government agreed to buy or sell gold at a fixed price of $35 per ounce, is referred to as A) the gold standard. B) the Bretton Woods System. C) a floating currency standard. D) a flexible exchange rate system. E) the international monetary fund system. Answer: B Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 13) Under the gold standard, to increase the money supply in the country, the government must A) simply print more currency. B) have enough gold to back up the increase in the money supply. C) buy foreign currencies with dollars to increase foreign currency reserves. D) increase the value of the country's currency on foreign exchange markets. E) sell reserves of gold to the Federal Reserve of the United States. Answer: B Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

14) From the nineteenth century until the 1930s, Canada most consistently adhered to A) the gold standard. B) the Bretton Woods system. C) a freely-floating exchange rate. D) a managed-float exchange rate system. E) International monetary exchange system. Answer: A Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 15) The Bretton Woods exchange rate system was a A) floating exchange rate system. B) managed float exchange rate system. C) fixed exchange rate system. D) flexible exchange rate system. E) currency union. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 16) When the value of a currency is determined ________, the exchange rate system is defined as managed float. A) only by supply and demand B) by its issuing government C) mostly by supply and demand, but with occasional government intervention D) by its issuing government, with occasional readjustments in value E) by supply and demand only within a narrow range determined by the currency's issuing government Answer: C Diff: 1 Type: MC Topic: Managed Float Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

17) When the value of a currency is determined ________, the exchange rate system is defined as a floating exchange rate system. A) only by supply and demand B) by its issuing government C) mostly by supply and demand, but with occasional government intervention D) by its issuing government, with occasional readjustments in value E) by supply and demand only within a narrow range determined by the currency's issuing government Answer: A Diff: 1 Type: MC Topic: Managed Float Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 18) Under the Bretton Woods exchange rate system, ________ could sell their dollars to the American government in exchange for gold. A) foreign central banks B) American citizens C) foreign citizens D) Canadian citizens E) all of the above Answer: A Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 19) Under a floating exchange rate, the exchange rate A) will change whenever the price of gold changes. B) is controlled by central bank intervention. C) is determined by the interaction of supply of the currency and demand for the currency. D) is pegged against the euro. E) is determined by price of gold. Answer: C Diff: 1 Type: MC Topic: Floating Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

20) The fixed exchange rate system set up in the 1940s was the A) purchasing power parity exchange system. B) gold standard. C) Bretton Woods system. D) European Union euro system. E) flexible exchange rate system. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 21) The ________ in Canada is best described as a floating exchange rate system. A) earliest used exchange rate system B) current exchange rate system C) exchange rate system used prior to the Great Depression D) exchange rate system set up at the end of World War II E) exchange rate system in use until the 1930s Answer: B Diff: 1 Type: MC Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 22) The ________ system of currency exchange rates was set up in 1944. A) gold standard B) Bretton Woods C) managed float D) flexible E) eurozone Answer: B Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 23) Under the Bretton Woods system, U.S. dollars were redeemable for ________ only if the dollars were presented by a foreign central bank. A) silver B) foreign currency C) gold D) U.S. Treasury bonds E) the foreign central bank's home currency Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 69 Copyright © 2024 Pearson Canada Inc.

24) Under the Bretton Woods exchange rate system, the U.S. government agreed to buy or sell gold at a fixed price of ________ per ounce. A) $1 B) $35 C) $70 D) $100 E) $400 Answer: B Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 25) Under the gold standard, the government must have enough gold to back up any A) increase in money demand. B) increase in the money supply. C) change in its currency's exchange rate. D) foreign currency deposits in its central bank. E) additional government spending. Answer: B Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 26) The currency adopted by most countries in Western Europe is referred to as the A) euro. B) Eurodollar. C) yen. D) pound. E) rouble. Answer: A Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 27) The current exchange rate system has which of the following characteristics? A) Canada allows the dollar to float against other major currencies. B) All developing countries allow their currencies to float against the dollar and other major currencies. C) The countries of the European Union have adopted the gold standard. D) Several developing countries in Asia have adopted the Bretton Woods system. E) The current global foreign exchange system is a fixed system. Answer: A Diff: 1 Type: MC Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 70 Copyright © 2024 Pearson Canada Inc.

28) By 2021, how many European countries were members of the European Union? A) 12 B) 17 C) 27 D) 38 E) 57 Answer: C Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 29) Members of the European Union decided to adopt a single currency by what year? A) 2008 B) 2005 C) 1999 D) 1992 E) 1957 Answer: C Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 30) Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency, rather than choosing a floating exchange rate? A) Pegging allows the country more flexibility in conducting monetary policy. B) Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports. C) Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency. D) Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning. E) None of the above is a drawback to choosing a fix exchange rate against a major currency. Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

31) You are made better off in which of the following situations? A) you borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must pay back the loan in pesos B) you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars C) you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars D) you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos E) None of the above. Answer: B Diff: 3 Type: MC Topic: Exchange Rate Fluctuations Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 32) If a country's currency is "pegged" to the dollar, its exchange rate is A) floating. B) flexible. C) fixed. D) undervalued. E) tied to the value of gold. Answer: C Diff: 1 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 33) A currency pegged at a value below the market equilibrium exchange rate is A) overvalued. B) undervalued. C) achieving purchasing power parity. D) depreciating in value relative to its pegged currency. E) revalued. Answer: B Diff: 2 Type: MC Topic: Currency Undervaluation Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

34) During the Chinese experience with pegging the yuan to the U.S. dollar, the yuan was ________. As a result, there was a ________ of U.S. dollars on the market, and the Chinese government had to purchase U.S. dollars to maintain the peg. A) overvalued; shortage B) undervalued; surplus C) overvalued; surplus D) undervalued; shortage E) appreciating; surplus Answer: B Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 35) Should European nations which are not currently using the euro choose to adopt the euro as their currency, these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession. A) increased government spending B) increased tax rates C) reductions in key interest rates D) banking regulation E) labour standards Answer: C Diff: 2 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Reflective Thinking 36) Pegging a country's exchange rate to the dollar can be advantageous if A) the country does not trade much with Canada. B) investors believe the dollar to be more stable than the domestic country's currency. C) a country wishes to conduct independent monetary policy. D) imports are not a significant fraction of the goods the country's consumers buy. E) demand for the goods being exported are not sensitive to changes in price. Answer: B Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Reflective Thinking

37) Although the pegged exchange rate between the yuan and the U.S. dollar has ________ the yuan, China has been reluctant to abandon the peg for fear that doing so would ________. A) undervalued; reduce exports B) undervalued; reduce imports C) overvalued; increase imports D) overvalued; reduce exports E) depreciated; reduce exports Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 38) Under pressure from Japan, the United States, and Europe, China announced in July 2005 that it would switch from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies. The result of this change was A) the value of the yuan increased gradually relative to the dollar. B) the value of the yuan has become very responsive to changes in demand and supply in the foreign currency market. C) the value of the yuan has increased dramatically and is beginning to remove the trade imbalance between the United States and China. D) the value of the yuan has decreased dramatically and has further spurred Chinese exports. E) the value of the yuan is now determined solely by market forces. Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency

39) How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar? A) Because the yuan was undervalued at the pegged exchange rate, the level of Chinese exports remained higher than they would have been if the exchange rate was allowed to float freely. B) Because the yuan was overvalued at the pegged exchange rate, competing firms from other countries feared that abandoning the peg would lead to an increase in Chinese exports. C) Competitors feared that the declining value of the dollar would continue to make Chinese goods more expensive. D) Because China's population is so large relative to other countries, the pegged exchange rate made the goods of foreign competing firms much less expensive than domestic Chinese goods. E) Because the yuan was overvalued, Chinese consumers were consuming more luxury goods than can be maintained at its current level of development. Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 40) The currency adopted by most countries in ________ is referred to as the euro. A) Western Europe B) Eastern Europe C) Europe and Asia D) Southern Europe and Northern Africa E) Scandinavian Europe Answer: A Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 41) How many countries in Europe have adopted the euro as their official currency? A) 12 B) 19 C) 28 D) 38 E) 57 Answer: B Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

