TEST BANK for Microeconomics 16th Canadian Edition by Christopher Ragan.

TEST BANK for Microeconomics 16th Canadian Edition by Christopher Ragan.

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Economics - Canadian Edition, 16e (Ragan) Chapter 1 Economic Issues and Concepts 1.1 What Is Economics? 1) Which of the following statements provides the best definition of economics? A) The study of the most equitable distribution of scarce resources. B) The study of the use of scarce resources to satisfy unlimited human wants. C) The study of the production of goods and services. D) The study of the productive capacity of a nation's factors of production. E) The study of production and increasing its efficiency. Answer: B Diff: 1 Type: MC Topic: 1.1a. economics/resources Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 2) Society's resources are often divided into broad categories. They are A) goods and services. B) factors of consumption. C) land, labour, and capital. D) population and natural resources. E) tangible commodities and intangible commodities. Answer: C Diff: 1 Type: MC Topic: 1.1a. economics/resources Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

3) Consider the following list: a worker with training in video gaming technology, 10 hectares of arable land in southern Ontario, a fishing trawler in Nova Scotia, an ice-cream truck at a park in Quebec. Each of these is an example of A) a factor of production. B) a capital resource. C) a commodity. D) goods and services. E) an economic service. Answer: A Diff: 1 Type: MC Topic: 1.1a. economics/resources Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 4) Which of the following is NOT considered a "factor of production" in economics? A) the espresso machine at your local cafe B) the barista who makes the coffee C) the espresso drink you purchase D) the wood stir sticks E) the land on which the cafe sits Answer: C Diff: 2 Type: MC Topic: 1.1a. economics/resources Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

5) Consider the following factors of production: - a pharmaceutical research centre - a hairstylist's scissors - Google headquarters - a cloud computing system - a stapler at a checkout counter. Each of these is an example of A) land. B) goods. C) services. D) capital. E) labour. Answer: D Diff: 2 Type: MC Topic: 1.1a. economics/resources Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 6) In economics, what word is used to describe the act of using goods or services to satisfy wants? A) consumption B) production C) purchasing power D) investment E) shopping Answer: A Diff: 2 Type: MC Topic: 1.1a. economics/resources Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

7) A basic underlying point in economics is that A) people have unlimited wants in the face of limited resources. B) there are unlimited resources. C) governments should satisfy the needs of the people. D) people have limited wants in the face of limited resources. E) governments should never interfere in the workings of a market economy. Answer: A Diff: 1 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 8) Which of the following best describes the study of economics? A) how to plan an economy B) how to limit human wants so that scarce resources are sufficient C) why resources are scarce D) the allocation of scarce resources among alternative uses E) how to distribute income as equally as possible Answer: D Diff: 1 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 9) Economics can best be described as A) the study of how a society ought to allocate its resources. B) the study of the use of scarce resources to satisfy unlimited human wants. C) the application of sophisticated mathematical models to address social problems. D) a normative science. E) the study of how to reduce inflation and unemployment. Answer: B Diff: 1 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

10) Scarcity is likely to be A) a problem that will be solved by the proper use of available resources. B) unique to the twenty-first century. C) a problem that will always exist. D) a result of the work ethic. E) eliminated with a better understanding of economics. Answer: C Diff: 2 Type: MC Topic: 1.1b. scarcity and choice Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 11) Which of the following statements best describes the economic concept of scarcity? A) Society is not employing all of its available resources in an efficient manner. B) People's wants can never be satisfied by the available resources. C) Scarcity afflicts only poor countries. D) Too many frivolous goods and services are produced at the expense of socially desirable goods and services. E) Production is efficient, but distribution is inefficient. Answer: B Diff: 2 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 12) Which of the following statements best describes the underlying feature of most economic problems? A) People have unlimited wants in the face of limited resources. B) There are unlimited resources. C) Resources are distributed fairly. D) People have limited wants in the face of limited resources. E) Governments should never interfere in the workings of a market economy. Answer: A Diff: 1 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

13) Because resources are scarce, individuals are required to A) make choices among alternatives. B) use resources inefficiently. C) sacrifice production but not consumption. D) improve distribution but not production. E) improve production but not distribution. Answer: A Diff: 2 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 14) Scarcity implies that choices must be made. Making choices implies A) the wasteful use of resources. B) that scarcity can be eliminated. C) the existence of costs of production. D) the existence of opportunity costs. E) both C and D above. Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 15) Which of the following best completes the definition of opportunity cost? The opportunity cost of choosing any one alternative is the A) market cost of the next best alternative. B) value of the next best alternative that is given up. C) the revenues that would be given up if that alternative is not chosen. D) value of all other alternatives combined. E) value of resources used to make that alternative available to the market. Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

16) With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway.

FIGURE 1-1 Refer to Figure 1-1. For the government, the opportunity cost of one search and rescue helicopter is A) 0 kilometres of highway repair. B) 50 kilometres of highway repair. C) 100 kilometres of highway repair. D) 150 kilometres of highway repair. E) 200 kilometres of highway repair. Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

17) With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway.

FIGURE 1-1 Refer to Figure 1-1. For the government, the opportunity cost of one kilometre of highway repair is A) 1 search and rescue helicopter. B) 1/2 of a search and rescue helicopter. C) 1/10 of a search and rescue helicopter. D) 1/50 of a search and rescue helicopter. E) 1/100 of a search and rescue helicopter. Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

18) With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway.

FIGURE 1-1 Refer to Figure 1-1. If the government chooses to allocate all $200 million to highway repair, we can say that A) the opportunity cost of the highway repair is uncertain. B) the opportunity cost of the highway repair is $0. C) the opportunity cost of the highway repair is 4 search and rescue helicopters. D) there is no opportunity cost involved because the government has achieved its objectives. E) there is no opportunity cost involved because the government stayed within its budget. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

19) With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway.

FIGURE 1-1 Refer to Figure 1-1. Which of the following combinations of kilometres of highway repair and helicopters is unaffordable, given the government's budget of $200 million? A) B B) D C) E D) F E) G Answer: E Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

20) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. For the school board, what is the opportunity cost of one additional laptop computer? A) 0 textbooks B) 1/10 of a textbook C) 10 textbooks D) 20 textbooks E) 2000 textbooks Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

21) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. For the school board, what is the opportunity cost of one additional textbook? A) 2000 laptops B) 1000 laptops C) 1/100 of a laptop D) 1/1000 of a laptop E) 1/10 of a laptop Answer: E Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

22) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. Suppose the school board chooses to allocate all $500 000 to the purchase of laptop computers. What is the opportunity cost of this entire purchase? A) The opportunity cost is 2000 laptops. B) The opportunity cost is 20,000 textbooks. C) The opportunity cost is uncertain. D) The opportunity cost is $0. E) There is no opportunity cost because the purchase was made within the available budget. Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

23) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. Which of the following combinations of textbooks and laptops is unaffordable, given the school board's budget of $500 000? A) A B) B C) C D) D E) E Answer: D Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

24) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. What is the price of a textbook in this example? A) $25 B) $40 C) $50 D) $100 E) $250 Answer: A Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

25) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. What is the price of a laptop computer in this example? A) $25 B) $40 C) $50 D) $100 E) $250 Answer: E Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

26) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. What is Tristan's opportunity cost of producing one fishing lure? A) one mowed lawn B) 3 mowed lawns C) 1/3 of a mowed lawn D) 1/4 of a mowed lawn E) 4 mowed lawns Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Quantitative 27) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. What is Thomas's opportunity cost of producing one fishing lure? A) 5 lures B) 1 mowed lawn C) 1/6 of a lure D) 1/6 of a mowed lawn E) There is no opportunity cost. Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table

Category: Quantitative 28) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. What is Tristan's opportunity cost of producing one mowed lawn? A) one fishing lure B) 3 fishing lures C) 4 fishing lures D) 6 fishing lures E) 12 fishing lures Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Quantitative 29) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. What is Thomas's opportunity cost of producing one mowed lawn? A) 0 fishing lures B) 1/6 fishing lure C) one fishing lure D) 6 fishing lures E) 12 fishing lures Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and

how each is illustrated by the production possibilities boundary. Graphics: Table Category: Quantitative 30) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. If Tristan and Thomas want to maximize their joint output from one day of work, how should they specialize their production? A) Tristan produces 3 mowed lawns; Thomas produces 6 mowed lawns B) Tristan produces 6 lures; Thomas produces 6 lures C) Tristan produces 6 lures and 3 mowed lawns D) Tristan produces 12 lures; Thomas produces 6 mowed lawns E) Tristan produces nothing, Thomas produces 6 lures and 6 mowed lawns Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Quantitative

31) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. Which of the following statements about Tristan's and Thomas's opportunity costs is correct? A) Tristan has a higher opportunity cost of producing mowed lawns. B) Thomas has a higher opportunity cost of producing mowed lawns. C) Tristan has a higher opportunity cost of producing fishing lures. D) Thomas has a higher opportunity cost of producing fishing lures. E) Both A and D are correct. Answer: E Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Qualitative

32) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her in each month.

FIGURE 1-3 Refer to Figure 1-3. For Madeleine, the opportunity cost of one regular coffee is A) 1/4 of a regular coffee. B) 20 lattes. C) 4 lattes. D) 1/4 of a latte. E) 80 lattes. Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

33) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her in each month.

FIGURE 1-3 Refer to Figure 1-3. For Madeleine, the opportunity cost of one latte is A) 1/4 of a regular coffee. B) 1/4 of a latte. C) 8 regular coffees. D) 80 regular coffees. E) 4 regular coffees. Answer: E Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

34) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her in each month.

FIGURE 1-3 Refer to Figure 1-3. If Madeleine chooses to allocate all $100 to buying lattes, we can say that her opportunity cost in one month is A) zero because she bought what she desired. B) zero because she stayed within her budget. C) 80 cups of regular coffee. D) 40 cups of regular coffee. E) 20 cups of regular coffee. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

35) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her in each month.

FIGURE 1-3 Refer to Figure 1-3. Which of the following combinations of regular coffees and lattes is affordable over the one-month period, given Madeleine's budget? A) 15 lattes and 30 coffees B) 16 lattes and 16 coffees C) 8 lattes and 50 coffees D) 4 lattes and 66 coffees E) 20 lattes and 80 coffees Answer: B Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

36) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her in each month.

FIGURE 1-3 Refer to Figure 1-3. What is the price of a regular coffee in this example? A) $0.80 B) $1.25 C) $2.00 D) $5.00 E) $8.00 Answer: B Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

37) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her in each month.

FIGURE 1-3 Refer to Figure 1-3. What is the price of a coffee latte in this example? A) $0.80 B) $1.00 C) $1.25 D) $2.00 E) $5.00 Answer: E Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

38) Suppose you own a courier service and you use two types of delivery vehicles — Model A, which costs to purchase, and Model B, which costs $50 000 to purchase. You have a budget of for the purchase of new vehicles. If you were to draw a budget line to illustrate the choice between Model A and Model B vehicles, with A on the vertical axis and B on the horizontal axis, the vertical intercept and the horizontal intercept, respectively, would be A) 10 and 10. B) 6 and 6. C) 0 and 10. D) 0 and 0. E) 10 and 6. Answer: E Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 39) Suppose you own a courier service and you use two types of delivery vehicles — Model A, which costs to purchase, and Model B, which costs $50 000 to purchase. You have a budget of for the purchase of new vehicles. What is the opportunity cost of one Model A vehicle? A) 0 B) 3/5 of a Model B vehicle C) 5/3 of Model B vehicle D) 5 Model B vehicles E) 3 Model B vehicles Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

40) Suppose you own a courier service and you use two types of delivery vehicles — Model A, which costs to purchase, and Model B, which costs $50 000 to purchase. You have a budget of for the purchase of new vehicles. What is the opportunity cost of one Model B vehicle? A) 0 B) 3/5 of a Model A vehicle C) 5/3 of a Model A vehicle D) 5 Model A vehicles E) 3 Model A vehicles Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 41) Suppose you own a courier service and you use two types of delivery vehicles — Model A, which costs to purchase, and Model B, which costs $50 000 to purchase. You have a budget of for the purchase of new vehicles. Which of the following statements best describes the shape of your budget line? A) The budget line is concave to the origin, indicating that the opportunity cost of each model of vehicle increases with each additional unit purchased. B) The budget line is convex to the origin, indicating that the opportunity cost of each vehicle decreases with each additional unit purchased. C) The budget line is a straight line, indicating that the opportunity cost of each vehicle decreases with each additional unit purchased. D) The budget line is a straight line, indicating that the opportunity cost of each model of vehicle is independent of how many are purchased. E) The budget line is a straight line, indicating that the opportunity cost of each vehicle increases with each additional unit purchased. Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

42) Scarcity arises from limited resources. For this reason, all economic choices involve A) a value judgement. B) an educated decision. C) an opportunity cost. D) complementary ends. E) greed. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 43) The opportunity cost of going to college or university for four years is A) equal to the wage rate a person will earn after graduation. B) the least valued alternative one forfeits to attend. C) the cost of tuition and books and four years of lost wages from employment. D) the cost of tuition, residence fees and books. E) zero. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 44) Suppose there are only three alternatives to attending a "free" social event: read a novel (you value this at $10), go to work (you could earn $20), or watch videos with some friends (you value this at $25). The opportunity cost of attending the social event is A) $10. B) $20. C) $25. D) $45. E) $55. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

45) The opportunity cost of producing good A is defined to be A) the money cost of the factors of production used in good A. B) the retail price of good A. C) the cheapest method of producing good A. D) what must be sacrificed of other goods to get an additional unit of good A. E) the cost of having to get by using something else in place of good A. Answer: D Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 46) Suppose one unit of labour can produce either 5 wool sweaters or 2 pineapples. What is the opportunity cost of producing one wool sweater? A) 5 pineapples B) 2 pineapples C) 2/5 of a pineapple D) 5/2 pineapples E) zero pineapples Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 47) Suppose one unit of labour can produce either 5 units of wool or 2 pineapples. What is the opportunity cost of producing 1 pineapple? A) 5 units of wool B) 2 units of wool C) 2/5 unit of wool D) 5/2 units of wool E) zero Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

48) A small landscaping firm purchases a tractor that, in one day, is capable of drilling 60 fence-post holes or removing 12 tree stumps (or some intermediate combination). For this landscaper, what is the opportunity cost of removing one extra tree stump? A) 1/12th of the cost of the tractor B) 1/5 of the cost of the tractor C) drilling 12 fence-post holes D) drilling 5 fence-post holes E) There is no opportunity cost. Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 49) Suppose a bakeshop with 5 employees can produce both pies and cakes. In one day, if all resources are devoted to baking pies, the shop can produce 125 pies; if all resources are devoted to baking cakes, the shop can produce 50. What is the shop's opportunity cost of producing any one cake? A) 0.4 pies B) 0.25 pies C) 2.5 pies D) 0.4 cakes E) 2.5 cakes Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

50) Suppose a bakeshop with 5 employees can produce both pies and cakes. In one day, if all resources are devoted to baking pies, the shop can produce 125 pies; if all resources are devoted to baking cakes, the shop can produce 50. What is the shop's opportunity cost of producing any one pie? A) 125 pies B) 0.4 cakes C) 2.5 pies D) 0.4 pies E) 50 cakes Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 51) Katie and Hugh are producing pies and jars of pickles. Katie can produce either 200 jars of pickles or 100 pies per month. Hugh can produce either 800 jars of pickles or 200 pies per month. Which of the following statements is correct? A) Katie's opportunity cost of producing 1 jar of pickles is 2 pies. B) Katie's opportunity cost of producing 1 jar of pickles is 1/2 of a pie. C) Hugh's opportunity cost of producing 1 jar of pickles is 4 pies. D) Hugh's opportunity cost of producing 1 pie is 1/4 jar of pickles. E) Hugh's and Katie's opportunity costs of producing are the same. Answer: B Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

52) Suppose Andrea has a job that pays her $50 000 per year (after taxes). She is considering quitting her job and going to university full time for four years. Tuition fees and books will cost $12 000 per year. Living expenses in either situation will cost $20 000 per year. What is the opportunity cost of Andrea's four-year university degree? A) $128 000 B) $200 000 C) $240 000 D) $248 000 E) $288 000 Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 53) Suppose Amin has a job that pays him $87 000 per year (after taxes). He is considering taking an unpaid leave of absence from his job to complete a 12-month MBA program. Tuition is $75 000 and books and materials will cost $5000. Living expenses for the 12-month period will be cheaper by $500 per month, mostly due to lower apartment rental costs. What is the opportunity cost of Amin's 1-year MBA program? A) $75 000 B) $76 000 C) $161 000 D) $167 000 E) $175 000 Answer: C Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

54) It has been observed that university enrollment in Canada is higher during periods of high unemployment. A possible explanation for this is that A) when prospects for getting a job are poor, the opportunity cost of getting a job is lower. B) when prospects for getting a job are poor, the opportunity cost of doing nothing is higher. C) during periods of high unemployment, tuition fees are reduced. D) during periods of high unemployment, the opportunity cost is no longer relevant. E) when prospects for getting a job are poor, the opportunity cost of going to university is lower. Answer: E Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 55) Chantal has a full-time job as a geological engineer and earns an annual after-tax salary of $85 000. She decides to leave her job for 6 months to scuba dive on the Great Barrier Reef in Australia, and incurs costs of $7500 for course equipment and certification, $2500 for airfare, and $12 000 for regular living expenses in Australia (equal to her living expenses at home). What is Chantal's opportunity cost for this 6month, unpaid leave of absence? A) $12 000 B) $22 000 C) $42 000 D) $52 500 E) $65 000 Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 56) During economic recessions, the opportunity cost of going to university ________ because the wages a student can expect to earn working in the best alternative ________. A) increases; decrease B) decreases; increase C) increases; increase D) decreases; decrease E) remains the same; remain the same Answer: D Diff: 2 Type: MC

Topic: 1.1c. opportunity cost Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 57) A country's production possibilities boundary shows that when a society uses its resources efficiently, A) it cannot produce more of one good without producing less of the other good. B) it can produce more of only one good. C) it is always possible to produce more of all goods. D) all points inside the boundary are preferred to all points on the boundary. E) the supply for goods always exceeds the demand. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 58) Consider a production possibilities boundary that is drawn concave to the origin and shows the possible combinations of military goods and civilian goods that a country can produce. Suppose the country is currently at a point on the boundary. If the production of military goods is increased, the production of civilian goods will necessarily A) decrease. B) remain the same. C) increase. D) increase at a decreasing rate. E) increase at a increasing rate. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 59) A point lying inside the production possibilities boundary is one at which A) there is no scarcity. B) the opportunity cost of producing more output is negative. C) it is not possible to produce more output with existing resources. D) the economy has run out of resources. E) more output could be produced with existing resources. Answer: E Diff: 2 Type: MC

Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 60) If a country's production possibilities boundary is drawn as a straight (downwardsloping) line it indicates A) decreasing opportunity cost of producing more of either good. B) the use of the scarce resources in an economy. C) constant opportunity cost of producing more of either good. D) an unfair distribution of resources in an economy. E) increasing opportunity cost of producing more of either good. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

61) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. The production possibilities boundaries are drawn concave to the origin. What does this shape of the PPB demonstrate? A) the decreasing opportunity cost of producing more of either good B) the scarcity of resources in the economy C) the constant opportunity cost of producing more of either good D) the unfair distribution of resources in the economy E) the increasing opportunity cost of producing more of either good Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

62) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. If Country X, constrained by the production possibilities boundary PPB1, is producing the combination of goods indicated at point F, it can produce more consumer goods by moving to one of the points A) A or E. B) D or E. C) A, B, or C. D) A or B, but not C. E) A, B, C, D, or E. Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

63) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. If Country X is currently producing at point A, it could move to point B if A) the cost of producing capital goods were to increase. B) some resources were switched from the capital goods industries to the consumer goods industries. C) the cost of producing consumer goods were to increase. D) some resources were switched from the consumer goods industries to the capital goods industries. E) Country X is no longer able to produce the quantity of capital goods at point A. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

64) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. If Country X were producing at point C, A) the opportunity cost of moving to point A is to give up an increase in the production of consumer goods. B) the opportunity cost of moving to point A is zero. C) the opportunity cost of moving to point A is to give up some capital goods. D) this is the maximum output possible from given resources. E) it is not possible to move to any point on PPB1 or PPB2 without technological progress. Answer: A Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

65) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. At point B, A) the price of capital goods is higher than the price of consumer goods. B) Country X is producing too many consumer goods and too few capital goods. C) the price of consumer goods is equal to the price of capital goods. D) the opportunity cost of producing an extra unit of capital goods is higher than at point A. E) the opportunity cost of producing an extra unit of consumer goods is higher than at point A. Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

66) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. If Country X, constrained by the production possibilities boundary PPB1, is currently producing at point A, it can produce more capital goods by moving to point A) F. B) E. C) D. D) C. E) B. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

67) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. Suppose Country X is currently producing at point E. Country X could achieve production at point D if A) the given resources were fully employed. B) the given resources were more efficiently employed. C) sufficient improvements in technology occurred in either the capital goods industry or the consumer goods industries. D) firms reduced output of capital goods. E) the prices of capital goods and consumption goods fell. Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

68) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. A shift of the production possibilities boundary from PPB1 to PPB2 implies A) a movement from full employment to some unemployment. B) that if point E is the new choice of outputs, productivity has increased in the consumer goods industry. C) that productive capacity in the capital goods industries has improved. D) an inevitable decrease in total output. E) that productive capacity in the consumer goods industry has improved. Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

69) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. Growth in the country's productive capacity is illustrated by A) a point like D outside the boundary. B) a movement from a point inside the boundary such as C to the boundary. C) the movement between points on a given boundary. D) a single point such as A on the boundary. E) an outward shift of the boundary, for example from PPB1 to PPB2. Answer: E Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

70) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. An outward shift of the production possibilities boundary from to indicates which of the following? A) an increase in the price of raw materials for consumer goods B) growth in the country's productive capacity C) an increase in the price of raw material for capital goods D) more of the country's resources are being used E) the country's resources are being used less efficiently Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

71)

FIGURE 1-5 Refer to Figure 1-5. Suppose the relevant production possibilities boundary is the one labelled B. This boundary implies that A) the concept of opportunity cost is not at work in this economy. B) the opportunity cost of producing either capital goods or consumer goods does not depend on how much of each good is produced. C) consumer goods are preferred to capital goods. D) in this society, the resources are not efficiently employed. E) capital goods are preferred to consumer goods. Answer: B Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

72)

FIGURE 1-5 Refer to Figure 1-5. Which production possibilities boundaries are consistent with increasing opportunity costs? A) boundary A only B) boundaries A and B C) boundary C only D) boundaries B and C E) boundaries A, B, and C Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

73)

FIGURE 1-5 Refer to Figure 1-5. Which production possibilities boundaries exhibit decreasing opportunity costs? A) boundary B only B) boundaries A and C C) boundaries A and B D) boundary A only E) boundary C only Answer: D Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

74) If there is always a three-for-one trade-off between the production of goods X and Y, then the production possibilities boundary for X and Y is A) a downward-sloping curve convex to the origin. B) semicircular. C) a downward-sloping straight line. D) a downward-sloping straight line that is broken at one point. E) a downward-sloping curve concave to the origin. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 75) On a diagram of a production possibilities boundary, the concept of scarcity is illustrated by the A) points on the boundary. B) area within the boundary. C) distance from the origin to the boundary. D) negative slope of the boundary. E) unattainable points outside the boundary. Answer: E Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 76) On a diagram of a production possibilities boundary, the concept of opportunity cost is illustrated by the A) distance from the origin to the boundary. B) negative slope of the boundary. C) boundary being concave to the origin. D) unattainable points outside the boundary. E) area bounded by the two axes and the boundary. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

77) On a diagram of a production possibilities boundary, the concept of choice is illustrated by the A) negative slope of the boundary. B) unattainable combinations outside the boundary. C) need to select among the alternative attainable points along or inside the boundary. D) the concave shape of the boundary. E) the distance from the origin to the boundary. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Recall Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 78) Consider the production possibilities boundary (PPB) of an economy. Economic growth is illustrated by A) the negative slope of the PPB. B) an outward shift of the PPB. C) a movement onto the PPB. D) a movement along the PPB. E) the movement to a point outside of the PPB. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 79) Suppose there are only two goods produced in our economy—snowplows and helicopters. If there is always a two-for-one tradeoff between the production of these two goods (in terms of opportunity cost), then the production possibilities boundary between snowplows and helicopters is A) a downward-sloping curve convex to the origin. B) circular. C) a downward-sloping straight line. D) a downward-sloping straight line with slope equal to -1. E) a downward-sloping curve concave to the origin. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

80) A straight-line production possibilities boundary differs from a concave boundary in which of the following ways? A) The straight-line boundary illustrates constant opportunity costs, whereas the concave boundary illustrates increasing opportunity costs. B) The concave boundary illustrates constant opportunity costs, whereas the straight-line boundary illustrates decreasing opportunity costs. C) The straight-line boundary does not show scarcity, whereas the concave boundary does. D) The straight-line boundary shows opportunity cost, whereas the concave boundary does not. E) A straight-line boundary is associated with a command economy, whereas a concave boundary is associated with a free-market economy. Answer: A Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 81) Consider Canada's production possibilities boundary. Suppose a scientific breakthrough leads to a lower-cost method of producing battery-operated cars in Canada. The likely effect would be to move Canada's current production A) to a point beyond its new production possibilities boundary. B) to a point inside its new production possibilities boundary. C) possibilities boundary outward. D) possibilities boundary inward. E) above the level of U.S. production. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

82) Consider Canada's production possibilities boundary. Suppose fire destroys many millions of hectares of valuable Canadian forest. The effect on the Canadian economy would be best illustrated by ________ the production possibilities boundary. A) a movement inside B) a movement along C) a movement to a point beyond D) a shift outward of E) an inward shift of Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 83) Consider Canada's production possibilities boundary. During the nineteenth and early twentieth centuries, millions of people immigrated to western Canada. The effect on the Canadian economy was to A) move it to a point beyond its new production possibilities boundary. B) move it inside its new production possibilities boundary. C) shift its production possibilities boundary inward. D) shift its production possibilities boundary outward. E) move it along an unchanged production possibilities boundary. Answer: D Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 84) In recent years, several large Canadian-owned mining and resource companies have been sold to foreign owners. The immediate effect on Canada's production possibilities boundary is A) a shift outward. B) a shift inward. C) no change. D) a movement along. E) a movement to a point beyond the boundary. Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary.

Category: Qualitative 85) The world price of oil fell in 2014-2015 from over $100 per barrel to less than $50. As a producer of oil, what effect did this change have on Canada's production possibilities boundary? A) a shift outward B) a shift inward C) movement to a point beyond the boundary D) movement to a point within the boundary E) no change Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 86) Suppose drought destroys many millions of acres of valuable Canadian farmland. The effect on the Canadian economy would be to move A) it along its production possibilities boundary. B) its production possibilities boundary inward. C) it beyond its production possibilities boundary. D) its production possibilities boundary outward. E) None of the above. There would be no change in Canada's production possibilities boundary. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 87) A move from inside the production possibilities boundary to the boundary itself could be caused by A) the employment of previously idle resources. B) a reallocation of resources from military to civilian goods. C) technological progress. D) an increase in the labour supply. E) an improvement in the government's ability to control its spending. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and

how each is illustrated by the production possibilities boundary. Category: Qualitative

88) Consider a production possibilities boundary showing the quantity of military goods and the quantity of civilian goods on the two axes. A movement along the production possibilities boundary could be caused by A) the employment of previously idle resources. B) the reallocation of resources between military and civilian goods. C) the growth of productive capacity. D) an increase in the labour supply. E) technological progress. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

89) The downward-sloping line in the diagram below shows the combinations of health care and education expenditures that the government can afford with a given amount of tax revenue.

FIGURE 1-6 Refer to Figure 1-6. The levels of health and education expenditures at point C A) are less than at point D. B) are equal to those of point A and point B. C) are more cost-effective than those at points A, B, and D. D) could be achieved if the prices of health and/or education increased. E) are not attainable with the government's current budget. Answer: E Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

90) The downward-sloping line in the diagram below shows the combinations of health care and education expenditures that the government can afford with a given amount of tax revenue.

FIGURE 1-6 Refer to Figure 1-6. If the government's spending on health and education is given by point B, a move to point A must involve A) less spending on health. B) zero opportunity cost. C) less spending on education. D) less spending in total. E) more spending on education. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

91) The downward-sloping line in the diagram below shows the combinations of health care and education expenditures that the government can afford with a given amount of tax revenue.

FIGURE 1-6 Refer to Figure 1-6. Suppose the government's current spending is shown by point D. In this case, A) the government is not spending its total available budget for these two items. B) more education expenditures can be achieved only by sacrificing some existing health expenditures. C) more health expenditures can be achieved only by sacrificing some existing education expenditures. D) the government is spending more than its total budget. E) the prices of education and health care have increased beyond the government's ability to pay. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

92) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods—cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods—cotton and bananas, both measured in tonnes produced per year. Suppose the economy is currently producing at point A. What is the opportunity cost to this economy of increasing production of bananas by 100 tonnes? A) There is no opportunity cost. B) 60 tonnes of cotton C) 100 tonnes of cotton D) 1440 tonnes of bananas E) 1500 tonnes of bananas Answer: B Diff: 1 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

93) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods—cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods—cotton and bananas, both measured in tonnes produced per year. Suppose the economy is currently producing at point D. What is the opportunity cost of increasing production of bananas by 100 tonnes? A) There is no opportunity cost. B) 420 tonnes of cotton C) 100 tonnes of cotton D) 60 tonnes of cotton E) 920 tonnes of cotton Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

94) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods—cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods—cotton and bananas, both measured in tonnes produced per year. Suppose this economy is currently producing 1280 tonnes of cotton and 200 tonnes of bananas. What is the opportunity cost of increasing production of bananas by 100 tonnes? A) 100 tonnes of cotton B) 360 tonnes of cotton C) 360 tonnes of bananas D) 920 tonnes of cotton E) There is no opportunity cost. Answer: B Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

95) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods—cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods—cotton and bananas, both measured in tonnes produced per year. Suppose this economy moves from point D to point F, where it is then producing bananas exclusively. Which of the following explanations best describes the opportunity cost involved in producing this extra 100 tonnes of bananas? A) The opportunity cost is very high in this case because resources that are probably much better suited to producing cotton are now being devoted to producing bananas. B) The opportunity cost is very low in this case because resources that are probably much better suited to producing cotton are now being devoted to producing bananas. C) The opportunity cost is very high in this case because resources that are probably much better suited to producing bananas are now being devoted to producing cotton. D) The opportunity cost is very low in this case because resources that are probably much better suited to producing bananas are now being devoted to producing cotton. E) The opportunity cost of producing the extra bananas is independent of the amount being produced. Answer: A Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph

Category: Quantitative 96) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods—cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods—cotton and bananas, both measured in tonnes produced per year. If the economy moves from point C to point D, what is the opportunity cost of each extra tonne of bananas produced? A) 0.36 tonnes of cotton B) 3.6 tonnes of cotton C) 3.75 tonnes of cotton D) 36 tonnes of cotton E) 375 tonnes of cotton Answer: B Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

97) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods—cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods—cotton and bananas, both measured in tonnes produced per year. Which of the following statements best describes the difference in opportunity costs that this economy faces at point A compared to point E? A) The opportunity cost is 1500 tonnes of cotton at point A, compared to 500 tonnes at point E. B) The opportunity cost is 500 tonnes of cotton at point A, compared to 1500 tonnes at point E. C) The opportunity cost of producing an extra tonne of bananas is much higher at point A than at point E. D) The opportunity cost of producing an extra tonne of bananas is much lower at point A than at point E. E) The opportunity cost of producing an extra tonne of bananas is the same at point A as at point E. Answer: D Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj.: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

1.2 The Complexity of Modern Economics 1) A modern economy like Canada's is largely organized by A) governments at all levels coordinating the activities of firms and citizens. B) individuals forming cooperative enterprises and labour unions. C) individuals following their own self-interest, doing what seems best for themselves. D) benevolent individuals pursuing the public interest. E) the self-interested behaviour of a small number of individuals. Answer: C Diff: 2 Type: MC Topic: 1.2a. self-organizing economy Skill: Recall Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 2) An insight first fully developed by Adam Smith is that A) without benevolence production would not occur. B) all individuals are motivated solely by self-interest. C) self-interest, not benevolence, is the foundation of economic order. D) self-interest undermines effective economic order. E) individual self-interest is the only necessary force for social order. Answer: C Diff: 1 Type: MC Topic: 1.2a. self-organizing economy Skill: Recall Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 3) An important insight by Adam Smith, which was more fully developed over the next century, is that in a free market the resources available to a nation are organized so as to produce the goods and services that people want with the least possible amount of resources. This concept is known in economics as A) productivity. B) division of labour. C) specialization. D) benevolence. E) efficiency. Answer: E Diff: 2 Type: MC Topic: 1.2a. self-organizing economy Skill: Recall Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative

4) In the Canadian economy, most decisions regarding resource allocation are made by A) consumers and producers interacting in the price system. B) the various levels of government. C) negotiation between unions and firms. D) business firms only. E) legal contract. Answer: A Diff: 1 Type: MC Topic: 1.2a. self-organizing economy Skill: Recall Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 5) With reference to the circular flow of income, how is the allocation of resources largely decided? A) by central authorities only B) by central authorities and firms only C) by firms and individuals acting independently D) by political parties and firms only E) by individuals only Answer: C Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 6) The key decision makers in a market economy are A) individuals, firms, and government. B) individuals, non-profit organizations, and the Bank of Canada. C) governments and all institutions under government control. D) large corporations and labour organizations. E) corporations and governments. Answer: A Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative

7) Economists usually assume that individuals and firms, respectively, maximize A) income and sales. B) savings and profits. C) wages and revenues. D) utility and profits. E) expenditures and profits. Answer: D Diff: 2 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 8) Which of the following is illustrated by the circular flow of income? A) the flows of expenditures and income in a household B) that firms own the factors of production C) the interaction of individuals and firms through the factors and goods markets D) that the flow of payments moves in the same direction as the flow of goods E) that there is no relationship between goods markets and factor markets Answer: C Diff: 2 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 9) Which of the following represents a typical "real" flow (as opposed to a financial flow) in the circular flow of income? A) goods going from producers to consumers B) factor services going from producers to consumers C) goods going from consumers to producers D) money payments going from consumers to producers E) money payments going from producers to consumers Answer: A Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative

10) If some income earned by households is not spent on output, or if some income earned by firms is not spent on factor services, the circular flow of income will A) stop. B) run over. C) expand. D) contract. E) explode. Answer: D Diff: 2 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Applied Learning Obj.: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 11) The famous economist who first described the division of labour was A) Karl Marx. B) Milton Friedman. C) David Ricardo. D) John Maynard Keynes. E) Adam Smith. Answer: E Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 12) Which of the following statements about specialization and trade are correct? A) They developed only in the twentieth century. B) They exist only in capitalist economies. C) They arose as humans changed from nomadic and self-sufficient food gatherers to settled food producers. D) They developed only where government and political institutions were stable. E) They occur only in the private sector. Answer: C Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative

13) If an economy exhibits the specialization of labour, we know that A) a barter economy is more suitable. B) most production is artisanal in nature. C) each worker is self-sufficient. D) job security is ensured. E) different individuals are producing different products. Answer: E Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 14) Which of the following statements best describes a barter system of exchange? A) It involves the trading of goods directly for other goods. B) It requires the use of money. C) It eliminates the transactions costs involved in exchange. D) It developed late in history. E) It is the most efficient form of exchange. Answer: A Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 15) Specialization of labour led to greater efficiency in the allocation of resources because of A) greater reliance on self-sufficiency. B) the use of barter. C) the principle of comparative advantage. D) an increase in total work effort. E) the opportunity cost of labour increased. Answer: C Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative

16) A greater specialization of labour leads to which of the following major results? A) The overall output of the economy declines. B) There is an increased need for government to intervene in the marketplace. C) The circular flow of income contracts. D) There is a greater need for trade. E) Each worker must become more self-sufficient. Answer: D Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 17) A farmer selling tomatoes and corn at a roadside, and a currency trader in Hong Kong are each participating in A) barter. B) a market. C) an involuntary transaction. D) flexible manufacturing. E) international trade. Answer: B Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Applied Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 18) Which of the following has most contributed to the globalization of the economy? A) the decreased importance of agriculture B) reductions in transportation and communication costs C) the shift toward a market economy in China D) tariffs and trade barriers E) the decline in the relative importance of manufacturing Answer: B Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative

19) Which of the following results from the introduction of money for use in transactions? A) exchange becomes easier and this promotes the specialization of labour B) an increased use of barter C) the specialization of labour becomes more difficult D) self-sufficiency is assured E) society is able to satisfy all wants Answer: A Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 20) The barter system of exchange is inefficient because A) "fair" values cannot be defined without the use of money. B) bargaining power is unequal between rich and poor. C) the double coincidence of wants may not exist. D) markets do not exist. E) exchange partners need to know each other. Answer: C Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Applied Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 21) Which of the points below are true of money? 1) Money eliminates the need for barter. 2) Money allows for specialization of labour and expansion of trade. 3) Money facilitates the development of a market economy. 4) Trade did not take place before the introduction of money. A) only 1 B) only 1 and 2 C) only 1 and 4 D) only 1, 2, and 3 E) All of the points are true. Answer: D Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative

22) Money facilitates trade and specialization by A) allowing an efficient barter system to develop. B) increasing the value of gold. C) eliminating the need for barter. D) reducing the shift of resources between uses. E) providing employment for coin makers. Answer: C Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj.: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 1.3 Is There an Alternative to the Market Economy? 1) An economic system that relies primarily upon custom and habit in economic decision making is referred to as a A) market system. B) traditional system. C) command system. D) mixed system. E) communist system. Answer: B Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 2) In practice, the term "centrally planned economy" refers to an economy in which A) the government makes ALL production and consumption decisions. B) the mix of market and command principles is heavily weighted towards the latter. C) all commodities are rationed. D) the military is in control of the government. E) economic decisions are made in the geographic centre of the country. Answer: B Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

3) Karl Marx argued that A) technological change was not important in improving living standards. B) a free-market system would produce a low level of total output. C) benevolence, not self-interest, produced an effective economic order. D) centrally planned economies could provide a more equitable distribution of total output than capitalist economies. E) the unfettered market system driven by self-interest leads to the best social outcome. Answer: D Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 4) When discussing types of economic systems, the Canadian economy is best described as A) primarily a public ownership economy. B) primarily free-market decision making. C) traditional. D) a command economy. E) a mixed economic system. Answer: E Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Applied Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 5) With regard to various economic systems, most economists agree that A) the mix of market and command principles that exists in Canada is the best. B) the optimal mix of market and command systems remains constant over time. C) most production and consumption decisions are more efficiently coordinated by markets than through central planning. D) government intervention in the economy is only justified in time of war. E) command economies have been very successful in distributing income in socially just ways. Answer: C Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

6) Which countries have mostly public ownership of resources? A) United States and Canada B) Cuba and North Korea C) France and Germany D) Sweden and Norway E) Brazil and Argentina Answer: B Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 7) Behaviour in free-market economies is A) determined by a central authority. B) based primarily on custom and habit. C) mostly directed by self-interest. D) mostly affected by elements of tradition and government command. E) random and unpredictable. Answer: C Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 8) In command economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed by individual self-interest. D) largely affected by elements of tradition and market incentives. E) random and unpredictable. Answer: A Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

9) In mixed economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed only by self-interest. D) affected by elements of tradition, government command, and market incentives. E) random and unpredictable. Answer: D Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 10) In traditional economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed only by self-interest. D) affected by elements of tradition, government command, and market incentives. E) random and unpredictable. Answer: B Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 11) Complex economic plans for many economic sectors are most associated with a A) free-market system. B) mixed market system. C) command economy. D) feudal system. E) traditional economy. Answer: C Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

12) Most modern economies in the world today A) have pure market exchange. B) are similar to feudal systems. C) are mostly run by government decree. D) have a mix of traditional, command and market elements. E) are complex systems that defy description and analysis. Answer: D Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 13) In the current Canadian economy, the majority of choices on how resources are allocated are made by A) the various levels of government. B) negotiation between unions and firms. C) business firms only. D) legal contracts. E) consumers and firms through the price system. Answer: E Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Applied Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 14) Comparison of economic systems indicates that A) most nations have either a purely socialist economy or a purely capitalist economy. B) most countries have mixed economies. C) socialist economies are clearly superior in producing consumer goods. D) capitalist economies are clearly superior in distributing income. E) all countries have largely traditional economies. Answer: B Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

15) Many economies in central and Eastern Europe, including the countries of the former Soviet Union, are still in the process of moving from a command economy to a market economy. In the first years of this transition, most of these countries experienced sharp drops in output and reductions in living standards. Economists generally see this as A) the failure of the market system. B) the triumph of capitalism over communism. C) an indication of the extreme difficulty of transition from one type of economic system to another. D) an indication that these economies should return to being command economies. E) the difficulty of corruption in non-market economies. Answer: C Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 16) In a pure market economy, the role of government is limited to provision of : i) a basic legal and institutional structure. ii) intervention in the allocation of resources in some areas of the economy. iii) redistribution of income. iv) stabilization of economic conditions generally. Which of the above points is true? A) Only i). B) Only i) and ii). C) Only i) and iv). D) Only i), ii), and iv). E) All of the points are provided by government in a pure market economy. Answer: A Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

17) In a modern mixed economy the government ensures that key institutions are in place to facilitate voluntary transactions between economic agents. These key institutions are A) labour and capital markets. B) the House of Commons and the Senate. C) the Department of Finance and the Bank of Canada. D) securities regulators and the court system. E) private property and freedom of contract. Answer: E Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj.: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 2 Economic Theories, Data, and Graphs 2.1 Positive and Normative Statements 1) Disagreements over positive statements A) cannot arise because positive statements are facts. B) are best handled by an appeal to the facts. C) arise from the failure to distinguish between a positive and a normative statement. D) are basically devoid of any emotion. E) never occur. Answer: B Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative 2) A positive statement is one that states A) what is, was, or will be. B) what is and what should be. C) what should be but is not. D) what is desirable. E) non-negative numbers. Answer: A Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Recall Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative 3) Which is the best description of positive statements? Positive statements

A) have been verified by appeal to factual evidence. B) form the basis of all normative arguments. C) are falsifiable in principle by appeal to factual evidence. D) are seldom employed in social sciences like economics. E) have no place in economics because economics deals only with value judgments. Answer: C Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Recall Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative

4) Which is an example of a positive statement? A) There should be one price for gasoline throughout Canada. B) The higher the price for gasoline, the less of it will be consumed. C) Substitutes for fossil fuels should be developed. D) Canada should reduce its imports of consumer goods. E) Corporations in Canada should pay more taxes. Answer: B Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative 5) Which is the best description of a normative statement? A normative statement A) can be derived logically from facts. B) concerns what is provable. C) is a statement that is empirically testable. D) is one that involves a value judgment. E) has no place in the study and practice of economics. Answer: D Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Recall Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative 6) Which of the following is a normative statement? A) The sun rises in the west and sets in the east. B) A government deficit will reduce unemployment and cause an increase in prices. C) Reducing unemployment is more important than reducing inflation. D) Queen Elizabeth II is the wealthiest woman in the world. E) An increase in the price of lumber is followed by a decrease in the construction of new houses. Answer: C Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative

7) Which of the following is a normative statement? A) The higher is the level of taxes, the lower is consumption spending. B) The higher is the level of taxes, the higher are wage demands. C) A reduction in export taxes on petroleum would result in higher wages. D) Tuition fees should be waived for low-income students. E) A free-trade agreement between two countries will result in an increase in trade. Answer: D Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative 8) Suppose an economist tells you that the unemployment rate in Canada last year was 7.8%. This is an example of a(n) ________ statement. A) autonomous B) positive C) normative D) induced E) imputed Answer: B Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative 9) Suppose an economist tells you that, on average, people in Canada have too much personal debt. This is an example of a(n) ________ statement. A) autonomous B) positive C) normative D) independent E) induced Answer: C Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative

10) Which of the following statements belongs more properly in the field of normative economics than positive economics? A) An increase in the minimum wage leads to more unemployment. B) The price of one Canadian dollar is $0.85 U.S. C) When a drought occurs, the price of vegetables tends to rise. D) Canadian governments should provide assistance to the auto industry. E) Technological change has reduced the cost of cell phone service. Answer: D Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative 11) Which of the following best describes the relationship between positive and normative statements in economics? A) Normative statements are those with which all economists agree; positive statements may give rise to some disagreement. B) Positive and normative statements are alternate ways of describing the desirability of certain economic policies. C) Normative statements evaluate the desirability of certain economic changes; positive statements do not. D) Neither positive nor normative statements are concerned with the desirability of certain economic changes. E) Economists generally agree with each other regardless of whether a question is positive or normative. Answer: C Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative 12) An assertion about the desirability of reducing unemployment by lowering payroll taxes is most likely A) a theory. B) a testable proposition. C) a hypothesis. D) a normative statement. E) a positive statement. Answer: D Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj.: 2-1 Distinguish between positive and normative statements. Category: Qualitative

2.2 Building and Testing Economic Theories 1) Which of the following best describes a theory? A theory A) enables one to predict the future with certainty. B) is designed to explain and predict what we observe. C) is used to impose order on the world. D) can only be tested with a controlled experiment. E) assumes definitions for variables. Answer: B Diff: 1 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 2) An economic theory requires, among other things, A) a set of definitions of the variables to be considered. B) a controlled laboratory setting in which the theory can be tested. C) that the set of predictions be correct. D) a set of value judgments to interpret the empirical evidence. E) the use of endogenous variables only. Answer: A Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 3) Choose the statement that best describes how endogenous variables differ from exogenous variables. A) An endogenous variable is a flow, while an exogenous variable is a stock. B) An endogenous variable is explained outside the theory and influences an exogenous variable while an exogenous variable is explained within the theory. C) An exogenous variable is a function of the endogenous variable, and both are flow variables. D) An endogenous variable is a function of the exogenous variable, and both are stock variables. E) An endogenous variable is explained within the theory, while an exogenous variable influences the endogenous variables but is determined outside the theory. Answer: E Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Recall

Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 4) Suppose there is a theory that several things influence the price of fish in Halifax, one of which is the weather during the fishing season. When examining the determinants of the price of fish, the weather is A) an endogenous variable, as it influences the price of fish. B) an exogenous variable, as it is determined outside the theory. C) a stock, as it influences the quantity of fish caught. D) an act of God and, therefore, has no legitimate connection with the theory. E) an endogenous variable, as it is determined within the theory. Answer: B Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 5) The statement that a country's rate of economic growth is positively influenced by its level of investment is an example of a(n) A) variable. B) definition. C) normative statement. D) theory. E) economic law. Answer: D Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 6) The statement that a 2% increase in the money supply leads to a 2% increase in the price level is an example of a(n) A) prediction. B) assumption. C) normative statement. D) variable. E) model. Answer: A Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied

Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative

7) The statement that introducing a policy of legislated rent controls will lead to a housing shortage is an example of a(n) A) assumption. B) prediction. C) theory. D) normative statement. E) model. Answer: B Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 8) Choose the statement that best characterizes an economic theory. A valid theory A) allows one to deduce a normative statement. B) appeals to the law of large numbers. C) generates a hypothesis that can predict future events. D) extrapolates from the past behaviour of a variable to predict its future course. E) allows one to prove irrefutably one's hypothesis. Answer: C Diff: 1 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 9) Choose the statement that best characterizes an economic theory. An economic theory A) is only useful if its underlying assumptions are realistic. B) will be useful as long as it is logically consistent. C) must be judged on its ability to explain and predict real-world phenomena. D) will predict more accurately if it contains a greater number of mathematical equations. E) will be useful only if all human behaviour is rational. Answer: C Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative

10) Which of the following pairs of words have similar meanings? A) induced and autonomous B) endogenous and autonomous C) independent and exogenous D) dependent and exogenous E) induced and exogenous Answer: C Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 11) Choose the answer that best explains why economists build models that abstract from the complexities of reality. A) Because the complexities of reality are unimportant. B) Because they believe they gain a greater understanding of reality. C) Because economists are not interested in reality. D) Because this allows economists to conduct controlled experiments to test their theories. E) Because economics deals only in the abstract. Answer: B Diff: 1 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 12) Suppose an individual wheat farmer's income is influenced by the region's average daily temperature. When examining the determinants of individual farmer income, the average daily temperature is a(n) ________ variable. A) endogenous B) exogenous C) flow D) dependent E) induced Answer: B Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative

13) If we seek to explain the number of seats sold on a particular air route, say Toronto to Halifax, over a one-year period, we would consider many variables. Which of the following variables would be endogenous to our theory? A) the average salary of Canadian airline pilots B) the number of airline seats sold on this route C) the price of jet fuel D) the number of fog days in Halifax E) the unemployment rate in Toronto Answer: B Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 14) When an economist assumes that the owners of firms are motivated only by the desire to maximize profits, the economist most likely believes that A) all people enter business for their own selfish gain. B) the assumption is descriptively accurate, since surveys have been taken and the owners of firms have admitted that their only objective is to maximize profits. C) it doesn't matter whether or not the assumption is descriptively accurate; what matters is whether a theory built on the assumption predicts well. D) the assumption is inaccurate, since surveys have been taken and the owners of firms have admitted that they care about more than just profits. E) individuals entering business are quite narrow in their personal objectives. Answer: C Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 15) An economic model that contains a highly realistic set of assumptions is A) useful because there is then very little difference between "theory" and "reality." B) necessarily better able to predict the future. C) certainly superior to a model whose assumptions are somewhat unrealistic. D) more abstract than a model whose assumptions are further removed from reality. E) not likely to be useful because of its particularized nature and its complexity. Answer: E Diff: 3 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy.

Category: Qualitative 16) Economists build models that abstract from the complexities of reality because A) it is easier to do so. B) they believe they gain a greater understanding of reality. C) economists are not interested in reality. D) economists do not understand the real world. E) the complexities of reality are unimportant. Answer: B Diff: 1 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj.: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 17) Suppose we have data for 1000 students for a period of one year. The data show that those students who spend more hours studying have a higher grade point average (GPA). We can say that A) if hours of study time increase, then GPA will automatically increase. B) having a higher GPA leads students to spend more time studying. C) there is a causal relationship between hours of study time and GPA. D) more hours spent studying leads to a higher GPA. E) there is a positive correlation between hours of study time and GPA. Answer: E Diff: 3 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 18) Suppose economists at the World Bank discover a positive correlation between family income and female education levels in developing countries. We can say that A) the correlation is inconsistent with a theory that an increase in female education levels causes an increase in family income. B) an increase in family income causes an increase in female education levels. C) an increase in female education levels causes an increase in family incomes. D) there is a causal relationship between family income and female education. E) the observed correlation is consistent with a theory that an increase in female education levels causes an increase in family income. Answer: E Diff: 3 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical

observation. Category: Qualitative 19) Economists at the Department of Finance in Ottawa employ an economic model that predicts the effects of an increase in the GST. After implementation of the change, suppose researchers find that the empirical data is in conflict with the model's prediction. They are likely to A) modify the prediction in light of the new evidence. B) ignore the empirical evidence and continue using the model. C) modify the model in light of this newly acquired empirical knowledge. D) reject the empirical data as faulty because it did not support the theory. E) modify the data to suit the definitions and assumptions. Answer: C Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 20) Suppose economists at the World Bank develop a theory with a prediction that increased levels of foreign aid lead to increases in per capita GDP in the recipient developing countries. They find empirical evidence that is consistent with this theory. The economists are able to conclude that A) the theory is valid, but should be subjected to continued scrutiny. B) the theory has been proven correct. C) the theory is always reliable. D) the evidence is rejected by the theory. E) the assumptions used in the theory have been proven correct. Answer: A Diff: 3 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative

21) Suppose a theory predicts that lowering tuition fees at Canadian universities will increase enrollment from low-income households. If empirical evidence is inconsistent with this prediction, then we A) need to amend the theory. B) should test the theory again. C) should change the empirical data. D) should increase tuition fees back to their initial level. E) change the exogenous variables in the theory. Answer: A Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 22) A hypothesis (or a prediction) is a statement about A) how assumptions affect theories. B) those things which we believe to be true, but cannot prove. C) what will certainly happen in the future. D) the relationship between facts explained by the hypothesis. E) how two or more variables are related to each other. Answer: E Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 23) The scientific approach is central to the study of economics. In economic theory, a prediction is A) not testable. B) a prophesy of how the future will unfold. C) a causal statement of the following form: A will occur because B occurred. D) a conditional statement of the following form: if A occurs, then B will follow. E) always based on the law of large numbers. Answer: D Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Recall Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative

24) Of the following, which is the most important characteristic of a successful theory? A) The theory provides a basis for facts about economic behaviour. B) The theory could never be refuted. C) The theory adequately explains all economic behaviour. D) All assumptions on which the theory is based are true. E) The theory allows us to predict behaviour reasonably accurately. Answer: E Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 25) The scientific approach to economic inquiry involves A) choosing data that will support the predictions. B) using only endogenous variables in economic models. C) testing the predictions with empirical data. D) testing the reality of the assumptions of the model. E) using only independent variables. Answer: C Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 26) Economics is scientific because A) economists routinely conduct controlled experiments. B) individual behaviour is predictable. C) economists routinely conduct laboratory experiments. D) economists use data. E) economists test hypotheses by appealing to empirical evidence. Answer: E Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Recall Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative

27) In order to test a theory, one must A) develop a better explanation than the one presented. B) present a series of normative statements and positive statements. C) use assumptions that most closely reflect reality. D) develop normative statements from the law of large numbers. E) confront the predictions of the theory with evidence. Answer: E Diff: 1 Type: MC Topic: 2.2b. testing theories Skill: Recall Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 28) Suppose a particular theory predicts that on Monday, Wednesday, and Friday the stock market will rise and that on Tuesday and Thursday the stock market will fall. If an economist tests this theory and finds that over a six-month period the theory predicts accurately, the economist would likely say that the theory A) has been proven correct. B) is reliable. C) is not in conflict with the evidence. D) shouldn't be taken seriously. E) is not useful because stock markets involve irrational human behaviour. Answer: C Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 29) If a theory's prediction is tested and is in conflict with the evidence, A) the original data and assumptions should be discarded. B) it is rejected with certainty, because it is not possible to reject a hypothesis that is actually true. C) the statistical tolerance of risk for accepting a false hypothesis should be increased. D) inquiry into the matter should cease. E) a new hypothesis is usually suggested and tested. Answer: E Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative

30) When testing theories, economics is disadvantaged compared to the natural sciences because A) it deals with human behaviour and thus is not open to empirical testing. B) it is usually not possible to conduct controlled experiments in economics, in contrast with certain other sciences. C) economic hypotheses cannot be accepted with complete certainty, by contrast with the other sciences. D) economic variables do not change enough to provide reliable data for testing hypotheses. E) some economic variables are determined within the theory. Answer: B Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 31) Most economists believe that economic analysis ________ be made completely free of judgement, in part because it is ________ to absolutely refute a theory on the basis of factual evidence. A) can; possible B) can; impossible C) cannot; possible D) cannot; impossible E) will; necessary Answer: D Diff: 3 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj.: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative

2.3 Economic Data 1) When studying economic data, and when comparing the magnitude of changes in variables with different scales it is best to A) compare the absolute data on each variable. B) compare the relative data on each variable. C) express each variable as an index number. D) express each variable as a logarithmic number. E) use only time-series data. Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 2) When studying economic data, index numbers are especially valuable when comparing A) relative movements in different variables measured in different units. B) relative movements in real and nominal variables. C) linear and logarithmic data. D) time-series data with cross-sectional data. E) government data with private-sector data. Answer: A Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 3) The base year for an index number is A) determined by the year the variable equals exactly 100. B) dependant upon the type of data. C) declared by the federal government. D) chosen arbitrarily by those who construct the data series. E) the year in which 2 or more index numbers are equal to 100. Answer: D Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative

4) For a given year, an index number of average prices across the economy (in Canada, the Consumer Price Index) is the ratio of the A) price of several goods in the given year to that in the base year. B) simple average price of all goods in the given year to that in the base year. C) average price of several goods in the base year to that in the given year. D) weighted prices of a typical bundle of goods purchased in a given year to that in the base year. E) weighted prices of a typical bundle of goods purchased in the base year to that in the given year. Answer: D Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 5) An index number expresses the value of a variable in any given period A) as a percentage of its value in the base period. B) as a weighted average. C) as a proportional weighted average. D) as an average of its value in the base period. E) as an absolute compared to the base period. Answer: A Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative

6) Let 1 stand for "any given period" and 2 stand for "base period." The formula of any index number can be written as A) value of index at 1 = × 100. B) value of index at 1 =

× 100.