42) The year in which euro coins and paper currency were introduced and participating countries withdrew old domestic currencies from circulation was A) 2007. B) 2002. C) 1999. D) 1995. E) 1992. Answer: B Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 43) Pegging a country's exchange rate to the dollar can be advantageous in all of the following situations except A) if the country has extensive trade with the United States. B) if investors believe the dollar to be more stable than the domestic country's currency. C) if a country wishes to conduct independent monetary policy. D) if imports are a significant fraction of the goods the country's consumers buy. E) if potential foreign investors are deterred by potential changes in the currency's value. Answer: C Diff: 3 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 44) If a country's currency ________ the dollar, its exchange rate is fixed. A) is exchanged in currency markets for B) depreciates against C) is pegged to D) has a floating exchange rate value which is equal to E) appropriately valued relative to Answer: C Diff: 1 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

45) A currency pegged at a value above the market equilibrium exchange rate is A) overvalued. B) undervalued. C) achieving purchasing power parity. D) depreciating in value relative to its pegged currency. E) revalued. Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 46) If a country sets a pegged exchange rate that is below the equilibrium exchange rate, how can the country maintain the peg? A) by purchasing surplus domestic currency at the pegged rate B) by selling surplus domestic currency at the pegged rate C) by purchasing surplus domestic currency at the equilibrium exchange rate D) by decreasing the pegged exchange rate E) by decreasing the supply of domestic currency Answer: B Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 47) Compared to a situation in which there is no change in the value of the dollar relative to the peso, in which of the following situations would you be worse off? A) you borrow 10,000 pesos, you earn income in dollars, the dollar appreciates against the peso, you must pay back the loan in pesos B) you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars C) you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars D) you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos E) None of the above Answer: C Diff: 3 Type: MC Topic: Exchange Rate Fluctuations Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

48) During the Chinese experience with pegging the yuan to the dollar, the yuan was ________. As a result, there was a ________ of dollars on the market, and the Chinese government had to purchase dollars to maintain the peg. A) overvalued; shortage B) undervalued; surplus C) overvalued; surplus D) undervalued; shortage E) appreciated; shortage Answer: B Diff: 3 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 49) Destabilizing speculation refers to A) actions taken by the International Monetary Fund that increase lending to countries who have pegged their currencies against the dollar. B) actions taken by currency traders to sell a currency that is undervalued. C) actions taken by investors who sell a country's currency in anticipation of buying it back later at a lower price. D) any depreciation of a country's currency as a result of long-run adjustments to purchasing power parity. E) any purchase of foreign currency assets by foreign investors. Answer: C Diff: 2 Type: MC Topic: Currency Overvaluation Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 50) China began pegging its currency, the yuan, to the U.S. dollar in 1994. Because the yuan has been ________ at the pegged exchange rate, the Chinese government ________ its reserves of U.S. dollars as the government purchased more ________ to maintain the pegged exchange rate. A) undervalued; increased; dollars B) undervalued; decreased; yuan C) overvalued; decreased; yuan D) overvalued; increased; yuan E) overvalued; increased; dollars Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency

51) China began pegging its currency, the yuan, to the U.S. dollar in 1994. Because the yuan was ________ at the pegged exchange rate, the Chinese government increased its reserves of ________ as the government purchased more ________ to maintain the pegged exchange rate. A) undervalued; U.S. dollars; U.S. dollars B) undervalued; yuan; yuan C) overvalued; yuan; yuan D) overvalued; U.S. dollars; U.S. dollars E) undervalued; yuan; U.S. dollars Answer: A Diff: 3 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 52) Although the pegged exchange rate between the yuan and the U.S dollar has ________ the yuan, China had been reluctant to abandon the peg for fear that abandoning the peg would ________. A) undervalued; reduce exports B) undervalued; reduce imports C) overvalued; increase imports D) overvalued; reduce exports E) depreciated; reduce exports Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 53) If two countries adhere to a gold standard, the exchange rate for their currencies is fixed. Answer: TRUE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 54) The current exchange rate system is a managed float exchange rate system. Answer: TRUE Diff: 1 Type: TF Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

55) Expanding, contracting, and managing the money supply is easier for a central bank under the gold standard. Answer: FALSE Diff: 1 Type: TF Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 56) Foreign currency prices of Canadian dollar are currently determined by a managed float exchange rate system. Answer: TRUE Diff: 1 Type: TF Topic: Managed Float Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 57) Exchange rates under the Bretton Woods system were determined by relative supplies of gold held by countries within the system. Answer: FALSE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 58) The Bretton Woods system was established in 1944 and remained in place until the early 1970s. Answer: TRUE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 59) Both countries involved in a pegging of currency must agree to the terms of the pegging. Answer: FALSE Diff: 2 Type: TF Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 60) In order to maintain an undervalued yuan to encourage a trade surplus, the Chinese government must buy dollars and increase the supply of yuan. Answer: TRUE Diff: 3 Type: TF Topic: Currency Undervaluation Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency

61) What are the three main exchange rate systems, and how do they operate? Answer: The three main exchange rate systems are the floating exchange rate, the fixed exchange rate, and the managed float. The floating exchange rate is determined solely by equilibrium of demand and supply in the foreign exchange market. The fixed exchange rate exists when the government maintains one fixed rate at which currency can be exchanged. Under a managed float, the exchange rate is mostly determined by demand and supply in the market for foreign exchange, with occasional government intervention. Diff: 1 Type: SA Topic: Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 62) How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard? Answer: Under the gold standard, exchange rates were determined by the relative amounts of gold in each country's currency. Both the gold standard and Bretton Woods systems were fixed exchange rate systems, but people were able to redeem paper currency for gold domestically only under the gold standard. Diff: 2 Type: SA Topic: Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 63) What is the difference between a fixed exchange rate system and a managed float exchange rate system? Answer: In a fixed exchange rate system, the value of the currencies of the participating countries is fixed, and in a managed float exchange rate system, the value of currencies is determined by demand and supply, with occasional government intervention. Diff: 1 Type: SA Topic: Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 64) Why might a developing country choose to peg the value of its currency to the dollar? Answer: The dollar is a relatively stable currency, so by pegging the value of a country's currency to the dollar, the country provides reassurance that debts will be paid in a currency whose value doesn't fluctuate dramatically. This reduces the risk foreigners face in collecting returns on investments in that country. In addition, if imports are a significant fraction of the goods consumers buy, a decrease in the value of the country's currency can result in higher inflation. By pegging the country's currency, these fluctuations in the exchange rate don't occur, so inflation may be lower. Diff: 2 Type: SA Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

65) What does it mean when one currency is "pegged" against another currency? Answer: One currency is pegged against another currency when a country decides to keep the exchange rate between its currency and another currency fixed. Diff: 1 Type: SA Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 66) Why do countries peg their currencies, and what problems can result from pegging? Answer: Countries peg their currencies to make planning easier for their firms with extensive trade with another country, to aid their firms that have borrowed foreign investment funds denominated in other currencies, and to prevent inflation that would result from a decline in the value of their currency. Countries that peg can find that their currencies become either overvalued or undervalued relative to the equilibrium exchange rate. Diff: 2 Type: SA Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

14.4

Define and apply the saving and investment equation

1) If net exports are positive, A) net foreign investment is also positive. B) capital inflows must be greater than capital outflows. C) the currency will appreciate. D) net foreign investment is negative. E) Both A and B are correct. Answer: A Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 2) Suppose that domestic investment in Japan is 20.2% of GDP, and Japanese national savings is 24% of GDP. What is Japan's foreign investment as a percentage of GDP? A) 0.84% B) 1.19% C) 3.8% D) 27.8% E) 44.2% Answer: C Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills

3) If net exports are equal to net foreign investment, which of the following is not true? A) The balance of payments is zero. B) The current account balance is equal to the negative of the financial account balance. C) Net capital inflows are equal to imports minus exports. D) The balance on the financial account is zero. E) The current account balance plus the financial account balance is equal to zero. Answer: D Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills 4) If Canada has a net export surplus, which of the following must be true? A) The balance on the financial account must equal the balance on the current account. B) Net foreign investment must be positive as well. C) Domestic private saving must be greater than net foreign investment. D) Domestic public saving must be greater than net foreign investment. E) Investment equals domestic savings. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 5) Canada has had negative net exports since 2009. This means that Canada has ________ since 2009. A) had a financial account surplus B) had a net capital outflow C) had positive net foreign investment D) had a current account surplus E) been building up assets in the rest of the world Answer: A Diff: 1 Type: MC Topic: The Financial Account Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 6) According to the saving and investment equation, if net foreign investment rises by $60 million, A) national saving will increase by $60 million. B) national saving will fall by $60 million. C) domestic investment will rise by $60 million. D) private saving will fall by $60 million. E) public saving will rise by $60 million. Answer: A Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

7) If net foreign investment is negative, which of the following must be true? A) Capital outflows are greater than capital inflows. B) Domestic investment must be greater than national saving. C) Net exports are positive. D) Private saving is greater than public saving. E) Canada's stock of foreign assets is growing faster than foreigners' stocks of Canadian assets. Answer: B Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 8) Which of the following equations is true in an open economy? A) Private saving = net foreign investment + domestic investment. B) Domestic saving = net capital flows. C) Net exports = -Financial account balance. D) Net exports = net foreign investment. E) Investment = national saving. Answer: D Diff: 3 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 9) If Canada is a "net borrower" from abroad, A) Canada must be exporting more than it is importing. B) net capital flows must be negative. C) domestic saving is less than domestic investment. D) net foreign investment must be positive. E) Canadian incomes must be falling. Answer: C Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 10) If national saving decreases, A) the sum of domestic investment and net exports must increase. B) the sum of domestic investment and foreign investment must increase. C) the sum of domestic investment and foreign investment must decrease. D) foreign investment must increase to cover the loss. E) both public and private savings must be falling. Answer: C Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

11) If net foreign investment (NFI) is negative, domestic investment (I) must be A) greater than national saving (S). B) smaller than national saving (S). C) equal national saving (S). D) equal regardless of net foreign investment being positive or negative. E) negative as well. Answer: B Diff: 3 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills 12) Suppose the federal government is successful in enacting tariffs large enough to eliminate the current account deficit. What would happen to the level of domestic investment? A) It would not change. B) It would rise and exceed national saving. C) It would rise to a level equal to net foreign investment. D) It would fall to a level equal to national saving. E) It would rise to a level equal to exports. Answer: D Diff: 3 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills 13) The level of saving in Japan has historically been high relative to the level of domestic investment. Based on this information, we would expect that A) Japan's net foreign investment has been relatively low. B) Japan's net exports have been relatively high. C) Japan's capital inflows are positive. D) Japan's private saving is greater than its public saving. E) Japan's public savings is greater than investment. Answer: B Diff: 3 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

14) If net foreign investment in Canada is negative, how must national saving and domestic investment be related? A) Domestic investment and national saving must also be negative. B) Domestic investment must be greater than national saving. C) Domestic investment must be less than national saving. D) Domestic investment can be greater than or less than national saving. E) Domestic investment is always unrelated to national saving. Answer: B Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 15) Public saving equals taxes minus government spending minus transfer payments. Answer: TRUE Diff: 2 Type: TF Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 16) The saving and investment equation holds only when the federal budget is balanced. Answer: FALSE Diff: 2 Type: TF Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 17) If net exports are positive for China, it must be true that China is experiencing net outflows of capital. Answer: TRUE Diff: 2 Type: TF Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 18) Explain the relationship between net exports and net foreign investment. Answer: Net exports equal net foreign investment. If net exports are negative, the people of the country will sell assets and borrow (negative foreign investment) to pay for the surplus of imports over exports. If net exports are positive, the people of the country will buy assets and lend (positive foreign investment). Diff: 2 Type: ES Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills

19) Based on the following information, calculate public saving, net foreign investment, and national income. Private saving = $83 billion Exports = $125 billion Imports = $130 billion Consumption = $200 billion Private investment = $56 billion Government purchases = $38 billion Answer: Based on the macroeconomic equation for national income, Y = C + I + G + NX = 200 + 56 + 38 + 5 = $289 billion. Since net exports are -$5 billion, net foreign investment must also be . According to the saving and investment equation, national saving = domestic investment plus net foreign investment. Based on the numbers provided, domestic investment plus net foreign investment = $56 billion + -$5 billion = $51 billion. This $51 billion comes from private and public saving. Since private saving is $83 billion, it must be the case that public saving is -$32 billion, so the government is running a budget deficit of $32 billion. Diff: 3 Type: ES Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills Special Feature: Solved Problem: Arriving at the Saving and Investment Equation 20) If you know that a country's net foreign investment is negative, what does that tell you about the relationship between the country's national saving and private investment? Answer: For any country, national saving must equal investment, where investment is the sum of domestic private investment and net foreign investment (S = I + NFI). Rearranging the saving and investment equation, NFI = S - I, so that if a country has negative net foreign investment, it must be saving less than it is investing domestically. Diff: 2 Type: ES Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 21) Japan has a fairly high saving rate and the level of saving in Japan is above domestic investment. Use the saving and investment equation to explain what Japan is doing with this excess of saving above domestic investment. Answer: In an open economy, the saving and investment equation implies that a country's national saving must always equal domestic investment plus net foreign investment or (S = I + NFI). Japan's saving in excess of domestic investment implies that net foreign investment is positive for Japan so that Japan must be investing in other countries. Companies like Toyota, Honda, and Nissan have built plants in the United States. Diff: 1 Type: ES Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

22) National saving equals A) income - taxes - consumption. B) taxes - government spending. C) income - consumption - government spending. D) private saving + public saving - net foreign investment. E) taxes - transfers - government spending. Answer: C Diff: 1 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 23) If net exports are negative, A) net foreign investment is also negative. B) capital inflows must be less than capital outflows. C) net foreign investment must be greater than public saving. D) net foreign investment is positive. E) Both A and B are correct. Answer: A Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 24) Suppose that domestic investment in Canada is 10.7% of GDP, and Canada's national savings is 13% of GDP. What is Canada's foreign investment as a percentage of GDP? A) 0.82% B) 1.15% C) 2.3% D) 15.3% E) 23.7% Answer: C Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills 25) If net exports are equal to net foreign investment, A) the balance of payments is zero. B) the current account balance is equal to the negative of the financial account balance. C) net capital inflows are equal to imports minus exports. D) the current account balance plus the financial account balance is equal to zero. E) All of the above are true. Answer: E Diff: 3 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 88 Copyright © 2024 Pearson Canada Inc.

26) If Canada has a current account deficit and the capital account is zero, which of the following must be true? A) The balance on the financial account must equal the balance on the current account. B) Net foreign investment must be negative as well. C) Domestic private saving must be less than net foreign investment. D) Domestic public saving must be less than net foreign investment. E) Domestic investment must be falling. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 27) If Canada has negative net exports, which of the following must be true? (Assume that the capital account is zero and net transfers are zero.) A) The balance on the financial account must equal the balance on the current account. B) Net foreign investment must be negative as well. C) Domestic private saving must be less than net foreign investment. D) Domestic public saving must be less than net foreign investment. E) Domestic public savings must be greater than domestic private savings. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 28) According to the saving and investment equation, if net foreign investment falls by $35 million, A) national saving in excess of domestic investment will decrease by $35 million. B) national savings will rise by $35 million. C) domestic investment will fall by $35 million. D) national saving in excess of domestic investment will rise by $35 million. E) domestic public savings will fall by $35 million. Answer: A Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills

29) If net foreign investment is positive, which of the following must be true? (Assume that the capital account is zero and net transfers are zero.) A) Capital outflows are less than capital inflows. B) Domestic investment must be less than national saving. C) Net exports are negative. D) The country will owe more to foreigners in the future. E) None of the above is true when net foreign investment is positive. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 30) In an open economy, the current account balance equals ________. (Assume that the capital account is zero and net transfers are zero.) A) net foreign investment + domestic investment B) net capital outflows C) the financial account balance + net income on investments D) net foreign investment E) domestic saving Answer: D Diff: 3 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 31) If Canada is a "net lender" abroad, ________. (Assume that the capital account is zero and net transfers are zero.) A) Canada must be exporting less than it is importing B) net capital flows must be positive C) domestic saving is greater than domestic investment D) net foreign investment must be negative E) Canada's net exports is lower than it should be Answer: C Diff: 3 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

32) If national saving increases, ________. (Assume that the capital account is zero and net transfers are zero.) A) the sum of domestic investment and net exports must decrease B) the sum of domestic investment and foreign investment must increase C) the sum of domestic investment and foreign investment must decrease D) foreign investment must decrease to cover the gain E) domestic investment must increase Answer: B Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 33) The level of saving in Canada has historically been low relative to the level of domestic investment. Based on this information, we would expect that A) Canadian net foreign investment has been relatively high. B) Canadian net exports have been relatively low. C) Canadian capital inflows are negative. D) Canadian private saving is less than its public saving. E) Canadian public savings has been low. Answer: B Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 34) If net foreign investment in Canada is positive, how must national saving and domestic investment be related? (Assume that the capital account is zero and net transfers are zero.) A) Domestic investment and national saving must also be positive. B) Domestic investment must be less than national saving. C) Domestic investment must be greater than national saving. D) Domestic investment can be greater than or less than national saving. E) Domestic investment must be falling. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 35) Investment (I) in Canada may increase with either an increase in national saving or an increase in net foreign investment. Answer: FALSE Diff: 2 Type: TF Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

36) In Canada, domestic investment is greater than national saving. Answer: TRUE Diff: 1 Type: TF Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 37) An increase in net foreign investment is possible through a decrease in national saving or a decrease in domestic investment. Answer: FALSE Diff: 2 Type: TF Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 38) Saving exceeds domestic investment in Japan, which generates a financial account deficit in Japan's balance of payments. Answer: TRUE Diff: 2 Type: TF Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 39) Based on the following information, calculate public saving, net foreign investment, and national income. Assume that the capital account is zero and net transfers are zero. private saving = $145 billion exports = $285 billion imports = $240 billion consumption = $600 billion private investment = $125 billion government purchases = $75 billion Answer: Based on the macroeconomic equation for national income, Y = C + I + G + NX = 600 + 125 + 75 + 45 = $845 billion. Since net exports are $45 billion, net foreign investment must also be . According to the saving and investment equation, national saving = domestic investment plus net foreign investment. Based on the numbers provided, domestic investment plus net foreign investment = $125 billion + $45 billion = $170 billion. This $170 billion comes from private and public saving. Since private saving is $145 billion, it must be the case that public saving is $25 billion, so the government is running a budget surplus of $25 billion. Diff: 3 Type: SA Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills Special Feature: Solved Problem: Arriving at the Saving and Investment Equation

40) If you know that a country's net foreign investment is positive, what does that tell you about the relationship between the country's national saving and private investment? (Assume that the capital account is zero and net transfers are zero.) Answer: For any country, national saving must equal investment, where investment is the sum of domestic private investment and net foreign investment (S = I + NFI). Rearranging the saving and investment equation, NFI = S - I, so that if a country has positive net foreign investment, it must be saving more than it is investing domestically. Diff: 2 Type: SA Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 41) Does the saving and investment equation imply that a country's national saving must always equal its domestic investment? Explain. Answer: No. In an open economy, the saving and investment equation implies that a country's national saving must always equal domestic investment plus net foreign investment. Diff: 1 Type: SA Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 42) Use the saving and investment equation to explain why Canada experienced large current account deficits in the late 1990s. Answer: Investment in Canada was greater than saving in the late 1990s, so net foreign investment was negative. Net foreign investment equals net exports, which approximately equals the current account balance. Negative net foreign investment implies a current account deficit. Diff: 2 Type: SA Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

14.5

Explain the effect of a government budget deficit on investment in an open economy

1) How might a budget deficit affect the balance of trade? A) A budget deficit raises interest rates, which raises exchange rates and increases the balance of trade. B) A budget deficit raises interest rates, which raises exchange rates and reduces the balance of trade. C) A budget deficit reduces interest rates, which raises exchange rates and reduces the balance of trade. D) A budget deficit reduces interest rates, which reduces exchange rates and reduces the balance of trade. E) A budget deficit raises interest rates, which reduces exchange rates, and reduces the balance of trade. Answer: B Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 2) What impact might an increase in the budget deficit have on interest rates and exchange rates? A) Interest rates and exchange rates increase. B) Interest rates increase and exchange rates decrease. C) Interest rates decrease and exchange rates increase. D) Interest rates and exchange rates decrease. E) Interest rates rise and exchange rates are unchanged. Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 3) How does an increase in the budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market? A) The demand for dollars falls, and the supply of dollars falls. B) The demand for dollars rises, and the supply of dollars rises. C) The demand for dollars rises, and the supply of dollars falls. D) The demand for dollars falls, and the supply of dollars rises. E) The demand for dollars and the supply of dollars remains unchanged. Answer: C Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

4) How would a decrease in the Canadian budget deficit affect the exchange rate in the market for dollars? A) The exchange rate will increase. B) The exchange rate will decrease. C) The quantity of dollars traded for foreign currencies will rise. D) The exchange rate will not be affected by a change in the budget deficit. E) The impact of the decrease in the budget deficit on the exchange rate cannot be predicted. Answer: B Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 5) What two measures of macroeconomic activity are often referred to as the "twin deficits"? A) net capital flows and net exports B) the foreign exchange deficit and net foreign investment C) the budget deficit and net exports D) the saving-investment deficit and the export deficit E) household and corporate debt Answer: C Diff: 2 Type: MC Topic: Twin Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 6) An increase in federal government budget deficits that raises Canadian interest rates relative to the rest of the world should A) raise the trade balance. B) increase net exports. C) cause the dollar to depreciate. D) lead to a current account deficit. E) decrease foreign portfolio investment. Answer: D Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytic Skills

7) Which of the following is true about the occurrence of the twin deficits? A) They always occur together. B) They only occur when exchange rates are fixed. C) They did not occur in Canada between 1997 and 2007. D) They occur consistently in all the economies of the world except Canada. E) They only occur during large expansions. Answer: C Diff: 2 Type: MC Topic: Twin Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 8) The ability of the United States to run current account deficits A) can be seen as a vote of confidence in the strength of the U.S. economy. B) causes persistent declines in investment in the United States. C) causes U.S. investors to accumulate more foreign assets than foreign investors accumulate U.S. assets. D) will eventually cause the value of the dollar to rise. E) is the result of ultra low interest rates in the rest of the world. Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 9) The United States is called a debtor nation because A) it has a large current account deficit that is simultaneously funded by foreign investment. B) it has a large financial account deficit that is used to fund the current account deficit. C) it has a large balance of payments deficit that is used to fund the current account deficit. D) U.S. capital outflows are much greater than U.S. capital inflows. E) U.S. households finance the majority of their purchases using credit cards (debt). Answer: A Diff: 3 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 10) An increase in the government budget deficit will not lead to a current account deficit if domestic investment declines. Answer: TRUE Diff: 3 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytic Skills