C) value of index at 1 =

× 100.

D) value of index at 1 =

.

E) value of index at 1 =

.

Answer: A Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Quantitative 7) The table below shows hypothetical tuition costs at a Canadian university. Year 2015 2016 2017 2018 2019

Tuition $5000 $5050 $5100 $5150 $5200

TABLE 2-1 Refer to Table 2-1. Assume that 2015 is used as the base year, with the index number = 100. The value of the index number in 2017 is calculated as follows: A) (5000/5100) × 100 = 98. B) 5100/5000 = 1.02. C) 5000/5100 = 0.98. D) 5100/5100 = 100. E) (5100/5000) × 100 = 102. Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

8) The table below shows hypothetical tuition costs at a Canadian university. Year 2015 2016 2017 2018 2019

Tuition $5000 $5050 $5100 $5150 $5200

TABLE 2-1 Refer to Table 2-1. Assume that 2015 is used as the base year, with the index number = 100. The value of the index number in 2019 is A) 100. B) 104. C) 1.04. D) 96. E) 0.96. Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

9) The table below shows hypothetical tuition costs at a Canadian university. Year 2015 2016 2017 2018 2019

Tuition $5000 $5050 $5100 $5150 $5200

TABLE 2-1 Refer to Table 2-1. The increase in tuition fees from 2015 to 2019 is A) 200. B) 100/5000. C) 4%. D) 0.04%. E) 200/5200. Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

10) The table below shows hypothetical tuition costs at a Canadian university. Year 2015 2016 2017 2018 2019

Tuition $5000 $5050 $5100 $5150 $5200

TABLE 2-1 Refer to Table 2-1. Assume that 2017 is used as the base year, with the index number = 100. The value of the index number in 2015 is calculated as follows: A) 5000/5100 = 0.98. B) (5100/5000) × 100 = 102. C) 5100/5000 = 1.02. D) 5100/5100 = 100. E) (5000/5100) × 100 = 98. Answer: E Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

11) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2015 2016 2017 2018 2019

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2015 is used as the base year, with the index number = 100. The value of the index number in 2018 is calculated as follows: A) (35/100) × 100 = 35. B) 35/55 = 0.64. C) 55/35 = 1.57. D) (35/55) × 100 = 63.64. E) (55/35) × 100 = 157.14. Answer: D Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

12) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2015 2016 2017 2018 2019

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2015 is used as the base year, with the index number = 100. The value of the index number in 2019 is A) 0.25. B) 2.5. C) 25.0. D) 0.45. E) 45.45. Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

13) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2015 2016 2017 2018 2019

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2015 is used as the base year, with the index number = 100. The value of the index number in 2017 is A) 100. B) 0.72. C) 72.73. D) 1.375. E) 137.5. Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

14) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2015 2016 2017 2018 2019

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2015 is used as the base year, with the index number = 100. What is the percentage change in the monthly fee from 2018 to 2019? A) -28.6% B) -10.0% C) -71.4% D) -25.0% E) -35.0% Answer: A Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

15) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2015 2016 2017 2018 2019

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2015 is used as the base year, with the index number = 100. Which of the following series is the correct set of index numbers for the monthly cell phone charges from 2015 to 2019? A) 0.55; 0.50; 0.40; 0.35; 0.25 B) 100; 91; 73; 64; 45 C) 55; 50; 40; 35; 25 D) 1.0; 0.91; 0.73; 0.64; 0.45 E) 100%; 91%; 73%; 64%; 45% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

16) The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.

Year 1 Year 2 Year 3

E-books 23 000 52 000 106 000

Hardcover Books 72 000 59 000 31 000

TABLE 2-3 Refer to Table 2-3. Suppose we choose Year 1 as the base year and construct a series of index numbers with which to analyze the sales data. The index numbers for volumes of ebooks sold (starting with Year 1) is A) 100; 44.2; 21.7. B) 100; 226.1; 460.9. C) 23 000; 52 000; 106 000. D) 100; 126.1; 360.1. E) 1; 0.442; 0.217. Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

17) The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.

Year 1 Year 2 Year 3

E-books 23 000 52 000 106 000

Hardcover Books 72 000 59 000 31 000

TABLE 2-3 Refer to Table 2-3. Suppose we choose Year 1 as the base year and construct a series of index numbers with which to analyze sales data. The index numbers for volumes of hardcover books sold (starting with Year 1) is A) 431; 819; 100. B) 43.1; 81.9; 100. C) 100; 81.9; 43.1. D) 100; 0.819; 0.431. E) 0.431; 0.819; 100. Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

18) The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.

Year 1 Year 2 Year 3

E-books 23 000 52 000 106 000

Hardcover Books 72 000 59 000 31 000

TABLE 2-3 Refer to Table 2-3. Between Year 1 and Year 3, what is the percentage change in sales of e-books? A) 83 000% B) 460.9% C) 360.9% D) 21.7% E) 83% Answer: C Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

19) The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.

Year 1 Year 2 Year 3

E-books 23 000 52 000 106 000

Hardcover Books 72 000 59 000 31 000

TABLE 2-3 Refer to Table 2-3. Between Year 1 and Year 3, what is the percentage change in sales of hardcover books? A) 0.569% B) 56.9% C) -56.9% D) -0.569% E) -569% Answer: C Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

20) The table below shows hypothetical prices for a particular anatomy textbook at a university bookstore over several years. Year 2015 2016 2017 2018 2019

Price $180 $185 $205 $215 $220

TABLE 2-4 Refer to Table 2-4. Assume that 2015 is used as the base year, with the index number = 100. The value of the index number in 2018 is calculated as follows: A) 215/180 = 1.194. B) 180/215 = 0.837. C) (215/180) × 100 = 119.4. D) (180/215) × 100 = 83.7. E) (215 - 180) = 35. Answer: C Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

21) The table below shows hypothetical prices for a particular anatomy textbook at a university bookstore over several years. Year 2015 2016 2017 2018 2019

Price $180 $185 $205 $215 $220

TABLE 2-4 Refer to Table 2-4. Assume that 2015 is used as the base year, with the index number = 100. The value of the index number in 2017 is A) 0.878. B) 1.0. C) 1.139. D) 87.8. E) 113.9. Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

22) The table below shows hypothetical prices for a particular anatomy textbook at a university bookstore over several years. Year 2015 2016 2017 2018 2019

Price $180 $185 $205 $215 $220

TABLE 2-4 Refer to Table 2-4. Assume that 2019 is used as the base year, with the index number = 100. The value of the index number in 2015 is A) 0.818. B) 1.0. C) 1.222. D) 81.8. E) 122.2. Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

23) The table below shows hypothetical prices for a particular anatomy textbook at a university bookstore over several years. Year 2015 2016 2017 2018 2019

Price $180 $185 $205 $215 $220

TABLE 2-4 Refer to Table 2-4. The increase in the price of the textbook from 2015 to 2019 is A) -40. B) 40. C) 18.2%. D) 22.2%. E) 40%. Answer: D Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

24) The table below shows hypothetical data for the volume of gold and nickel output across several years.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-5 Refer to Table 2-5. What is the index number for gold output in Year 1? A) 0.91 B) 109.7 C) 1.097 D) 91.2 E) 99.7 Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

25) The table below shows hypothetical data for the volume of gold and nickel output across several years.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-5 Refer to Table 2-5. What is the index number for gold output in Year 8? A) 111.9 B) 111.9% C) 11.9 D) 11.9% E) 1.119 Answer: A Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

26) The table below shows hypothetical data for the volume of gold and nickel output across several years.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-5 Refer to Table 2-5. What is the index number for nickel output in Year 6? A) 108.2 B) 105.3 C) 110.7 D) 95.0 E) 95.0% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

27) The table below shows hypothetical data for the volume of gold and nickel output across several years.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-5 Refer to Table 2-5. What is the index number for nickel output in Year 2? A) 98.4% B) 98.4 C) -72.0% D) 72.0% E) 0.984% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

28) The table below shows hypothetical data for the volume of gold and nickel output across several years.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the index number for gold output in Year 2? A) 97.7% B) 0.977 C) -3.4% D) 97.7 E) -34% Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

29) The table below shows hypothetical data for the volume of gold and nickel output across several years.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the index number for gold output in Year 8? A) 104.1% B) 104.1 C) 1.04 D) 60 E) 60% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

30) The table below shows hypothetical data for the volume of gold and nickel output across several years.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the index number for nickel output in Year 5? A) -200 B) -200% C) 96 D) 0.96% E) 96% Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

31) The table below shows hypothetical data for the volume of gold and nickel output across several years.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the index number for nickel output in Year 3? A) 92.4% B) -379 C) 379 D) 0.924% E) 92.4 Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

32) The table below shows hypothetical data for the volume of gold and nickel output across several years.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the percentage change in gold output from Year 1 to Year 7? A) 17.9% B) 84.8% C) 15.2% D) -15.2% E) 0.152% Answer: A Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

33) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2013 2014 2015 2016 2017

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2013 is the base year, with an index number = 100. What is the index number for the value of crude oil exports in 2017? A) 1.22 B) 122.4 C) 122.4% D) 0.817 E) 81.7 Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

34) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2013 2014 2015 2016 2017

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2013 is the base year, with an index number = 100. What is the index number for the value of natural gas exports in 2017? A) 0.912 B) 92.0 C) 92.0% D) 1.09 E) 109.7 Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

35) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2013 2014 2015 2016 2017

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2013 is the base year, with an index number = 100. What is the index number for the value of crude oil exports in 2016? A) 1.64 B) 164.1 C) 60.9 D) 0.609 E) 60.9% Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

36) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2013 2014 2015 2016 2017

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2013 is the base year, with an index number = 100. What is the index number for the value of natural gas exports in 2016? A) 0.109 B) 108.7% C) 108.7 D) 78.6 E) 0.786 Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

37) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2013 2014 2015 2016 2017

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2013 is the base year, with an index number = 100. What is the percentage change in the value of exports of crude oil from 2013 to 2017? A) -18.3% B) -183.2% C) -100% D) 18.3% E) 183.2% Answer: A Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

38) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2013 2014 2015 2016 2017

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2013 is the base year, with an index number = 100. What is the percentage change in the value of exports of natural gas from 2013 to 2017? A) 0.8% B) 8% C) -0.8% D) -18% E) -8% Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

39) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2013 2014 2015 2016 2017

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2013 is the base year, with an index number = 100. What is the percentage change in the value of exports of crude oil from 2016 to 2017? A) 0.34% B) 34% C) -0.34% D) -34% E) -18% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

40) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2013 2014 2015 2016 2017

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2013 is the base year, with an index number = 100. What is the percentage change in the value of exports of natural gas from 2016 to 2017? A) 14.6% B) -14.6% C) -18.7% D) 17.0% E) -17.0% Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative 41) According to the Bank of Canada's website, Canada's Consumer Price Index (CPI) in August 2015 was 127.3, August 2016 was 128.7, August 2017 was 130.5 and August 2018 was 134.2. Given this set of index numbers, what can we conclude about average prices in Canada between August 2015 and August 2018? A) Average prices increased over this time period by 6.9 percent per year. B) Average prices decreased over this time period by 6.9%. C) Average prices decreased each year. D) Average prices increased over this time period by 6.9%. E) Average prices increased each year. Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Quantitative

42) According to the Bank of Canada's website, Canada's Consumer Price Index (CPI) in August 2015 was 127.3, August 2016 was 128.7, August 2017 was 130.5 and August 2018 was 134.2. Given this set of index numbers, what is the percentage change in the average level of prices between August 2015 and August 2018? A) 127.3% B) 134.2% C) 6.9% D) 5.4% E) 5.1% Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Quantitative 43) An economist collects data comparing per-capita expenditures on health care across provinces and territories for the year 2018. The best way to illustrate this data is A) a time-series line graph. B) a cross-sectional bar-chart graph. C) a scatter diagram. D) a logarithmic scale diagram. E) a time-series bar chart diagram. Answer: B Diff: 2 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 44) An economist has data showing Canadian GDP for the years 1945-2018. The best way to illustrate these data is A) a time-series line graph. B) a cross-sectional bar-chart graph. C) a scatter diagram. D) a logarithmic scale diagram. E) a time-series pie chart. Answer: A Diff: 2 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative

45) An economist has data showing household income and energy consumption for 10 000 Canadian households. The best way to illustrate these data is A) a time-series line graph. B) a cross-sectional bar-chart graph. C) a scatter diagram. D) a logarithmic scale diagram. E) a time-series bar chart diagram. Answer: C Diff: 2 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 46) What is the best way to display the unemployment rate in each of the world's developed economies in 2018? A) a time series line graph B) a scatter diagram C) a scatter diagram with two variables D) a cross-sectional graph with time-series data E) a cross-sectional bar chart graph Answer: E Diff: 2 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 47) You have collected data over the summer on the hours of exposure to sunlight received by 100 tomato plants and the number of tomatoes that grow on each plant. What is the best way to display this data and the relationship between these two variables? A) time series line graph B) a cross-sectional bar chart graph C) scatter diagram D) time series bar chart E) cross-sectional line graph Answer: C Diff: 3 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative

48) An economist has data showing average apartment rental rates in different Canadian cities in 2019. The best way to illustrate these data is A) a line graph. B) a scatter diagram. C) a time-series line graph. D) a cross-sectional bar graph. E) a scatter plot. Answer: D Diff: 3 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 49) An economist has data showing Canadian disposable income and consumption spending for the years 1960-2018. The best way to illustrate these data is A) a pair of time-series line graphs. B) a separate scatter diagram for each variable. C) a cross-sectional graph with time series data. D) a cross-sectional bar chart graph. E) a logarithmic scale diagram. Answer: A Diff: 3 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 50) Data collected repeatedly over successive periods of time are called A) cross-sectional data. B) time-analysis data. C) logarithmic data. D) topographic data. E) time-series data. Answer: E Diff: 1 Type: MC Topic: 2.3b. graphing economic data Skill: Recall Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative

51) Data collected of several variables but for the same time period are called A) cross-sectional data. B) time-analysis data. C) logarithmic data. D) topographic data. E) time-series data. Answer: A Diff: 1 Type: MC Topic: 2.3b. graphing economic data Skill: Recall Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 52) A scatter diagram A) is a graph of a theoretical relationship between two variables. B) relates cross-sectional data only. C) relates time series data only. D) plots a series of observations, showing the relationship between two variables. E) shows the dependence of one variable on another. Answer: D Diff: 1 Type: MC Topic: 2.3b. graphing economic data Skill: Recall Learning Obj.: 2-4 Identify several types of economic data, including index numbers, time‐series and cross‐sectional data, and scatter diagrams. Category: Qualitative 2.4 Graphing Economics Theories 1) When it is said that variable A depends on variable B, then A is A) a derivative of B. B) proportional to B. C) partially exclusive of B. D) a function of B. E) independent of B. Answer: D Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

2) Consider the following equation: Y = 10 + 5X - X2. This equation is an expression of A) a functional relation between X and Y. B) two dependent variables in a functional relation. C) two independent variables in a functional relation. D) a functional relation in a schedule format. E) a functional relation in a verbal format. Answer: A Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 3) When considering how a family's level of consumption changes in response to changes in its income, A) income is the dependent variable and family consumption is the independent variable. B) consumption is the dependent variable and income is the independent variable. C) both of the variables are independent. D) both of the variables are dependent. E) there is no relationship between the variables. Answer: B Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 4) The mathematical expression of a relationship between two or more variables is usually known as A) a definition. B) an assumption. C) an observation. D) a function. E) a theory. Answer: D Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Recall Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

5) The statement "Y is a function of X" means that the A) value of Y depends on that of X. B) value of X depends on that of Y. C) values of Y and X are the same. D) values of Y and X are independent. E) values of Y and X are related to some third variable. Answer: A Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Recall Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 6) When an increase in one variable is associated with an increase in a second variable, the two variables are A) proportionally related. B) inversely proportionally related. C) positively related. D) equivalent. E) negatively related. Answer: C Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 7) When an increase in one variable is associated with a decrease in a second variable, the two variables are A) proportionally related. B) inversely proportionally related. C) positively related. D) equivalent. E) negatively related. Answer: E Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Recall Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

8) Negatively related variables change such that as the value of one variable A) decreases, the value of the other variable remains the same. B) increases, the value of the other variable increases. C) increases, the value of the other variable remains the same. D) decreases, the value of the other variable decreases. E) increases, the value of the other decreases. Answer: E Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 9) Positively related variables change such that as the value of one variable A) decreases, the value of the other variable increases. B) decreases, the value of the other variable decreases. C) decreases, the value of the other variable remains the same. D) increases, the value of the other variable decreases. E) increases, the value of the other variable remains the same. Answer: B Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 10) Suppose we observe that consumption of electricity decreases when the price of electricity rises. We can say that the two variables are related A) positively. B) linearly. C) negatively. D) non-linearly. E) exogenously. Answer: C Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

11) Consider the functional relationship between two variables, X and Y. If Y is an increasing function of X, then A) Y increases when X increases. B) Y increases when X decreases. C) X decreases when Y increases. D) Y decreases when X increases. E) X remains constant as Y increases. Answer: A Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 12) The slope of a straight line is necessarily A) zero. B) constant. C) positive. D) negative. E) increasing as one moves up the line. Answer: B Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 13) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose that two points on a straight line are (X = 4, Y = 5), and (X = 2, Y = 1). The slope of this line is A) -2. B) - . C) . D) . E) 2. Answer: E Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other.