11) The large budget deficits of the early 1990s resulted in large current account deficits. Answer: FALSE Diff: 2 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 12) Ceteris paribus, an increase in the government budget deficit increases interest rates in Canada and causes a real appreciation of the dollar. Answer: FALSE Diff: 3 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 13) Explain why the budget deficit and the trade deficit are sometimes referred to as the "twin deficits." Answer: When the government runs a budget deficit, the government is spending more than it is receiving in net taxes. As the government reduces its saving, the interest rate will rise. With higher interest rates, firms will reduce domestic investment, capital outflows will fall, and capital inflows will rise. As a result, net foreign investment will also fall. Since net foreign investment is equal to net exports, as net foreign investment falls, so will net exports. Diff: 2 Type: ES Topic: Twin Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

14) How does an increase in government purchases financed by an increase in the deficit affect exchange rates? Support your answer with graphs of the loanable funds market and the foreign exchange market. Answer: An increase in government purchases financed by an increase in the deficit will reduce the supply of loanable funds, thereby increasing the interest rate, as shown below. The increase in the interest rate will increase the demand for dollars (as capital inflows increase) and reduce the supply of dollars (as capital outflows decrease). Both the increase in the demand for dollars and the decrease in the supply of dollars will increase the equilibrium exchange rate, as shown below.

Diff: 2 Type: ES Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytic Skills

15) A federal budget deficit ________ interest rates, which ________ exchange rates (foreign currency per domestic currency) and ________ the balance of trade. A) raises; raises; reduces B) reduces; raises; reduces C) raises; reduces; reduces D) reduces; reduces; raises E) raises; raises; raises Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 16) What impact might a decrease in the Canadian federal budget deficit have on interest rates and exchange rates in the market for the Canadian dollar? (Assume the exchange rate is stated in terms of foreign currency per Canadian dollar.) A) Interest rates and exchange rates increase. B) Interest rates increase and exchange rates decrease. C) Interest rates decrease and exchange rates increase. D) Interest rates and exchange rates decrease. E) Interest rates decrease and the exchange rate remains constant. Answer: D Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 17) How might a Canadian federal budget surplus affect the balance of trade? (Assume exchange rates are stated in terms of foreign currency per Canadian dollar.) A) A federal budget surplus raises interest rates, which raises exchange rates and increases the balance of trade. B) A federal budget surplus raises interest rates, which raises exchange rates and reduces the balance of trade. C) A federal budget surplus reduces interest rates, which raises exchange rates and reduces the balance of trade. D) A federal budget surplus reduces interest rates, which reduces exchange rates and increases the balance of trade. E) A federal budget surplus reduces interest rates, which raises exchange rates and increases the balance of trade. Answer: D Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

18) How does a decrease in the federal budget deficit affect the demand for Canadian dollars and the supply of Canadian dollars on the foreign exchange market? A) The demand for Canadian dollars falls, and the supply of Canadian dollars falls. B) The demand for Canadian dollars rises, and the supply of Canadian dollars rises. C) The demand for Canadian dollars rises, and the supply of Canadian dollars falls. D) The demand for Canadian dollars falls, and the supply of Canadian dollars rises. E) The demand for Canadian dollars and the supply of Canadian dollars remains unchanged. Answer: D Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 19) How would an increase in the Canadian federal budget deficit affect the exchange rate in the market for Canadian dollars? A) The exchange rate will increase. B) The exchange rate will decrease. C) The exchange rate will not be affected by a change in the federal budget deficit. D) The impact of the increase in the federal budget deficit on the exchange rate cannot be predicted. E) The demand for Canadian dollars and the supply of Canadian dollars remain unchanged. Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 20) The federal budget deficit and the trade balance are often referred to as the A) balance of payments. B) dueling depreciators. C) twin deficits. D) national debt. E) dynamic duo. Answer: C Diff: 2 Type: MC Topic: Twin Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

21) A decrease in Canadian federal government budget deficits that lowers Canadian interest rates relative to the rest of the world should A) lower the trade balance. B) decrease net exports. C) cause the dollar to appreciate. D) lead to a current account surplus. E) increase foreign portfolio investment. Answer: E Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytic Skills 22) The current account deficits incurred by the United States in the 1980s were caused, in the opinion of many economists, by A) federal budget deficits. B) "flight to quality" as foreign investors favoured U.S. investments. C) a sharp decline in private saving. D) accelerating economic growth in the U.S. economy. E) increased foreign portfolio investment. Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 23) The current account deficits incurred by the United States in the 1990s and early 2000s were caused, in the opinion of many economists, by A) federal budget deficits. B) "flight to quality" as foreign investors favoured U.S. investments. C) a sharp decline in private saving. D) the U.S. economy enjoying the fastest growth in its history. E) both B and C. Answer: E Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

24) Persistent current account deficits for the United States have A) decreased investment in new plants and equipment. B) slowed economic growth. C) increased government budget deficits. D) increased consumer debt. E) None of the above is correct. Answer: E Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 25) In 2020, ________ of U.S. workers were employed in manufacturing. A) 8 percent B) 12 percent C) 33 percent D) 47 percent Answer: A Diff: 1 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytical Thinking Special Feature: Apply the Concept: Will Apple Start Manufacturing iPhones in the United States? 26) From 1972 to 2020, U.S. manufacturing output has ________ and U.S. manufacturing employment has ________. A) increased; increased B) increased; declined C) declined; increased D) declined; declined Answer: B Diff: 1 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytical Thinking Special Feature: Apply the Concept: Will Apple Start Manufacturing iPhones in the United States? 27) Ceteris paribus, an increase in the government's budget deficit will increase the current account deficit. Answer: TRUE Diff: 2 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

28) Ceteris paribus, an increase in the government's budget deficit will decrease the financial account surplus. Answer: FALSE Diff: 3 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 29) Ceteris paribus, a decrease in the government's budget deficit will increase domestic investment and net foreign investment. Answer: TRUE Diff: 3 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 30) An increase in perceived risk of foreign assets increased both the financial account surplus and current account deficit in the United States during the late 1990s. Answer: TRUE Diff: 1 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 31) What happens to national saving when the government runs a budget surplus? What happens to national saving when the government runs a budget deficit? Answer: National saving increases when the government runs a budget surplus unless private saving decreases by the amount of the budget surplus, which is unlikely. National saving decreases when the government runs a budget deficit unless private saving increases by the amount of the budget deficit, which is also unlikely. Diff: 1 Type: SA Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

32) Why does continued foreign investment in U.S. stocks and bonds, and foreign companies continuing to build factories in the United States, result in a current account deficit in the United States? Answer: The willingness of foreign investors and companies to purchase financial and physical assets in the United States leads to a U.S. financial account surplus. If the United States runs a financial account surplus, it must run a current account deficit. Diff: 2 Type: SA Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

14.6 Compare the Effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy 1) Expansionary monetary policy will have what effect on the components of aggregate demand? A) Consumption, investment, and net exports will rise. B) Consumption and investment will rise, but net exports will fall. C) Consumption will rise, but investment and net exports will fall. D) Consumption will fall, but investment and net exports will rise. E) Consumption and investment will rise, but government spending and net exports will fall. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 2) Which of the following is not "crowded out" by higher interest rates as a result of expansionary fiscal policy? A) household consumption B) private investment C) net exports D) government spending E) household investment Answer: D Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

3) If the Bank of Canada does not take into account the additional policy channels available in an open economy, then ________ when conducting contractionary monetary policy. A) it is likely to decrease GDP too much and cause a recession B) it is likely to decrease GDP too little and inflation will persist C) it is likely to increase GDP too much and inflation will persist D) it is likely to increase GDP too little and cause a recession E) it is likely to decrease GDP too little and cause deflation Answer: A Diff: 3 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Analytic Skills 4) If the government finances an increase in government purchases with an increase in taxes, which of the following would you not expect to see? A) an increase in the exchange rate B) a decrease in the interest rate C) an increase in aggregate demand D) a decrease in net exports E) a decrease in private investment Answer: B Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 5) How does expansionary monetary policy affect net exports? A) Expansionary monetary policy increases exports and reduces imports. B) Expansionary monetary policy reduces exports and increases imports. C) Expansionary monetary policy increases exports and increases imports. D) Expansionary monetary policy reduces exports and reduces imports. E) Expansionary monetary policy has no impact on exports or imports. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

6) Suppose the Bank of Canada pursues a policy that leads to higher interest rates in Canada. How will this policy affect real GDP in the short run given that Canada is an open economy? This policy A) reduces investment spending, consumption spending and net exports, all of which reduce GDP. B) reduces investment spending and consumption spending, both of which reduce GDP. Net exports rise, which increases GDP. C) reduces investment spending and consumption spending, both of which reduce GDP. Net exports fall, which increases GDP. D) increases investment spending, consumption spending, and net exports, all of which increase GDP. E) reduces investment spending and net exports, both of which raise GDP. Consumption spending rises, which increases GDP. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 7) Why is the multiplier for contractionary fiscal policy smaller in an open economy? A) Contractionary fiscal policy reduces the deficit, which raises the interest rate, which raises the foreign exchange value of the dollar, which increases net exports. B) Contractionary fiscal policy increases the deficit, which raises the interest rate, which reduces the foreign exchange value of the dollar, which increases net exports. C) Contractionary fiscal policy reduces the deficit, which reduces the interest rate, which reduces the foreign exchange value of the dollar, which increases net exports. D) Contractionary fiscal policy reduces the deficit, which reduces the interest rate, which reduces the foreign exchange value of the dollar, which decreases net exports. E) Contractionary fiscal policy reduces the deficit, which raises the interest rate, which in turn increases foreign investment. Answer: C Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 8) If the Bank of Canada is using policy to combat inflation, what is likely to happen in the foreign exchange market and to the foreign exchange value of the dollar? A) The demand for the dollar will increase, and the foreign exchange value of the dollar will rise. B) The demand for the dollar will decrease, and the foreign exchange value of the dollar will rise. C) The demand for the dollar will increase, and the foreign exchange value of the dollar will fall. D) The demand for the dollar will decrease, and the foreign exchange value of the dollar will fall. E) The supply of the dollar will decrease, and the foreign exchange value of the dollar will fall. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 106 Copyright © 2024 Pearson Canada Inc.

9) Which of the following would you expect to increase both interest rates and exchange rates? A) expansionary monetary policy B) contractionary monetary policy C) expansionary fiscal policy D) contractionary fiscal policy E) Both B and C will increase both interest rates and exchange rates. Answer: E Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 10) The impact of crowding out A) is larger in a closed economy as compared to an open economy. B) is larger in an open economy as compared to a closed economy. C) is larger in an open economy as compared to a closed economy when fiscal policy is contractionary. D) is larger in a closed economy as compared to an open economy when fiscal policy is contractionary. E) is larger in a closed economy for expansionary fiscal policy, but larger in an open economy for contractionary fiscal policy. Answer: B Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 11) Monetary policy has a ________ effect on aggregate demand in a(n) ________ economy, and fiscal policy has a ________ effect on aggregate demand in a(n) ________ economy. A) weaker; open; weaker; open B) weaker; closed; weaker; closed C) stronger; open; weaker; open D) stronger; closed; weaker; open E) weaker; closed; stronger; closed Answer: C Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 12) Monetary policy has a greater impact in an open economy than it does in a closed economy. Answer: TRUE Diff: 2 Type: TF Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 107 Copyright © 2024 Pearson Canada Inc.

13) Expansionary fiscal policy should raise the exchange rate of the dollar. Answer: TRUE Diff: 2 Type: TF Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 14) Contractionary monetary policy should increase foreign financial investment in Canada. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 15) Is fiscal policy more or less effective in manipulating aggregate demand in an open economy? Answer: Expansionary fiscal policy (as from tax cuts or increases in government spending) will increase aggregate demand. However, expansionary fiscal policy can result in higher interest rates if government or private saving falls as a result of expansionary fiscal policy. The higher interest rates reduce not only consumption and investment, but they also reduce net exports. That is, the crowding out effect may be much larger than in the case of a closed economy. Because the impact of expansionary fiscal policy has a negative impact on net exports that does not exist in a closed economy, fiscal policy has a smaller impact on aggregate demand in an open economy than in a closed economy. Diff: 2 Type: ES Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 16) How is the impact of contractionary monetary policy different in an open economy than in a closed economy? Answer: In an open economy, the higher interest rate resulting from contractionary monetary policy will affect not only consumption and domestic investment, but it will also affect net exports and net capital flows. Higher interest rates will increase capital inflows and reduce capital outflows, resulting in an increase in the exchange rate which will reduce net exports. The result is that monetary policy has a stronger effect in an open economy than in a closed economy. Diff: 2 Type: ES Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

17) How is the impact of expansionary fiscal policy different in an open economy than in a closed economy? Answer: In a closed economy, expansionary fiscal policy raises aggregate demand through higher government spending. If the higher spending level is financed by government borrowing, this increase in the deficit raises interest rates and crowds out private consumption and investment. However, the direct effect of higher government spending is strong enough to result in an increase in aggregate demand. In an open economy, however, the higher interest rate that results from an increase in the deficit also raises exchange rates, which will reduce net exports. Since net exports are also a component of aggregate demand, the impact of expansionary fiscal policy in increasing aggregate demand is more limited in an open economy than in a closed economy. Diff: 2 Type: ES Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 18) Suppose the Bank of Canada purchases government securities. Interest rates in Canada will ________, and the Canadian dollar will ________ against foreign currencies. A) decrease; appreciate B) decrease; depreciate C) increase; depreciate D) increase; appreciate E) remain unchanged; appreciate Answer: B Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 19) If the Bank of Canada pursues an expansionary monetary policy, investment in Canada will ________, and net exports will ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) remain unchanged; appreciate Answer: D Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

20) Suppose the government cuts taxes. We would expect interest rates to ________ and the dollar to ________ in foreign exchange markets. A) rise; appreciate B) rise; depreciate C) fall; depreciate D) fall; appreciate E) remain unchanged; appreciate Answer: A Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 21) Following a tax cut by government, domestic investment will ________, and net exports will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) remain unchanged; increase Answer: D Diff: 3 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 22) How will contractionary monetary policy in Japan affect the demand for yen and the supply of yen in the foreign exchange market? A) The demand for yen will fall, and the supply of yen will increase. B) The demand for yen will increase, and the supply of yen will fall. C) The demand for yen will fall, and the supply of yen will fall. D) The demand for yen will increase, and the supply of yen will remain unchanged. E) The demand for yen will remain unchanged, and the supply of yen will increase. Answer: B Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

23) In an open economy, expansionary monetary policy will cause A) consumption, investment, and net exports to rise. B) consumption and investment to rise, but net exports will fall. C) consumption to rise, but investment and net exports will fall. D) consumption to fall, but investment and net exports will rise. E) consumption and investment to fall, but net exports will rise. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 24) Which of the following is "crowded out" by higher interest rates that can be the result of expansionary fiscal policy? A) consumption B) private investment C) net exports D) All of the above are crowded out by higher interest rates. E) None of the above are crowded out by higher interest rates. Answer: D Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 25) If the government finances an increase in government purchases with an increase in taxes, which of the following would you expect to see? A) an increase in the exchange rate B) a decrease in the interest rate C) a decrease in aggregate demand D) an increase in net exports E) an increase in investment Answer: A Diff: 3 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