Category: Quantitative 14) If the graph of a function is a horizontal line, the slope of this line is A) undefined. B) 0. C) 1. D) infinity. E) -1. Answer: B Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 15) On a coordinate graph with y on the vertical axis and x on the horizontal axis, what is the X intercept of the function X = 60 + 3Y? A) -20 B) 20 C) -60 D) 60 E) 0 Answer: D Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 16) On a coordinate graph with y on the vertical axis and x on the horizontal axis, what is the Y intercept of the function X = 60 + 3Y? A) -20 B) 0.1 C) 3.0 D) 20 E) 60 Answer: A Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

17) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose point A represents coordinates (X = 5, Y = 6) and point B represents coordinates (X = 2, Y = 3). Then the slope of the straight line joining points A and B is A) -1. B) 2/3. C) 5/6. D) 1. E) 3/2. Answer: D Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 18) The slope of a curve is A) always positive. B) always negative. C) positive if the curve rises to the right. D) negative if the curve rises to the right. E) always constant. Answer: C Diff: 1 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 19) On a coordinate graph with y on the vertical axis and x on the horizontal axis, consider the line which is the graph of the function Y = 60 - 4X. The slope of this line is A) 4. B) 60. C) -2.5. D) -4.0. E) -40. Answer: D Diff: 1 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

20) In a co-ordinate graph, with Y on the vertical axis and X on the horizontal axis, the variable X is positive and the variable Y is negative in the ________ quadrant. A) top, right B) top, left C) bottom, left D) bottom, right E) any of the above Answer: D Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Recall Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 21) In a co-ordinate graph with Y on the vertical axis and X on the horizontal axis, the variable X is negative and the variable Y is negative in the ________quadrant. A) top, right B) top, left C) bottom, right D) bottom, left E) any of the above Answer: D Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Recall Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 22) In a co-ordinate graph with Y on the vertical axis and X on the horizontal axis, the variable X is positive and the variable Y is positive in the ________quadrant. A) top, right B) top, left C) bottom, right D) bottom, left E) any of the above Answer: A Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Recall Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

23) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose point A represents co-ordinates (X = 10, Y = 12) and point B represents coordinates (X = 5, Y = 7). The slope of the straight line joining points A and B is A) -1. B) 1. C) 2/3. D) 3/2. E) 5/6. Answer: B Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 24) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose point A represents coordinates (X = 2, Y = 12) and point B represents coordinates (X = 6, Y = 4). The slope of the straight line joining points A and B is A) 5. B) - . C) . D) -2. E) 2. Answer: D Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

25)

FIGURE 2-1 Refer to Figure 2-1. What is the slope of the line in part (i) of the figure? A) -10 B) 5 C) -5 D) -1 E) 1 Answer: A Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

26)

FIGURE 2-1 Refer to Figure 2-1. What is the slope of the line in part (ii) of the figure? A) 12.5 B) -12.5 C) 1 D) 0.05 E) 0.08 Answer: D Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

27) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose point A represents co-ordinates (x = 2, y = 16) and point B represents coordinates (x = 10, y = 4). What is the slope of the straight line joining points A and B? A) 0.75 B) -0.75 C) 1.5 D) -1.5 E) -0.43 Answer: D Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 28) Suppose Ahmoud would spend $1200 per year on travel, even if his annual income were zero. As his income rises, he would spend 20% of each additional dollar of income on travel. Choose the correct mathematical equation that describes the functional relation between his travel spending (T) and his income (Y). A) Y = 1200 + 0.2T B) Y = 1200 - 0.2T C) T = 0.2 + 1200Y D) T = 1200 + 0.8Y E) T = 1200 + 0.2Y Answer: E Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

29) Suppose Jillian will spend $250 on books per year, even if her income is zero. As her income rises, she will spend 8% of each additional dollar of income on books. Choose the correct mathematical equation that describes the functional relation between her spending on books (B) and her income (Y). A) Y = 250 - 0.02 Y B) Y = 250 - 8Y C) B = 250 + 0.08 Y D) B = 250 + 0.02Y E) B = 250 + 0.2Y Answer: C Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 30) Suppose that over a 12-month period, Sonali's income (Y) rises from $27 000 to $35 000 per year and, as a result, her spending on travel (T) increases from $1500 to $2500 per year. Assume there is a linear relation between the two variables, Y and T. What is the marginal response in T to a change in Y? A) 8 B) 4 C) 0 D) 0.25 E) 0.125 Answer: E Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

31) Suppose there is a linear relationship between national income and total tax revenue. If national income is $100 million, then $25 million is collected as tax revenue . If national income is $200 million, then $40 million is collected in tax revenue. What is the marginal response in tax revenue to a change in national income? A) 15 million B) 0.15 million C) 15 D) 0.15 E) -15 Answer: D Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 32) Suppose there is a linear relationship between the ticket price (P) to a university basketball game and the number of tickets sold (Q). If the ticket price is $20, then 600 tickets are sold; if the ticket price is $8, then 3000 tickets are sold. What is the slope of the function if Q is plotted on the horizontal axis and P is plotted on the vertical axis? A) -0.005 B) -0.05 C) 0 D) 0.05 E) 0.005 Answer: A Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

33) Suppose there is a linear relationship between the number of hours per day that Michael spends on social media and his average grade. If Michael spends one hour per day on social media, his average grade is 90; if he spends 9 hours per day his average grade is 40. What is the slope of the function if hours on social media is plotted on the horizontal axis and grade is plotted on the vertical axis? A) -2.25 B) 2.25 C) -6.25 D) 6.25 E) 0 Answer: C Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

34)

FIGURE 2-2 Refer to Figure 2-2. The slope of curve A is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) undefined. Answer: B Diff: 1 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

35)

FIGURE 2-2 Refer to Figure 2-2. The slope of curve B is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) undefined. Answer: A Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

36)

FIGURE 2-2 Refer to Figure 2-2. The slope of curve C is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) impossible to describe. Answer: C Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

37)

FIGURE 2-2 Refer to Figure 2-2. The slope of curve D is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) undefined. Answer: D Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

38)

FIGURE 2-3 Refer to Figure 2-3. The slope of curve A is A) zero. B) negative and variable. C) positive and variable. D) positive from X1 to X2 and negative from X2 to X3. E) negative from X1 to X2 and positive from X2 to X3. Answer: D Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

39)

FIGURE 2-3 Refer to Figure 2-3. The slope of curve B is A) zero at X2. B) always negative but variable. C) always positive but variable. D) undefined at X2. E) positive from Y1 to Y2 and negative between Y2 and Y3. Answer: A Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

40)

FIGURE 2-3 Refer to Figure 2-3. At X2 on curve A, the A) maximum occurs at Y1. B) minimum occurs at Y4. C) slope of the curve is zero. D) slope is increasing. E) slope is decreasing. Answer: C Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

41)

FIGURE 2-3 Refer to Figure 2-3. On curve A, the maximum value of Y occurs at A) values of X greater than X3. B) X3. C) X2. D) X1. E) X = 0. Answer: C Diff: 1 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

42)

FIGURE 2-3 Refer to Figure 2-3. At X2 on curve B, the A) maximum occurs at Y1. B) minimum occurs at Y4. C) slope of the curve is zero. D) slope is increasing. E) slope is decreasing. Answer: C Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

43) At the minimum or the maximum of the graph of a non-linear function (with x on the horizontal axis and y on the vertical axis) the slope of the curve is A) 1. B) -1. C) 0. D) infinite. E) undefined. Answer: C Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 44) At the minimum or the maximum of the graph of a non-linear function (with x on the horizontal axis and y on the vertical axis) the marginal response of y to a small change in x is A) 1. B) -1. C) 0. D) infinite. E) undefined. Answer: C Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

45)

FIGURE 2-4 Refer to Figure 2-4. This non-linear function shows that over the range shown, A) as more fertilizer is applied, the marginal response in yield is increasing B) as more fertilizer is applied, the marginal change in yield is diminishing. C) as the yield per acre increases, the amount of fertilizer required per acre is diminishing. D) as the yield per acre increases, the amount of fertilizer required per acre is increasing. E) as more fertilizer is applied, the total yield per acre is diminishing. Answer: B Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

46)

FIGURE 2-4 Refer to Figure 2-4. The functional relation shown between fertilizer applied and wheat yield can be described as a A) constant marginal response. B) increasing partial response. C) decreasing total response. D) diminishing marginal response. E) increasing marginal response. Answer: D Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

47)

FIGURE 2-4 Refer to Figure 2-4. The slope of the non-linear function changes as we move along the curve. The slope is A) positive and increasing, indicating an increasing marginal response. B) negative and decreasing, indicating a diminishing marginal response. C) positive and decreasing, indicating a diminishing marginal response. D) negative and increasing, indicating an increasing marginal response. E) constant at all points, indicating a constant marginal response. Answer: C Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

48)

FIGURE 2-4 Refer to Figure 2-4. If we want to know the marginal response of "yield per acre" due to a change in "fertilizer applied per acre of wheat" at point B, then we should determine the A) slope of a straight line tangent to point B. B) slope of a straight line joining points B and C. C) yield per acre at 30 units of fertilizer. D) the slope of a straight line from the origin to point B. E) quantity of fertilizer applied at point B. Answer: A Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

49)

FIGURE 2-4 Refer to Figure 2-4. Suppose we draw a straight line tangent to point B of the non-linear function. The straight line has a slope of 0.075. What information is conveyed to us by this measurement? A) At point B, the marginal response to the application of 30 units of fertilizer per acre is 0.075 tonnes of wheat. B) At point B, if one additional unit of fertilizer is applied per acre, the marginal response is 0.075 tonnes of wheat per acre. C) Because point B is midway between point A and point C, the yield per acre is 0.075 tonnes of wheat when fertilizer applied is between 10 and 60 units per acre. D) At point B, when fertilizer is applied at a rate of 30 units per acre, the yield is 0.075 tonnes per acre. E) At point B, the marginal response to the application of 0.075 units of fertilizer is between 4 and 5 tonnes per acre. Answer: B Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

50) Figure 2-5 shows monthly average (per unit) production costs for producing Good X.

FIGURE 2-5 Refer to Figure 2-5. What is the slope of this non-linear function when 200 units per month are being produced? A) 4 B) -4 C) 0.25 D) -5.2 E) -0.25 Answer: B Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

51) Figure 2-5 shows monthly average (per unit) production costs for producing Good X.

FIGURE 2-5 Refer to Figure 2-5. What is the slope of this non-linear function when 600 units per month are being produced? A) -2 B) 4 C) -4 D) 1 E) -1 Answer: E Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

52) Figure 2-5 shows monthly average (per unit) production costs for producing Good X.

FIGURE 2-5 Refer to Figure 2-5. What is the slope of this non-linear function when 1200 units per month are being produced? A) 0.25 B) -0.25 C) 4 D) -4 E) -2 Answer: B Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj.: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative Economics - Canadian Edition, 16e (Ragan) Chapter 3 Demand, Supply, and Price

3.1 Demand 1) Which of the following best defines quantity demanded of a good? A) The amount an individual purchases at the good's current price. B) The amount an individual purchases at his or her current income. C) The amount, per time period, that is desired at the most recent price. D) The amount, per time period, an individual desires to purchase at any given price. E) The various amounts that all individuals desire at all relevant prices. Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 2) The time period to which quantity demanded refers when constructing demand curves is A) a moment in time. B) a long period of time. C) one year. D) any specified time period. E) a period shorter than one year. Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 3) The term "quantity demanded" refers to the A) total amount of a good that is actually purchased during a given period of time. B) entire relationship between desired purchases and possible prices. C) total amount of a good that purchasers wish to purchase at a given price during a given period of time. D) product of advertising, and is unrelated to price. E) total amount of a good that people wish to buy, regardless of price. Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative

4) Four of the five statements below contain a stock and a flow. Which statement describes ONLY flow variables? A) Chris earns $1500 per month and has $4000 in his savings account at the bank. B) Nancy spends $400 per month on her credit card and has a balance owing of $2567. C) The Transit Authority of Mytown collects $22 000 in fares per day and has an operating budget of $2 million per year. D) Country X spends an average of $1 million per year for flood relief and has an emergency services fund of $20 million. E) The Canadian Federal government has a debt of approximately $750 billion and an annual deficit of over $25 billion dollars. Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 5) Four of the five statements below contain a stock and a flow. Which statement describes ONLY stock variables? A) Chris earns $1500 per month and has $4000 in his savings account at the bank. B) Nancy has a balance owing on her credit card of $2567 and a debt on her line of credit of $14,050. C) The Transit Authority of Mytown collects $22 000 in fares per day and has an operating budget of $2 million per year. D) Country X spends an average of $1 million per year for flood relief and has an emergency services fund of $20 million. E) The Canadian Federal government has a debt of approximately $750 billion and an annual deficit of over $25 billion dollars. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 6) A variable that is a "stock" A) is measured per unit of time. B) has meaning only at a point in time. C) has only to do with products where inventory is kept. D) has the same units as a flow variable. E) is used only in accounting. Answer: B Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good.

Category: Qualitative 7) Ceteris paribus means A) other things being equal. B) and so forth. C) knowledge gained before the study of evidence is made. D) among other things. E) in a historical context. Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 8) The "law of demand" hypothesizes that, other things being equal, A) the lower the price, the greater the demand. B) price and demand vary inversely. C) the higher the price, the lower the quantity demanded. D) the higher the income, the higher the quantity demanded. E) price and quantity demanded are positively related. Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 9) In a market for a good or service, the quantities demanded and supplied are A) both stock variables. B) both flow variables. C) a flow variable and a stock variable, respectively. D) a stock variable and a flow variable, respectively. E) neither stock nor flow variables. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative

10) A demand curve is a representation of the relationship, ceteris paribus, between quantity demanded of a product and A) supply. B) wealth. C) its price. D) income. E) preferences. Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 11) The "law of demand" describes A) an inverse relationship between the price of a good and the quantity of the good demanded per unit of time, other things being equal. B) a positive relationship between the price of a good and the quantity of the good demanded per unit of time, ceteris paribus. C) an inverse relationship between the price of a good and the demand for the good, per unit of time. D) a direct relationship between the price of a good and the demand for the good. E) any relationship between quantity demanded and demand for a good. Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 12) Which statement best describes the "law of demand"? Other things being equal, the quantity of tennis rackets demanded will be greater if the A) incomes of tennis players are higher. B) price of tennis rackets is lower. C) price of badminton rackets is higher. D) number of tennis players is higher. E) demand for tennis rackets rises. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative

13) Which statement best describes a "demand schedule"? A) a functional statement of the demand relationship B) a graph showing the inverse relationship between quantity demanded and price C) a numerical table showing the quantities demanded at various prices D) a timetable showing the quantity demanded at different time periods E) an abstract concept underlying the graph of a demand curve Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 14) An important assumption underlying a demand schedule is that A) quantity demanded and demand mean the same thing. B) everything else except the product's price is being held constant. C) the numbers are not important; the general relationship between the variables is. D) household tastes rarely change. E) income has little significance to household demand. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 15) Which statement best describes a demand curve? A) a functional statement of the demand relationship B) a numerical table showing the inverse relationship between quantity demanded and price, other things being equal C) a graph showing the relationship between quantity demanded and the price of a commodity, other things being equal D) a timetable showing the quantity demanded at different time periods E) an abstract concept underlying the graph of a demand curve Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative

16) A demand curve represents graphically A) a functional statement of the income-quantity relationship. B) the timeless relationship between quantity demanded and price. C) the quantity demanded per unit of time at various prices. D) the available quantities at all possible prices for the product. E) quantity demanded. Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 17) To say that the demand curve for movies is negatively sloped means that A) less quantity will be demanded at lower prices. B) less quantity will be demanded as preferences change. C) less quantity will be demanded at higher prices. D) more quantity will be demanded as consumers' income increases. E) less quantity will be demanded at the same price. Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 18) A change in demand is said to take place when there is a A) movement along the demand curve. B) shift of the demand curve. C) shift of the supply curve. D) price change. E) quantity change. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

19) What is a "normal" good? A) a good that everyone normally consumes B) a good that normal people consume C) a good for which demand varies directly with household income D) a good for which demand varies inversely with household income E) a good for which demand does not vary with household income Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 20) What is an inferior good? A) a good that everyone normally consumes B) a good that inferior people consume C) a good for which demand varies directly with household income D) a good for which demand varies inversely with household income E) a good for which demand does not vary with household income Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 21) Consider butter and margarine, which are substitutes. When the price of butter falls, the demand curve for margarine is likely to A) shift to the right. B) shift to the left. C) remain stationary. D) remain stationary, although its price will fall. E) remain stationary, although its price will rise. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

22) Goods X and Y are defined to be substitutes in consumption if A) the supply of Y varies inversely with the price of X. B) the two goods are virtually the same. C) the supply of Y varies directly with the price of X. D) the demand for Y varies directly with the price of X. E) the demand for Y varies inversely with the price of X. Answer: D Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 23) If the price of tea falls and as a consequence the demand for sugar rises, then tea and sugar are A) substitute goods. B) complementary goods. C) luxury goods. D) neutral goods. E) independent goods. Answer: B Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 24) If goods X and Y are substitutes and the price of X falls, all other things being equal, the demand curve for Y will A) shift to the left. B) shift to the right. C) not shift at all. D) be indeterminate. Answer: A Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

25) If goods X and Y are complements and the price of X rises, ceteris paribus, the demand curve for Y will A) be indeterminate. B) shift to the right. C) shift to the left. D) not shift at all. Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 26) If goods X and Y are complements and the price of X falls, all other things being equal, the demand curve for Y will A) shift to the left. B) shift to the right. C) not shift at all. D) be indeterminate. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 27) Which of the following pairs of goods are likely to be substitutes for a large group of consumers? A) eggs and toast B) coffee and cream C) green beans and peas D) wieners and buns E) pancakes and syrup Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

28) Which of the following pairs of goods are likely to be complements for a large group of consumers? A) televisions and radios B) cars and trucks C) tea and coffee D) e-readers and e-books E) tents and tent-trailers Answer: D Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 29) If tastes change so that a particular style of winter boots is now considered more appealing, the likely result is A) a shift in the demand curve to the right. B) a shift in the demand curve to the left. C) a movement down the demand curve. D) a movement up the demand curve. E) no change in the demand curve. Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 30) Cars and gasoline are likely to be A) complementary goods. B) substitute goods. C) independent goods. D) inferior goods. E) luxury goods. Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

31) Consider cars and gasoline. Other things being equal, when the price of cars decreases, the demand for gasoline is likely to A) remain unchanged because cars and gasoline are produced independently of one another. B) decrease because the two goods are complements. C) remain unchanged. D) increase because the two goods are complements. E) remain unchanged because cars and gasoline are two distinct markets. Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 32) Ceteris paribus, the position of the demand curve for apples will remain unchanged if there is a change in the A) income of apple eaters. B) price of apples. C) hourly wage rate of most workers. D) price of pears. E) knowledge regarding the health benefits of eating fresh fruit. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 33) A variable that is assumed to be constant along an individual's demand curve for good X is the A) price of good X. B) quantity of X demanded per unit of time. C) price of a substitute good, Y. D) amount of X the individual wishes to purchase. E) consumer's real purchasing power. Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

34) "Demand" in a particular market refers to A) only the quantity demanded by households at current market prices. B) the quantity purchased at the current market price. C) the quantity that is desired but not satisfied by current supply. D) the entire relationship between quantity demanded and price. E) the relationship between demand and supply. Answer: D Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 35) A change in which of the following variables will result in NO change in the demand for a given commodity? A) average household income B) the distribution of income C) population D) tastes in favour of the commodity E) the price of the commodity Answer: E Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 36) When deriving the market demand curve for a commodity, the only variable(s) that can change is (are) the A) price of a related commodity. B) income of consumers. C) quantity of the commodity demanded. D) price of the commodity. E) both C and D. Answer: E Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

37) Which of the following would cause a movement along the demand curve for ski-lift tickets, other things being equal? A) a change in tastes in favour of skiing B) an increase in price as the supply curve for lift tickets shifts to the left C) a rise in the price of ski boots and skis D) a rise in average household income E) an increase in population Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 38) In which statement is the term "demand" used correctly? (1) An increase in the price of eggs will lead to a decrease in the demand for eggs. (2) An increase in the price of eggs will lead to a decrease in the demand for bacon. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 39) In which statement is the term "demand" used correctly? (1) An increase in the price of copper will lead to a decrease in the demand for copper. (2) An increase in the price of copper will lead to an increase in the demand for aluminum (a substitute for copper). A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

40) In which statement is the term "demand" used correctly? (1) A decrease in the price of airline tickets led to an increase in quantity demanded for airline tickets. (2) A decrease in the price of airline tickets led to an increase in the demand for airline tickets. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: B Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 41) In which statement is the term "demand" used correctly? (1) An increase in the price of copper will lead to an increase in the demand for aluminum (a substitute for copper). (2) An increase in the price of aluminum will lead to a decrease in quantity demanded of aluminum. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: D Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 42) Suppose new medical research suggests that consuming 200 grams of tofu everyday helps to prevent heart disease. Widespread knowledge of this research, other things being equal, is likely to have what impact on the market for tofu? A) shift the whole demand curve to the right B) shift the whole demand curve to the left C) movement along the demand curve to the right D) movement along the demand curve to the left E) there would likely be no effect Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied

Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 43) Economists say there has been a change in demand when there is A) a movement along the demand curve. B) a shift of the demand curve. C) a shift of the supply curve. D) a price change. E) a quantity change. Answer: B Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 44) Which of the following events would result in a change in the quantity demanded for some commodity but NOT a change in the demand for that commodity? A) a change in average household income B) a change in the distribution of income C) a change in population D) a change in tastes in favour of the commodity E) a change in the price of the commodity Answer: E Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 45) Quantity demanded is a flow variable, which means that it must be expressed A) as so much at a specific moment in time. B) in units of the good per day. C) in units of the good per week. D) in units of the good per year. E) in units of the good per period of time. Answer: E Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

46)

FIGURE 3-1 Refer to Figure 3-1. If demand is given by the curve D, the ________ energy-efficient light bulbs is at a price of $9. A) demand for B) quantity purchased of C) demand schedule for D) quantity demanded of E) quantity sold of Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Graphics: Graph Category: Qualitative

47)

FIGURE 3-1 Refer to Figure 3-1. The movement along the demand curve, D, from point v to point x, could be caused by A) a change in preferences away from ordinary light bulbs to energy-efficient light bulbs. B) a change in the price of energy-efficient light bulbs. C) an increase in household income, which allows consumers to purchase more light bulbs. D) a change in the price of ordinary light bulbs. E) an expectation that new, government regulations will require the use of energyefficient light bulbs only. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Graphics: Graph Category: Qualitative

48)

FIGURE 3-1 Refer to Figure 3-1. A shift of the demand curve for energy-efficient light bulbs from D to D2 could be caused by A) an increase in the price of ordinary light bulbs. B) a change in preferences away from ordinary bulbs to energy-efficient bulbs. C) an expectation that new government regulation will require the use of energy-efficient light bulbs only. D) a decrease in the price of energy-efficient light bulbs. E) a news bulletin stating that energy-efficient light bulbs emit a harmful gas. Answer: E Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Graphics: Graph Category: Qualitative

49)

FIGURE 3-1 Refer to Figure 3-1. A shift of the demand curve for energy-efficient light bulbs from D to D1 could be caused by A) a decrease in the price of ordinary light bulbs. B) a news bulletin stating that energy-efficient light bulbs emit a harmful gas. C) a decrease in the price of energy-efficient light bulbs. D) an expectation that government regulation will soon prohibit the use of ordinary light bulbs. E) a change in preferences toward ordinary light bulbs. Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Graphics: Graph Category: Qualitative

50) Suppose that the demand curves for goods A, B, and C have the following functional forms:, where Q denotes quantity demanded and P denotes price: QA = 120 - 3.5 PA - 6PB QB = 100 - 2PB + 3PC QC = 1500 - 0.5PC. Based on these demand curves, which of the following pairs of goods are known to be complements? A) B and C B) A and C C) A and B D) A and C, and B and C E) none of the pairs are complements Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative 51) Consider the following equations for the demand for good A, where Q A denotes quantity demanded, PA denotes price, and M denotes income: 1. QA = 120 + 3.5 PA + 14M 2. QA = 120 - 3.5 PA + 14M 3. QA = 120 - 3.5 PA - 14M Which of these equations represents a downward-sloping demand curve for a normal good? A) 1 only B) 2 only C) 3 only D) 1 and 2 E) none of the equations Answer: B Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative

52) Consider the following equations for the demand for good A, where QA denotes quantity demanded, PA denotes price, and M denotes income: 1. QA = 120 + 3.5 PA + 14M 2. QA = 120 - 3.5 PA + 14M 3. QA = 120 - 3.5 PA - 14M Which of these equations represents a downward-sloping demand curve for an inferior good? A) 1 only B) 2 only C) 3 only D) 1 and 2 E) none of the equations Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative 53) Suppose that the demand curves for goods A, B, and C have the following functional forms:, where Q denotes quantity demanded and P denotes price: QA = 120 - 3.5PA - 6PB QB = 100 - 2PB + 3PC QC = 1500 - 0.5PC. Based on these demand curves, which of the following pairs of goods are known to be substitutes? A) A and C B) A and B C) B and C D) A and C, and B and C E) none of the pairs are substitutes Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative

54) Suppose the demand curves for goods A, B, and C have the following functional forms, where Q denotes quantity demanded, P denotes price, and M denotes income: QA = 120 - 3.5PA - 6PB + 14M QB = 100 - 2PB + 3PC + 1.1M QC = 1500 - 0.5PC - 300M. Based on these demand curves, which of the following goods are known to be normal goods? A) A B) B C) C D) A and B only E) A, B and C Answer: D Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative 55) Suppose the demand curves for goods A, B, and C have the following functional forms, where Q denotes quantity demanded, P denotes price, and M denotes income: QA = 120 - 3.5PA - 6PB + 14M QB = 100 - 2PB + 3PC + 1.1M QC = 1500 - 0.5PC - 300M. Based on these demand curves, which of the following goods are known to be inferior goods? A) A B) B C) C D) A and B only E) A, B and C Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj.: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative

3.2 Supply 1) The positive slope of a supply curve indicates that A) as price goes up, quantity supplied will decrease. B) consumers will want to buy less at higher prices. C) as price goes up, quantity supplied will increase. D) if the costs of production increase, the quantity supplied will increase. E) as price goes up, quantity supplied will remain constant. Answer: C Diff: 2 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 2) A supply curve is a representation of the relationship, ceteris paribus, between quantity supplied of a product and A) demand. B) quantity demanded. C) the number of sellers. D) preference of sellers. E) the product's own price. Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 3) Which statement best describes a "supply schedule"? A) a functional statement of the supply relationship B) a graph showing the positive relationship between quantity supplied and price C) a timetable showing the quantity supplied at different time periods D) a numerical table showing the quantities supplied at various prices E) the graphical relationship between quantity supplied and price Answer: D Diff: 2 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

4) Which of the following events would cause a change in the quantity supplied of some agricultural commodity but would not cause a change in the supply of that same commodity? A) a change in factor costs B) a technological change C) a change in the price of the commodity D) a change in the number of suppliers of the commodity E) a change in the price of substitute goods Answer: C Diff: 3 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 5) Suppose that many coal mines are shut for environmental reasons. This will cause A) no change in the supply curve, only a change in price. B) a movement up the supply curve. C) an increase in the supply of coal (a rightward shift of the supply curve). D) a decrease in the supply of coal (a leftward shift of the supply curve). E) a movement down the supply curve. Answer: D Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 6) The market supply curve for wooden shipping crates would shift to the right A) if a government subsidy for shipping crates is withdrawn. B) if the price of lumber falls. C) if a tax is applied to shipping crates. D) if suppliers leave the industry. E) if technological conditions for the production of crates deteriorates. Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

7) The term "quantity supplied" is the amount of a product that A) firms wish to sell at a given price during a given period of time. B) firms actually sell during a given period of time at a given price. C) households wish firms would sell during a given period of time at a given price. D) is exchanged between firms and consumers during a given period of time at a given price. E) is supplied at a fair market price. Answer: A Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 8) Suppose there is a decrease in the quantity supplied of copper at each price. This change would imply A) a shift to the left of the supply curve. B) a shift to the right of the supply curve. C) a movement up the supply curve. D) a movement down the supply curve. Answer: A Diff: 1 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 9) The term "supply" in a particular market refers to A) the particular quantity supplied at the moment. B) only one point on the supply curve. C) only one entry in a supply schedule. D) the entire relationship between quantity supplied and price. E) the quantity actually sold to consumers. Answer: D Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

10) A fall in the price of raw milk (which is used in the production of ice cream) will A) decrease the supply of ice cream, causing the supply curve of ice cream to shift to the left. B) increase the supply of ice cream, causing the supply curve of ice cream to shift to the right. C) decrease the supply of ice cream, causing the supply curve to shift to the right. D) have no effect on the supply curve of ice cream but cause a downward movement along the supply curve of ice cream. E) increase the supply of ice cream, causing the supply curve to shift to the left. Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 11) To say that the supply curve is positively sloped means that A) as price goes up, quantity supplied will decrease. B) households will want to buy less at higher prices. C) as price goes up, quantity supplied will increase. D) if the costs of production increase, the quantity supplied will have to increase also. E) as price goes up, quantity supplied will remain constant. Answer: C Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 12) A rightward shift in the supply curve indicates A) a decrease in the quantity supplied at each price. B) that an increase in income results in an increase in the quantity demanded at each price. C) that more is demanded at each price. D) an increase in the quantity supplied at each price. E) a shift in the demand curve also (because demand must equal supply). Answer: D Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

13) A "decrease in supply" refers to which of the following? A) the likely result from a decrease in the price of a factor of production B) a downward movement along a supply curve C) a decrease in quantity supplied D) a leftward shift in the supply curve E) a drop in the quantity actually exchanged Answer: D Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 14) Suppose that a newer way to produce a good is discovered, which reduces production costs for the good. This will cause A) no change in the supply curve, only a change in price. B) a decrease in supply (a leftward shift of the supply curve). C) a movement up the supply curve. D) a movement down the supply curve. E) an increase in supply (a rightward shift of the supply curve). Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 15) Suppose that some resource X is necessary to produce some good Y. If the price of X falls, A) the supply curve of resource X shifts to the left. B) the supply curve of good Y shifts to the right. C) the supply curve of good Y is unaffected. D) there is a movement along the supply curve of good Y. E) the demand curve for X shifts to the right. Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

16) An improvement in the technology used to produce solar panels will A) lead to a leftward shift in the supply curve. B) lead to a leftward shift of the demand curve. C) lead to a rightward shift of the demand curve. D) have no effect on the supply curve for solar panels. E) lead to a rightward shift in the supply curve. Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 17) An increase in the number of firms wanting to provide accounting services will cause a ________ for accounting services. A) leftward shift in the supply curve B) rightward shift in the demand curve C) leftward shift in the demand curve D) rightward shift in the supply curve E) simultaneous shift of both the demand and supply curves Answer: D Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 18) The supply for some good or service will decrease if A) technology improves. B) the prices of inputs fall. C) the prices of inputs increase. D) technology improves and the price of inputs falls. E) more suppliers enter the industry. Answer: C Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

19) In which statement is the term "supply" used correctly? (1) An increase in the price of leather will lead to a decrease in the supply of leather. (2) An increase in the price of leather will lead to a decrease in the supply of leather boots. A) the second statement only B) neither statement C) the first statement only D) both statements E) not enough information to tell Answer: A Diff: 3 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 20) In which statement is the term "supply" used correctly? (1) An increase in the price of copper will lead to an increase in the quantity supplied of copper. (2) An increase in the price of copper will lead to an increase in the supply of copper. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 21) In which statement is the term "supply" used correctly? (1) An increase in the number of suppliers of copper will lead to an increase in the supply of copper. (2) An increase in the number of suppliers of copper will likely lead to a decrease in the quantity supplied of copper. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement

along the supply curve. Category: Qualitative 22) In which statement is the term "supply" used correctly? (1) A hurricane that destroys orange groves in Florida will lead to a decrease in the quantity supplied of oranges. (2) A new technology that prevents a fungus in Florida orange trees will lead to an increase in the supply of oranges. A) the first statement B) the second statement C) both statements D) neither statement E) more information is needed Answer: C Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 23) A fall in the price of potatoes, which are used in the production of french fries, will A) lead to a decrease in the supply of french fries, causing the supply curve of french fries to shift to the left. B) have no effect on the supply of french fries. C) have no effect on the supply of french fries but cause a movement along the supply curve of french fries. D) lead to a decrease in the demand for french fries. E) lead to an increase in the supply of french fries, causing the supply curve of french fries to shift to the right. Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 24) A leftward shift in the supply curve indicates A) a decrease in the quantity supplied at each price. B) that an increase in income results in an increase in the quantity demanded at each price. C) that more is demanded at each price. D) an increase in the quantity supplied at each price. E) that more suppliers have entered the industry. Answer: A Diff: 2 Type: MC Topic: 3.2. supply

Skill: Recall Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 25)

FIGURE 3-2 Refer to Figure 3-2. If the supply curve is given by S, the ________ energy-efficient light bulbs is when the price is $9. A) quantity supplied of B) quantity purchased of C) quantity sold of D) supply schedule for E) supply of Answer: A Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Graphics: Graph Category: Qualitative

26)

FIGURE 3-2 Refer to Figure 3-2. The movement along the supply curve, S, from point a to point c, could be caused by A) a decrease in the price of energy-efficient light bulbs. B) a decrease in the price of glass, a major input in the production of energy-efficient light bulbs. C) an increase in the number of suppliers of energy-efficient light bulbs. D) an increase in the price of energy-efficient light bulbs. E) a decrease in the price of ordinary light bulbs. Answer: D Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Graphics: Graph Category: Qualitative

27)

FIGURE 3-2 Refer to Figure 3-2. A shift of the supply curve from S to S1 could be caused by A) an increase in the price of energy-efficient light bulbs. B) a decrease in the price of energy-efficient light bulbs. C) an expectation that new government regulations will ban the use of energy-efficient light bulbs. D) a change in consumers' preferences away from ordinary light bulbs toward energyefficient light bulbs. E) a decrease in the price of glass, a major input in the production of energy-efficient light bulbs. Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Graphics: Graph Category: Qualitative

28)

FIGURE 3-2 Refer to Figure 3-2. A shift of the supply curve for energy-efficient light bulbs from S to S2 could be caused by A) an increase in the price of energy-efficient light bulbs. B) a decrease in the price of energy-efficient light bulbs. C) an increase in the number of suppliers. D) the elimination of existing government subsidies to suppliers of energy-efficient light bulbs. E) a change in consumers' preferences away from ordinary light bulbs. Answer: D Diff: 3 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj.: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Graphics: Graph Category: Qualitative

3.3 The Determination of Price 1) Choose the best description of an "equilibrium price." A) the price in the middle of supply and demand B) the price at which the quantity demanded is equal to the quantity supplied C) the price that consumers are willing to pay D) the price that producers want to charge E) the price at which demand for the commodity is equal to supply Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 2) An equilibrium price can be described as A) the price at which excess demand equals excess supply. B) an aggregate price. C) the final price. D) one at which there is neither excess demand nor excess supply. E) a regulated price. Answer: D Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Recall Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 3) "Excess demand" can also be described as A) excess supply. B) the area to the left of the equilibrium price on a supply and demand diagram. C) quantity demanded exceeding quantity supplied. D) quantity supplied exceeding quantity demanded. E) the area to the right of the equilibrium price on a supply and demand diagram. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Recall Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

4) A surplus exists in the market when A) the quantity demanded exceeds the quantity supplied. B) supply and demand are equal. C) the quantity demanded is less than the quantity supplied. D) the equilibrium price is too low. E) the supply curve has shifted to the left. Answer: C Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 5) At the market-clearing price for a commodity, A) prices will remain unchanged, even if there is excess demand. B) there may be excess demand for a product but not excess supply. C) shifts in the supply or demand curves will not cause price changes. D) the quantity supplied of the commodity equals quantity demanded. E) there will never again be any pressure for prices to change, independent of what happens to demand or supply. Answer: D Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Recall Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

6) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. The equilibrium price for a dozen roses is A) $10. B) $20. C) $30. D) $40. E) $50. Answer: C Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

7) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. How many dozens of roses would actually be purchased if the price in this market were $10? A) 200 B) 300 C) 350 D) 400 E) 500 Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

8) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. At a price of ________ there would be an excess ________ of 300 dozen roses. A) $10; supply B) $30; supply C) $10; demand D) $50; demand E) $30; demand Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

9) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. At a price of ________ there would be an excess ________ of 300 dozen roses. A) $30; supply B) $50; demand C) $10; demand D) $50; supply E) both C and D are correct Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

10) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. How many dozen of roses would actually be purchased if the price in this market were $40? A) 150 B) 350 C) 200 D) 500 E) 850 Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

11) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied 400 500 600 700 800

Quantity Demanded 700 650 600 550 500

TABLE 3-2 Refer to Table 3-2. The equilibrium price for umbrellas is A) $10. B) $15. C) $20. D) $25. E) $30. Answer: C Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

12) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied 400 500 600 700 800

Quantity Demanded 700 650 600 550 500

TABLE 3-2 Refer to Table 3-2. What number of umbrellas would actually be purchased if the price in this market were $10? A) 400 B) 500 C) 550 D) 650 E) 700 Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

13) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied 400 500 600 700 800

Quantity Demanded 700 650 600 550 500

TABLE 3-2 Refer to Table 3-2. At a price of ________ there would be an excess ________ of umbrellas. A) $10; supply B) $20; supply C) $10; demand D) $30; demand E) $20; demand Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

14) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied 400 500 600 700 800

Quantity Demanded 700 650 600 550 500

TABLE 3-2 Refer to Table 3-2. At a price of ________ there would be an excess ________ of umbrellas. A) $10; supply B) $15; supply C) $20; supply D) $25; supply E) $30; demand Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

15) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied 400 500 600 700 800

Quantity Demanded 700 650 600 550 500

TABLE 3-2 Refer to Table 3-2. At a price of ________ there would be an excess ________of 150 umbrellas. A) $10; demand B) $15; demand C) $20; supply D) $25; demand E) $30; supply Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

16) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. The equilibrium price of barley is A) $125. B) $150. C) $175. D) $200. E) $225. Answer: B Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

17) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. If the price in this market was $100 per tonne, then the amount of barley actually purchased would be ________ million tonnes. A) 70 B) -70 C) 670 D) 300 E) 370 Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

18) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. If the price in this market was $200 per tonne, then the amount of barley actually purchased would be ________ million tonnes. A) 70 B) -70 C) 330 D) 400 E) 730 Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

19) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. At a price of $125 per tonne there would be an excess ________ million tonnes of barley. A) supply of 325 B) demand of 360 C) supply of 35 D) demand of 35 E) supply of 125 Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

20) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. At a price of $200 per tonne there would be an excess ________ million tonnes of barley. A) supply of 200 B) demand of 330 C) supply of 400 D) demand of 70 E) supply of 70 Answer: E Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

21) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. The equilibrium price and quantity for overnight parcel delivery in Year 1 is ________ and ________ million parcels. A) $30; 80 B) $14; 120 C) $22; 115 D) $10; 115 E) $22; 130 Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

22) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. The equilibrium price and quantity for overnight parcel delivery in Year 2 is ________ and ________ million parcels. A) $10; 100 B) $18; 110 C) $18; 125 D) $22; 115 E) $14; 120 Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

23) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. Which of the following statements describes a likely event in the market for overnight parcel delivery? From Year 1 to Year 2, A) there was a rise in the price of jet fuel. B) there was a decrease in consumers' income. C) there was an improvement in technology for tracking overnight parcels. D) the price of regular parcel delivery decreased. E) the number of suppliers of overnight parcel delivery service increased. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

24) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. If the price of overnight parcel delivery in Year 2 is $10, how many parcels will actually be delivered? A) 100 B) 115 C) 130 D) 145 E) 45 Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

25) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. Suppose the price of overnight parcel delivery in Year 1 is $22. Which of the following statements is correct? In Year 1, A) there is an excess demand of 15 million deliveries. B) there is an excess demand of 30 million deliveries. C) 115 million parcels will be delivered. D) there is an excess supply of 15 million deliveries. E) there is an excess supply of 30 million deliveries. Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

26) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. Which of the following events could explain the change in the market for overnight parcel delivery between Year 1 And Year 2? A) There was a decrease in the price of jet fuel. B) The price of regular parcel delivery decreased. C) Consumer preferences changed toward a desire for overnight delivery. D) The number of suppliers of overnight parcel delivery service increased. E) The government introduced a subsidy for overnight parcel delivery. Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

27) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. Which of the following statements best describes the change in equilibrium price and quantity in this market between Year 1 and Year 2? A) The demand curve has shifted to the left, the supply curve has shifted to the right; as a result equilibrium price is lower and equilibrium quantity is higher. B) The demand curve has shifted to the left, the supply curve has shifted to the left; as a result equilibrium price is higher and equilibrium quantity is lower. C) The demand curve has shifted to the right, the supply curve has shifted to the left; as a result equilibrium price is higher and equilibrium quantity is lower. D) The demand curve has shifted to the left, the supply curve has shifted to the right; as a result equilibrium price is higher and equilibrium quantity is lower. E) There is no change in equilibrium price or quantity from Year 1 to Year 2. Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

28)

FIGURE 3-3 Refer to Figure 3-3. At a price of P2 there would be excess demand equal to A) 0. B) Q1Q5. C) Q2Q4. D) Q1Q3. E) Q3 Q5. Answer: A Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

29)

FIGURE 3-3 Refer to Figure 3-3. At a price of P1 there would be excess supply equal to A) 0. B) Q1Q5. C) Q2Q4. D) Q1Q2. E) Q4Q5. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

30)

FIGURE 3-3 Refer to Figure 3-3. At a price of P1 there would be excess demand equal to A) Q1Q5. B) Q2Q4. C) Q1Q2. D) Q4Q5. E) There is no excess demand at P1. Answer: E Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Quantitative

31)

FIGURE 3-3 Refer to Figure 3-3. At a price of P3 there is excess ________ in the market for X and pressure for the price to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

32)

FIGURE 3-3 Refer to Figure 3-3. At a price of P1 there is excess ________ in the market for X and pressure for the price to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

33)

FIGURE 3-4 Refer to Figure 3-4. The market for 1-bedroom apartments in Collegetown will be in equilibrium at a price and quantity combination of A) $1000; 300 apartments. B) $1400; 450 apartments. C) $1000; 350 apartments. D) $600; 250 apartments. E) $800; 300 apartments. Answer: E Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Quantitative

34)

FIGURE 3-4 Refer to Figure 3-4. If the price of 1-bedroom apartments in Collegetown were $600, there would be a ________ of ________ apartments. A) surplus; 100 B) shortage; 50 C) shortage; 100 D) surplus; 50 E) surplus; 150 Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Quantitative

35)

FIGURE 3-4 Refer to Figure 3-4. If the price of 1-bedroom apartments in Collegetown were $1400, there would be a ________ of ________ apartments. A) surplus; 150 B) shortage; 300 C) shortage; 150 D) surplus; 300 E) surplus; 100 Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Quantitative

36)

FIGURE 3-5 Refer to Figure 3-5. The price at which there would be a shortage in this market is A) P1. B) P2. C) P3. D) both P1 and P3. E) both P2 and P3. Answer: C Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

37)

FIGURE 3-5 Refer to Figure 3-5. A price at which there would be a surplus in this market is A) P1. B) P2. C) P3. D) both P1 and P2. E) both P1 and P3. Answer: A Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

38)

FIGURE 3-5 Refer to Figure 3-5. Ceteris paribus, if supply were to increase, this would lead to A) an increase in both equilibrium price and quantity. B) a decrease in both equilibrium price and quantity. C) an increase in equilibrium price and a decrease in equilibrium quantity. D) a decrease in equilibrium price and an increase in equilibrium quantity. E) no change in equilibrium price or quantity. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

39)

FIGURE 3-5 Refer to Figure 3-5. Ceteris paribus, if demand were to decrease, this would lead to A) an increase in equilibrium price and an increase in equilibrium quantity. B) a decrease in equilibrium price and a decrease in equilibrium quantity. C) an increase in equilibrium price and a decrease in equilibrium quantity. D) a decrease in equilibrium price and an increase in equilibrium quantity. E) no change in equilibrium price or quantity. Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

40)

FIGURE 3-5 Refer to Figure 3-5. If supply and demand were to increase simultaneously, this would lead to A) an increase in both equilibrium price and quantity. B) a decrease in both equilibrium price and quantity. C) an increase in equilibrium quantity and an indeterminate change in price. D) an increase in equilibrium price and an indeterminate change in equilibrium quantity. E) no change in equilibrium price or quantity. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

41)

FIGURE 3-5 Refer to Figure 3-5. If supply were to increase and demand were to decrease simultaneously, this would lead to A) a decrease in equilibrium price and an indeterminate change in quantity. B) a decrease in equilibrium quantity and an indeterminate change in price. C) an increase in equilibrium quantity and a decrease in equilibrium price. D) an increase in equilibrium quantity and an increase in equilibrium price. E) no change in equilibrium price or quantity. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative 42) The term "comparative statics" describes the A) analysis of the path from one equilibrium to another. B) comparison of one equilibrium point with another. C) comparison of a demand curve with a supply curve. D) analysis of the process of price and quantity adjustments that leads to an equilibrium. E) analysis of excess demand and excess supply. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Recall Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

43) Suppose we observe an increase in the price of good A and an increase in the quantity of good A exchanged. Which of the following is a likely explanation? A) The "law of demand" is violated. B) The "law of supply" is violated. C) The supply of good A has increased. D) There is an excess supply of good A. E) The demand for good A has increased. Answer: E Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 44) Suppose that supply for some good increases and that simultaneously the demand for the same good decreases. The result would be A) a decrease in P and an indeterminate change in Q. B) a decrease in Q and an indeterminate change in P. C) an increase in Q and a decrease in P. D) an increase in Q and an increase in P. E) no change in either P or Q. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 45) The quantity exchanged in the market will be below the equilibrium quantity A) only if there is excess supply. B) only if there is excess demand. C) if there is either excess supply or demand. D) in no imaginable situation. E) only if price is below the equilibrium price. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

46) Given a positively sloped supply curve, a rise in the demand for that commodity causes A) a shortage of other goods. B) a fall in sales of that commodity. C) an increase in both the equilibrium price and the equilibrium quantity exchanged. D) a decrease in the equilibrium price and an increase in the equilibrium quantity exchanged. E) a decrease in both the equilibrium price and the equilibrium quantity exchanged. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 47) Which of the following could lead to a rise in the quantity demanded of lemons? A) a leftward shift in the supply curve of lemons B) a rightward shift in the supply curve of lemons C) a decline in the number of people drinking lemonade D) a decrease in the price of artificial lemon flavouring E) a cold spell which makes people want less lemonade Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 48) Weekend train travel costs less than weekday train travel. If the supply of train service remains the same between weekdays and weekends, then the most likely explanation for this difference in price is that the weekend A) demand curve is to the left of the weekday demand curve. B) demand curve is to the right of the weekday demand curve. C) demand curve is random. D) supply curve is to the right of the weekday supply curve. E) supply curve is to the left of the weekday supply curve. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

49) Suppose we observe that movie theatre prices are less during the daytime than in the evening. If the supply of movies does not change between daytime and evening, then the most likely explanation for this difference in price is A) the evening demand curve is to the left of the daytime demand curve. B) the evening demand curve is to the right of the daytime demand curve. C) the evening supply curve is to the left of the daytime supply curve. D) the evening supply curve is to the right of the daytime supply curve. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 50) Tickets for music concerts that are sold on the Internet are often sold out within minutes and many unsatisfied customers are unable to get tickets (in the legitimate market). One explanation for this is that A) concert goers are not rational. B) prices for purchasing digital music have increased. C) the market price for concert tickets may be set above its equilibrium price. D) the market price for concert tickets may be set below its equilibrium price. E) the market price for concert tickets is at its equilibrium level. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 51) Suppose that in Montreal in December, 2018, 10 000 ski helmets were sold at a price of $60 each. And in Montreal in December, 2019, 20 000 ski helmets were sold at a price of $80 each. One possible explanation for the change is that, ceteris paribus, from 2018 to 2019 the ________ curve for ski helmets shifted to the ________. A) supply; left B) supply; right C) demand; left D) demand; right E) supply or demand; right Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply.

Category: Qualitative 52) Consider a local market for 4-litre containers of windshield-wiper fluid. In January 2019, 100 000 containers were sold at a price of $3 each. In March 2019, 120 000 containers are sold at a price of $8 each. Does this change in equilibrium price and quantity violate the "law of demand"? A) Not necessarily, because the supply curve could have shifted to the right, leading to an increase in equilibrium price and quantity. B) Not necessarily, because the demand curve could have shifted to the right, leading to an increase in equilibrium price and quantity. C) Not necessarily, because the demand curve could have shifted to the left, leading to an increase in equilibrium price and quantity. D) Not necessarily, because the supply curve could have shifted to the left, leading to an increase in equilibrium price and quantity. E) No, because the "law of demand" is not valid. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 53) Consider a negatively sloped demand curve for natural gas. If the supply of natural gas increases, the new equilibrium will have A) a lower price and a greater quantity. B) a lower price and a smaller quantity. C) a higher price and a smaller quantity. D) a higher price and a larger quantity. E) the same price and larger quantity. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

54) Which of the following statements is correct for a market with an upward-sloping supply curve and a downward-sloping demand curve? A) If the supply curve shifts left and demand remains constant, equilibrium quantity will rise. B) If the supply curve shifts right and the demand curve remains constant, equilibrium price will rise. C) If the demand curve shifts left and the supply curve shifts right, equilibrium price will rise. D) If the demand curve shifts right and the supply curve shifts left, equilibrium price will rise. E) If the demand curve shifts left and the supply curve shifts left, equilibrium quantity will rise. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

55)

FIGURE 3-6 Refer to Figure 3-6. If the initial demand and supply curves are D1 and S1, equilibrium price and quantity are represented by point A) A. B) B. C) C. D) D. E) Not shown in the figure. Answer: A Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

56)

FIGURE 3-6 Refer to Figure 3-6. If the demand curve shifts from D1 to D2, while supply remains at S1, one could say that A) the quantity demanded has decreased to Q1 and price has fallen to P2. B) there has been an increase in demand for X. C) the price of a good which is a substitute for X must have fallen. D) the price increase has caused an increase in quantity demanded. E) there is now an excess demand at the new price of P1. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

57)

FIGURE 3-6 Refer to Figure 3-6. If the initial demand and supply curves are D1 and S1, and demand shifts to D2, then A) a permanent shortage of X will result. B) a surplus of Q1Q3 will occur. C) a shortage will occur at any price above P3. D) if price remained at P2, a shortage of Q1Q3 would exist. E) all of the above Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

58)

FIGURE 3-6 Refer to Figure 3-6. A shift in the supply curve from S2 to S1 might be caused by A) a rise in the costs of producing good X. B) a decrease in the price of X. C) a decrease in demand for X. D) an improvement in the technology of producing good X. E) additional suppliers entering the industry. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

59) With a given upward-sloping supply curve for restaurant meals (a normal good), a rise in household income will cause the A) equilibrium price and equilibrium quantity to both increase. B) equilibrium price to increase and equilibrium quantity to decrease. C) equilibrium price and equilibrium quantity to both decrease. D) equilibrium price to decrease and equilibrium quantity to increase. E) equilibrium price to increase and equilibrium quantity to remain constant. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 60) If the legal beer-drinking age is raised from 18 to 21, the changes to the equilibrium price and quantity of beer are likely to be that A) price rises and quantity rises. B) price falls and quantity rises. C) price rises and quantity falls. D) price falls and quantity falls. E) no change in price or quantity occurs. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 61) Steel is an important input to the production of cars. Tires and cars are used together by consumers. What will occur in the market for tires when there is an increase in the price of steel? A) Price rises; quantity rises. B) Price falls; quantity rises. C) Price rises; quantity falls. D) Price falls; quantity falls. E) No change in price or quantity occurs. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

62) Aeronautical engineers are a factor of production for airplanes. What will happen in the world market for airplanes when there is a worldwide shortage of aeronautical engineers? A) Price will increase; quantity exchanged will decrease. B) Price will increase; quantity exchanged will increase. C) Price will decrease; quantity exchanged will decrease. D) Price will decrease; quantity exchanged will increase. E) There will be no change in price or quantity exchanged. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Qualitative 63) Assume that apples and oranges are substitute goods. Given the initial supply and demand curves for apples, a reduction in the price of oranges will tend to A) increase the price of apples. B) increase the demand for apples. C) increase the demand for oranges. D) decrease the demand for oranges. E) decrease the price of apples. Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 64) Given a positively sloped supply curve, when market demand increases, A) the new equilibrium will have a lower price and a greater quantity. B) the new equilibrium will have a lower price and a smaller quantity. C) the new equilibrium will have a higher price and a smaller quantity. D) the new equilibrium will have a higher price and a larger quantity. E) the new equilibrium will have the same price and larger quantity. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

65) Consider the global market for some mineral, X. In January, 2017, the equilibrium price and quantity were P = $27 per unit and Q = 140 million units. In January, 2019, the equilibrium price and quantity were P = $45 per unit and Q = 175 million units. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been a decrease in supply of mineral X. B) There has been an increase in demand for mineral X. C) There has been an increase in supply of mineral X. D) There has been a decrease in demand for mineral X. E) There has been a simultaneous decrease in demand for, and increase in supply of, mineral X. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 66) Consider the global market for some mineral, X. In January, 2017, the equilibrium price and quantity were P = $27 per unit and Q = 140 million units. In January, 2019, the equilibrium price and quantity were P = $27 per unit and Q = 175 million units. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been a simultaneous increase in demand for, and increase in supply of, mineral X. B) There has been an increase in demand for mineral X. C) There has been an increase in quantity demanded for mineral X. D) There has been an increase in supply of mineral X. E) There has been an increase in quantity supplied of mineral X. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

67) Consider the global market for some mineral, X. In January, 2017, the equilibrium price and quantity were P = $27 per unit and Q = 140 million units. In January, 2019, the equilibrium price and quantity were P = $35 per unit and Q = 110 million units. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in demand for mineral X. B) There has been a decrease in supply of mineral X. C) There has been a decrease in global demand for mineral X. D) There has been a simultaneous increase in demand and increase in supply for mineral X. E) there has been a simultaneous increase in supply and decrease in demand for mineral X. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 68) Consider the global market for barley, an agricultural commodity. Suppose that in August, 2018, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August, 2019, the equilibrium price and quantity were P = $168 per tonne and Q = 350 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in demand for barley. B) There has been a decrease in supply of barley. C) There has been a decrease in demand for barley. D) There has been a simultaneous decrease in demand and increase in supply of barley. E) There has been a simultaneous increase in demand and decrease in supply of barley. Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

69) Consider the global market for barley, an agricultural commodity. Suppose that in August, 2018, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August, 2019, the equilibrium price and quantity were P = $150 per tonne and Q = 410 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been a decrease in supply of barley. B) There has been an increase in demand for barley. C) There has been a simultaneous increase in demand and increase in supply of barley. D) There has been a simultaneous increase in demand and decrease in supply of barley. E) There has been a decrease in demand for barley. Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 70) Consider the global market for barley, an agricultural commodity. Suppose that in August, 2018, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August, 2019, the equilibrium price and quantity were P = $159 per tonne and Q = 372 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in demand for barley. B) There has been an increase in supply of barley. C) There has been a simultaneous decrease in demand and increase in supply of barley. D) There has been a decrease in supply of barley. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

71) Consider the global market for barley, an agricultural commodity. Suppose that in August, 2018, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August, 2019, the equilibrium price and quantity were P = $168 per tonne and Q = 290 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in demand for barley. B) There has been an increase in supply of barley. C) There has been a simultaneous increase in demand and increase in supply of barley. D) There has been a decrease in supply of barley. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 72) Consider the global market for barley, an agricultural commodity. Suppose that in August, 2018, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August, 2019, the equilibrium price and quantity were P = $140 per tonne and Q = 325 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in supply of barley. B) There has been a decrease in supply of barley. C) There has been a simultaneous increase in demand and increase in supply of barley. D) There has been a decrease in demand for barley. E) There has been an increase in demand for barley. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

73) Consider the global market for barley, an agricultural commodity. Suppose that in August, 2018, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August, 2019, the equilibrium price and quantity were P = $142 per tonne and Q = 335 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in supply of barley. B) There has been a decrease in supply of barley. C) There has been a simultaneous increase in demand and increase in supply of barley. D) There has been a decrease in demand for barley. E) There has been an increase in demand for barley. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 74) If a demand curve and a supply curve can be stated functionally as Q D = 100 - 5p; and QS = 90 + 5p, respectively, then the equilibrium quantity and price would be A) Q = 95; p = 1. B) Q = 1; p = 95. C) Q = 190; p = 1. D) Q = 95; p = 10. E) Q = 190; p = 10. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 75) If a demand curve and a supply curve can be stated functionally as QD = 500 - 0.1p and QS = 440 + 0.4p respectively, then the equilibrium quantity and price would be A) Q = 150; p = 150. B) Q = 50; p = 176. C) Q = 150; p = 485. D) Q = 488; p = 120. E) Q = 940; p = 0.4. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied

Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 76) Suppose that the demand and supply curves in the market for apples have the following functional forms: QD = 250 - 4p and QS = 10 + p. The equilibrium quantity and price would then be A) Q = 48, p = 58. B) Q = 58, p = 48. C) Q = 68, p = 98. D) Q = 68, p = 108. E) Q = 92, p = 48. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 77) Suppose that the demand and supply curves in the market for apples have the following functional form: QD = 250 - 4p and QS = 10 + p. If the prevailing price on the market is 50, then A) the market is clearing. B) the market exhibits an excess supply of 10 units. C) the market exhibits an excess supply of 240 units. D) the market exhibits an excess demand of 10 units. E) the market exhibits an excess demand of 240 units. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 78) Suppose the demand and supply curves in the market for apples have the following functional form: QD = 250 - 4p and QS = 10 + p. If the prevailing market price is 40, then A) the market is clearing. B) the market exhibits an excess supply of 50 units. C) the market exhibits an excess supply of 40 units. D) the market exhibits an excess demand of 50 units. E) the market exhibits an excess demand of 40 units. Answer: E Diff: 3 Type: MC

Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 79) The price of one good divided by the price of another good is called a(n) A) marginal price. B) money price. C) absolute price. D) relative price. E) ceteris paribus price. Answer: D Diff: 1 Type: MC Topic: 3.3b. relative prices Skill: Recall Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 80) The relative price of a good A) is always measured in current dollars. B) is a measure of the relative share of the consumer's income devoted to its purchase. C) is its price in terms of money. D) is equal to the average price of the good over the last 5 years. E) reflects its price in terms of units of other goods. Answer: E Diff: 2 Type: MC Topic: 3.3b. relative prices Skill: Recall Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 81) Suppose the price of wheat has fallen from $3 to $2 per bushel and that the price of newsprint has fallen from $200 to $100 per tonne. The relative price of wheat in terms of newsprint A) has fallen. B) has risen. C) remained constant. D) cannot be determined from the above data. E) is completely unrelated. Answer: B Diff: 3 Type: MC Topic: 3.3b. relative prices Skill: Applied

Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

82) Suppose the price of good X increases from $3.00 to $4.00 while the price of good Y increases from $150 to $200. The relative price of X (in terms of Y) A) has fallen. B) has risen. C) remained constant. D) cannot be determined from the above data. E) is completely unrelated to the price of good Y. Answer: C Diff: 3 Type: MC Topic: 3.3b. relative prices Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 83) Suppose an index of average prices of imported goods in Canada indicates an increase in price of 2.3% over a 12-month period. Over the same period the Consumer Price Index indicates an increase in the general price level of 2.3%. What is the change in the price of imports relative to the change in the overall price level? A) an increase of 2.3% B) an increase of 4.6% C) a decrease of 2.3% D) a decrease of 4.6% E) no change Answer: E Diff: 2 Type: MC Topic: 3.3b. relative prices Skill: Applied Learning Obj.: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative Economics - Canadian Edition, 16e (Ragan) Chapter 4 Elasticity 4.1 Price Elasticity of Demand 1) The price elasticity of demand measures the responsiveness of A) the price to changes in quantity demanded. B) equilibrium changes. C) demand to supply changes. D) quantity demanded to changes in the price. E) supply to demand changes. Answer: D Diff: 1 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall

Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 2) When the percentage change in quantity demanded is greater than the percentage change in price that brought it about, demand is said to be A) zero elastic. B) unelastic. C) inelastic. D) unit elastic. E) elastic. Answer: E Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 3) When the percentage change in quantity demanded is less than the percentage change in price that brought it about, demand is said to be A) zero elastic. B) unelastic. C) inelastic. D) unit elastic. E) elastic. Answer: C Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative

4) The formula for the price elasticity of demand for a commodity can be written as which of the following? A) B) C) D) E) Answer: C Diff: 1 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 5) Consider the demand curves for two products with the same starting price. Now suppose there is an identical price change for each product. If the resulting percentage change in quantity demanded is greater for one (D1) than the other (D2), we can conclude A) that D1 is inelastic and D2 is elastic. B) that D1 is elastic and D2 is inelastic. C) that D2 is more elastic than D1. D) that D1 is more elastic than D2. E) nothing about their relative elasticities. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 6) If demand is unit elastic at all prices, then the demand curve is A) a straight line. B) a parabola. C) a rectangular hyperbola. D) upward sloping. E) perfectly horizontal. Answer: C Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand.

Category: Quantitative 7) A demand curve that is the shape of a rectangular hyperbola A) is elastic over the whole curve. B) is inelastic over the whole curve. C) is unit elastic over the whole curve. D) has the same elasticity as a straight-line demand curve. E) has an elasticity of 100% over the whole curve. Answer: C Diff: 1 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 8) If household income increases by 50% and desired household expenditure on vacation travel increases by 15%, the price elasticity of demand for vacation travel is A) elastic. B) inelastic. C) unity. D) positive. E) not determinable from the information given. Answer: E Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 9) If the value of the price elasticity of demand is 0.6, demand is said to be A) elastic. B) partially elastic. C) inelastic. D) partially inelastic. E) somewhat inelastic. Answer: C Diff: 1 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative

10) If the price elasticity of demand is 0.5, then a 10% increase in price results in a A) 50% reduction in quantity demanded. B) 5% increase in quantity demanded. C) 5% decrease in total revenues. D) 5% decrease in quantity demanded. E) 0.5% decrease in quantity demanded. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 11) If the price elasticity of demand is 1.2, then a 10% increase in price results in a A) 1.2% decrease in quantity demanded. B) 12% decrease in quantity demanded. C) 12% decrease in total revenue. D) 1.2% increase in quantity demanded. E) 12% increase in quantity demanded. Answer: B Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 12) If the price elasticity of demand is 0.75, then a 50% decrease in price results in a A) 75% decrease in quantity demanded. B) 37.5% decrease in quantity demanded. C) 0.75% increase in quantity demanded. D) 75% increase in quantity demanded. E) 37.5% increase in quantity demanded. Answer: E Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative

13) If the price elasticity of demand is 3.0, then a 10% decrease in price results in a A) 30% increase in quantity demanded. B) 3.0% increase in quantity demanded. C) 30% decrease in quantity demanded. D) 3.0% decrease in quantity demanded. E) no change in quantity demanded. Answer: A Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 14) When calculating the price elasticity of demand for some product, we ignore the ________ of the change, and focus only on the ________ of the measure. A) source: percentage change B) source; absolute value C) absolute value; percentage change D) direction; absolute value E) direction; percentage change Answer: D Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 15) Consider two linear, downward-sloping demand curves, A and B, that intersect each other at point X with positive price and quantity. Demand curve A is steeper than demand curve B. We can conclude that A) curve A is less elastic than curve B at any point. B) curve B is less elastic than curve A at any point. C) curve A is less elastic than curve B at point X. D) curve A is less elastic than curve B at any price above point X. E) curve B is less elastic than curve A at any price above point X. Answer: C Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative

16) If the price elasticity of demand for some good is 2.7, a 10% increase in the price results in A) a 2.7% decrease in the quantity demanded. B) a 2.7% increase in the quantity demanded. C) a 27% increase in the quantity demanded. D) a 27% decrease in the quantity demanded. E) There is not enough information to answer this question. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 17) Suppose the price elasticity of demand for some good is 1.4. A 10% increase in the price of the good results in A) a 1.4% decrease in the quantity demanded. B) a 1.4% increase in the quantity demanded. C) a 14% increase in the quantity demanded. D) a 14% decrease in the quantity demanded. E) There is not enough information to answer this question. Answer: D Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 18) Suppose that the quantity of a good demanded rises from 90 units to 110 units when the price falls from $1.20 to 80 cents per unit. The price elasticity of demand for this product is A) 0.5. B) 1.0. C) 1.5. D) 2.0. E) 4.0. Answer: A Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative

19) Suppose the quantity of lemonade demanded falls from 103 000 litres per week to 97 000 litres per week as a result of a 10% increase in its price. The price elasticity of demand for lemonade is therefore A) 0.6. B) 6.0. C) 1.97. D) 1.03. E) impossible to compute unless we know the before and after prices. Answer: A Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 20) Suppose the quantity demanded of skipping ropes rises from 1250 to 1750 units when the price falls from $1.25 to $0.75 per unit. The price elasticity of demand for this product is A) 1/3. B) 2/3. C) 1. D) 3/2. E) 2. Answer: B Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative

21) The table below shows the demand schedule for museum admissions in a small city. Price (per visit per person) $10 $8 $6 $4 $2

Quantity Demanded (thousands of personvisits per year) 2 4 6 8 10

TABLE 4-1 Refer to Table 4-1. The elasticity of demand for museum admissions is A) greater at higher prices than at lower prices. B) elastic at all points on the demand curve. C) inelastic at all points on the demand curve. D) greater at lower prices than at higher prices. E) constant at all points on the demand curve. Answer: A Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Table Category: Qualitative

22) The table below shows the demand schedule for museum admissions in a small city. Price (per visit per person) $10 $8 $6 $4 $2

Quantity Demanded (thousands of personvisits per year) 2 4 6 8 10

TABLE 4-1 Refer to Table 4-1. Between the prices of $8 and $10, the elasticity of demand is A) 1/3. B) 2/3. C) 1. D) 2. E) 3. Answer: E Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Table Category: Quantitative

23) The table below shows the demand schedule for museum admissions in a small city. Price (per visit per person) $10 $8 $6 $4 $2

Quantity Demanded (thousands of personvisits per year) 2 4 6 8 10

TABLE 4-1 Refer to Table 4-1. Between the prices of $4 and $6 the price elasticity of demand is A) 0.50. B) 0.71. C) 1.00. D) 1.40. E) 0.40. Answer: B Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Table Category: Quantitative

24) The table below shows the demand schedule for museum admissions in a small city. Price (per visit per person) $10 $8 $6 $4 $2

Quantity Demanded (thousands of personvisits per year) 2 4 6 8 10

TABLE 4-1 Refer to Table 4-1. Between the prices of $2 and $4 the price elasticity of demand is A) 1/3. B) 2/3. C) 1. D) 2. E) 3. Answer: A Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Table Category: Quantitative

25) The table below shows the demand schedule for museum admissions in a small city. Price (per visit per person) $10 $8 $6 $4 $2

Quantity Demanded (thousands of personvisits per year) 2 4 6 8 10

TABLE 4-1 Refer to Table 4-1. Between the prices of $8 and $6 the price elasticity of demand is A) 0.5. B) 0.71. C) 1.00. D) 1.40. E) 0.40. Answer: D Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Table Category: Quantitative 26) As the price for some product increases from $4.00 to $5.00 per unit, quantity demanded decreases from 400 to 300 units per month. For this segment of the demand curve, the price elasticity of demand is A) 7/9. B) 1. C) 9/7. D) 7. E) 9. Answer: C Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative

27) As the price for some product decreases from $4.00 to $3.00 per unit, quantity demanded increases from 400 to 500 units per day. For this segment of the demand curve, the price elasticity of demand is A) 7/9. B) 1. C) 9/7. D) 7. E) 9. Answer: A Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 28) Which of the following illustrates elastic demand? A) A 10% increase in price causes a 5% decrease in quantity demanded. B) A 10% increase in price causes a 20% decrease in quantity demanded. C) A price elasticity of 0.8 D) A price elasticity of 1.0 E) A 10% increase in price causes a 10% reduction in quantity demanded. Answer: B Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 29) Which of the following illustrates elastic demand? A) A 5% increase in price causes a 2.5% decrease in quantity demanded. B) A 5% increase in price causes a 10% decrease in quantity demanded. C) A price elasticity of 0.8 D) A price elasticity of 1.0 E) A 10% increase in price causes a 10% reduction in quantity demanded. Answer: B Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative

30) If per capita income increases by 10% and household expenditure on fur coats increases by 15%, one can conclude that the price elasticity of demand for fur coats is A) elastic. B) inelastic. C) unity. D) positive. E) not determinable from the information given. Answer: E Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 31)

FIGURE 4-1 Refer to Figure 4-1, which shows two demand curves, one linear and the other a rectangular hyperbola. In diagram 1, the price elasticity of demand A) at point A is equal to that at point C. B) at point A is less than at point C. C) at point A is greater than at point C. D) is equal at points A, B, and C. E) at point A is equal to that at point B. Answer: C Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Qualitative

32)

FIGURE 4-1 Refer to Figure 4-1, which shows two demand curves, one linear and the other a rectangular hyperbola. The price elasticity of demand is equal to one along the entire demand curve in A) diagram 1 only. B) diagram 2 only. C) both diagrams. D) neither diagram. Answer: B Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Qualitative 33) A perfectly horizontal demand curve has a price elasticity of demand of A) zero. B) unity. C) less than one. D) infinity. E) not defined. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative

34) A vertical demand curve shows that the price elasticity of demand is A) zero. B) unity. C) less than one. D) infinity. E) not defined. Answer: A Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 35) The price elasticity of demand for a product tends to be greater the A) lower its price. B) more broadly the product is defined. C) fewer close substitutes for it there are. D) more close substitutes for it there are. E) shorter the time span being considered. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 36) Which of the following statements would you expect to be true about the demand elasticities for cornflakes and food? A) Compared with food, cornflakes have a lower price elasticity of demand because it is specifically defined. B) Because cornflakes is food, but not all food is cornflakes, cornflakes would have a lower price elasticity of demand. C) Food has a higher price elasticity of demand because it is a necessity. D) Because cornflakes is food, cornflakes would have the same price elasticity of demand as food. E) Food has a lower price elasticity of demand than cornflakes because it is more broadly defined. Answer: E Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative

37) With a downward-sloping straight-line demand curve, price elasticity of demand is A) rising continuously with price increases. B) decreasing continuously with price increases. C) increasing to the midpoint of the curve and then decreasing. D) constant everywhere on it. E) indeterminate. Answer: A Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Recall Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 38) Which of the following statements about price elasticity of demand is true? A) It is greater than one if the percentage increase in the commodity's price is greater than the percentage decline in quantity demanded. B) It