26) How does contractionary monetary policy affect net exports in the short run? A) Contractionary monetary policy increases exports and reduces imports. B) Contractionary monetary policy reduces exports and increases imports. C) Contractionary monetary policy increases exports and increases imports. D) Contractionary monetary policy reduces exports and reduces imports. E) Contractionary monetary policy has no effect on exports or imports. Answer: B Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 27) Which of the following would you expect to decrease both interest rates and exchange rates? (Assume exchange rates are stated in terms of foreign currency per domestic currency.) A) contractionary monetary policy B) expansionary monetary policy C) contractionary fiscal policy D) expansionary fiscal policy E) Both B and C will decrease both interest rates and exchange rates. Answer: E Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 28) Monetary policy has a ________ effect on aggregate demand in a(n) ________ economy, and fiscal policy has a ________ effect on aggregate demand in a(n) ________ economy. A) weaker; open; weaker; open B) weaker; closed; stronger; closed C) stronger; open; weaker; closed D) stronger; closed; weaker; open E) stronger; open; stronger; closed Answer: B Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

29) A decision by foreign central banks to sell their holdings of Canadian bonds will A) lower bond prices and interest rates in Canada. B) increase bond prices and interest rates in Canada. C) increase bond prices and lower interest rates in Canada. D) lower bond prices and increase interest rates in Canada. E) have no effect on bond prices or interest rates in Canada. Answer: D Diff: 2 Type: MC Topic: Changes in Bond Holdings and Interest Rates Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: The South Korean Central Bank and Your Car Loan 30) Expansionary monetary policy lowers interest rates and forces a real appreciation of the dollar in international currency markets. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 31) Expansionary fiscal policy crowds out both domestic investment and net exports. Answer: TRUE Diff: 2 Type: TF Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 32) Fiscal policy has a greater impact in a closed economy than it does in an open economy. Answer: TRUE Diff: 2 Type: TF Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 33) Contractionary monetary policy and expansionary fiscal policy both reduce net exports in an open economy. Answer: TRUE Diff: 3 Type: TF Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

34) How will an increase in federal government spending without an increase in taxes affect real GDP and the price level in the short run in a closed economy and in an open economy? Answer: In a closed economy, an expansionary fiscal policy directly increases aggregate demand, leading to an increase in real GDP and in the price level. An expansionary fiscal policy also results in the crowding out effect as higher interest rates lower domestic investment and purchases of consumer durables. In an open economy, an expansionary fiscal policy also directly results in an increase in aggregate demand and, therefore, an increase in real GDP and in the price level. However, in addition to lower domestic investment, higher interest rates in an open economy also lead to an increase in the country's foreign exchange rate (when stated in terms of foreign currency per domestic currency), which decreases net exports. The crowding out effect in an open economy is therefore larger than in a closed economy. Diff: 2 Type: SA Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 35) How is the impact of expansionary monetary policy different in an open economy than in a closed economy? Answer: In an open economy, the lower interest rate resulting from expansionary monetary policy will affect not only consumption and domestic investment, but it will also affect net exports and net capital flows. Lower interest rates will decrease capital inflows and increase capital outflows, resulting in a decrease in the exchange rate (when stated in terms of foreign currency per domestic currency) which will increase net exports. The result is that monetary policy has a stronger effect in an open economy than in a closed economy. Diff: 2 Type: SA Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 36) Suppose that Bank of Canada policy leads to higher interest rates in Canada. How will this policy affect real GDP in the short run if Canada is a closed economy, and how will it affect real GDP in the short run if Canada is an open economy? Answer: For a closed economy, higher interest rates decrease domestic investment spending and purchases of consumer durables in the short run so that real GDP decreases. For an open economy, higher interest rates decrease domestic investment spending and purchases of consumer durables, as they do in a closed economy. However, in an open economy, higher interest rates also raise the value of the dollar in the foreign exchange market. As a result, net exports will decrease and, therefore, the decrease in real GDP is larger for an open economy than for a closed economy. Diff: 2 Type: SA Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

14.7

Explain the gold standard and the Bretton Woods system

1) Suppose Mexico and the United States are on the gold standard. If there is a half an ounce of gold in the dollar, and one quarter an ounce of gold in the peso, then the exchange rate is A) $1 = 2 pesos. B) $1 = 4 pesos. C) $1 = 1/2 peso. D) $1 = 1/3 peso. E) $1 = 1/4 peso. Answer: A Diff: 2 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 2) Suppose Canada decides to adopt the gold standard. This should A) decrease the Bank of Canada's ability to pursue active monetary policy. B) increase the effectiveness of contractionary monetary policy. C) increase the effectiveness of expansionary monetary policy. D) improve the Bank of Canada's ability to target inflation. Answer: A Diff: 2 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 3) Countries that abandoned the gold standard early in the Great Depression suffered an average decline in production of 3 percent between 1929 and 1934. Countries that stayed on the gold standard until 1933 or later suffered an average decline in production of A) 5 percent. B) 12 percent. C) 18 percent. D) 24 percent. E) > 30 percent. Answer: E Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

4) A decrease in a fixed exchange rate from $1.75 per pound to $1.60 per pound is called a(n) ________ of the pound. A) devaluation B) depreciation C) appreciation D) revaluation E) affirmation Answer: A Diff: 1 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 5) A persistent surplus of pounds at a given fixed exchange rate (in dollars per pound) is evidence that the pound is ________ versus the dollar. This surplus can be reduced or eliminated through a ________ of the pound. A) undervalued; devaluation B) undervalued; revaluation C) overvalued; revaluation D) overvalued; devaluation E) appreciated; revaluation Answer: D Diff: 2 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 6) In order to support an undervalued euro, the European Central Bank must ________ dollars. Over time, this action will cause the rate of inflation in the EU to ________. A) buy; decrease B) buy; increase C) sell; increase D) sell; decrease E) sell; stay constant Answer: B Diff: 3 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

7) The Bretton Woods system confronted severe problems in the 1960s, problems which included A) some countries with overvalued currencies refused to devalue their currencies. B) dollars held by foreign central banks exceeded gold reserves held by the United States. C) the increased demand for gold brought about by lifting the prohibition against U.S. citizens owning gold. D) most European countries tightened their capital controls. E) all of the above. Answer: B Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking Figure 14.5

8) Refer to Figure 14.5. Under the Bretton Woods System of exchange rates, if the par exchange rate was $4 per pound in the figure above, then which of the following is true? A) The Bank of England would have to buy 0.7 million pounds per day with dollars. B) There is a shortage of pounds equal to 0.7 million. C) The Bank of England would have to sell 0.7 million pounds per day in exchange for dollars. D) The par exchange rate is below the equilibrium rate, causing a shortage of domestic currency. E) The Bank of England would have to buy 0.3 million pounds per day in exchange for dollars. Answer: A Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

9) Refer to Figure 14.5. Under the Bretton Woods System of exchange rates, if the par exchange rate was $2 per pound in the figure above, and equilibrium persisted at $3, then this was evidence of ________ and the IMF would allow a ________ in the exchange rate. A) fundamental disequilibrium; revaluation B) fundamental disequilibrium; devaluation C) fundamental overvaluation; devaluation D) fundamental overvaluation; revaluation E) fundamental revaluation; devaluation Answer: A Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 10) Refer to Figure 14.5. Under the Bretton Woods System of exchange rates, if the par exchange rate was $2 per pound in the figure above, and equilibrium persisted at $3, then a revaluation of the currency would have A) increased the price of British exports to the United States. B) increased the price of imports to Britain. C) led to a current account surplus. D) led to a balance of trade surplus. E) brought the exchange rate to the equilibrium. Answer: A Diff: 3 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

Figure 14.6

11) Refer to Figure 14.6. The graph above depicts supply and demand for British pounds during a trading day, where the quantity is millions of pounds. In order to support a fixed exchange rate of $2.00 per pound, the British central bank must A) buy 0.6 million pounds per trading day. B) sell 0.6 million pounds per trading day. C) buy 1.2 million pounds per trading day. D) sell 1.2 million pounds per trading day. E) leave it to market forces to bring it back to the equilibrium. Answer: C Diff: 2 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 12) Refer to Figure 14.6. The graph above depicts supply and demand for British pounds during a trading day. At a fixed exchange rate of $2.00 per pound, the pound is ________ versus the dollar. A ________ of the pound would correct the fundamental disequilibrium that exists in this market. A) undervalued; devaluation B) undervalued; revaluation C) overvalued; revaluation D) overvalued; devaluation E) appreciated; revaluation Answer: D Diff: 3 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

13) Suppose the U.S. dollar is backed by one-sixth of an ounce of gold and the British pound is backed by one-third of an ounce of gold. The exchange rate between the U.S. dollar and the British pound equals ________ per pound. A) $0.50 B) $1.00 C) $1.50 D) $2.00 E) $2.50 Answer: D Diff: 2 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 14) In 1931, the first major country to abandon the gold standard–in order to increase its policy options in face of the Great Depression–was A) Great Britain. B) the United States. C) Germany. D) France. E) Canada. Answer: A Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 15) When the Bretton Woods system was set up, the United States agreed initially to buy and sell gold at a price of ________ per ounce. A) $24 B) $35 C) $42 D) $48 E) $52 Answer: B Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

16) Americans, other than jewelers or rare coin collectors, were not allowed to own gold from the early 1930s until the A) 1950s. B) 1960s. C) 1970s. D) 1980s. E) 1990s. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 17) Under the Bretton Woods system, a fixed exchange rate supported by central banks was known as a(n) ________ exchange rate. A) par B) equilibrium C) fundamental D) target E) standard Answer: A Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 18) A persistent shortage or surplus of a currency under the Bretton Woods system was evidence of A) failure to support the existing fixed exchange rate by central banks. B) fundamental disequilibrium in the country's exchange rate. C) speculation against the currency by speculators in world exchange markets. D) inefficiency of the government to pursue an effective policy. E) all of the above. Answer: B Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

19) An increase in a fixed exchange rate from $2.00 per pound to $2.10 per pound is called a(n) ________ of the pound. A) devaluation B) depreciation C) appreciation D) revaluation E) overvaluation Answer: D Diff: 1 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking Figure 14.7

20) Refer to Figure 14.7. The graph above depicts supply and demand for Canadian dollars during a trading day, where the quantity is millions of dollars. In order to support a fixed exchange rate of 0.30 pounds per dollar, the Bank of Canada must A) buy 0.4 million dollars per trading day. B) sell 0.4 million dollars per trading day. C) buy 0.8 million dollars per trading day. D) sell 0.8 million dollars per trading day. E) leave it to market forces of supply and demand to adjust. Answer: D Diff: 2 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

21) Refer to Figure 14.7. The graph above, depicts supply and demand for U.S. dollars during a trading day. At a fixed exchange rate of 0.30 pounds per dollar, the dollar is ________ versus the pound. A ________ of the dollar would correct the fundamental disequilibrium that exists in this market. A) undervalued; devaluation B) undervalued; revaluation C) overvalued; revaluation D) overvalued; devaluation E) appreciated; devaluation Answer: B Diff: 3 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 22) A persistent shortage of yen at a given fixed exchange rate (in dollars per yen) is evidence that the yen is ________ versus the dollar. This shortage can be reduced or eliminated through a ________ of the yen. A) undervalued; devaluation B) undervalued; revaluation C) overvalued; revaluation D) overvalued; devaluation E) appreciated; devaluation Answer: B Diff: 2 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 23) Limits on the flow of foreign exchange and financial investment across countries are called A) capital controls. B) fixed exchange rates. C) credit constraints. D) currency restrictions. E) financial barriers. Answer: A Diff: 1 Type: MC Topic: Capital Controls Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

24) If speculators believe a currency is undervalued, their trades in international exchange markets will A) increase the surplus of the currency at the existing fixed exchange rate. B) decrease the surplus of the currency at the existing fixed exchange rate. C) decrease the shortage of the currency at the existing fixed exchange rate. D) increase the shortage of the currency at the existing fixed exchange rate. E) have no effect on the quantity of the currency. Answer: D Diff: 1 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 25) Under the Bretton Woods system, central bankers could obtain foreign currency loans from the A) U.S. Treasury Department. B) World Trade Organization. C) International Monetary Fund. D) Bank of England. E) The World Bank. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 26) The International Monetary Fund was created to facilitate the borrowing and lending of dollar reserves to central banks of the countries participating in the Bretton Wood System. Answer: TRUE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 27) Under the Bretton Woods system, the World Trade Organization (WTO) provided foreign currency loans to central banks and approved adjustments to the agreed upon fixed exchange rates. Answer: FALSE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 28) In order to reduce or eliminate a chronic shortage in the market for a currency under a fixed exchange rate system, we must devalue the currency. Answer: FALSE Diff: 2 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

29) If speculators believe a currency is soon going to be revalued, they will increase their demand for that currency. Answer: TRUE Diff: 2 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 30) The German central bank, the Bundesbank, faced the risk of increased inflation caused by its actions to support an overvalued deutsche mark in the 1960s. Answer: FALSE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 31) Increasing a fixed exchange rate is called a revaluation. Answer: TRUE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 32) If the equilibrium exchange rate exceeds the par exchange rate in the market for pounds, the pound is overvalued. Answer: FALSE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 33) In a fixed exchange rate system, speculation regarding an expected revaluation or devaluation of a currency makes it more difficult to maintain the existing exchange rate. Answer: TRUE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 34) By the late 1950s, dollars held by foreign central banks exceeded the official dollar value of U.S. gold reserves. Answer: FALSE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

35) What is the difference between a devaluation and a revaluation of a currency? Answer: A devaluation is a reduction in a fixed exchange rate and a revaluation is an increase in a fixed exchange rate. Diff: 1 Type: SA Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 36) What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system? Answer: Destabilizing speculation refers to actions by investors that make it more difficult to maintain a fixed exchange rate. Destabilizing speculation in 1971 against the German mark led to the collapse of the Bretton Woods System. Investors became convinced in early 1971 that Germany would have to allow a revaluation of the mark against the dollar. Investors increased their demand for marks, which increased the shortage of marks. The West German government finally opted out of the fixed exchange-rate system and allowed the mark to float against the dollar. Diff: 2 Type: SA Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 37) What determined the exchange rates among currencies under the gold standard, and what caused the gold standard to collapse? Answer: Under the gold standard, the exchange rate between two currencies was automatically determined by the quantity of gold in each currency. The gold standard collapsed during the Great Depression because countries wanted to fight the Depression with expansionary monetary policy, but under the gold standard the central banks lacked control of the money supply. Diff: 1 Type: SA Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 38) Briefly describe how the Bretton Woods system operated. Answer: Under the Bretton Woods System of fixed exchange rates, the United States pledged to buy or sell gold at a fixed price of $35 per ounce and the central banks of the member countries pledged to buy and sell their currencies at a fixed rate against the dollar. If a shortage or surplus of a country's currency occurred at the fixed exchange rate (also known as the par exchange rate), the central bank of the member country would buy or sell dollars with their currency to maintain the fixed exchange rate. Diff: 2 Type: SA Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking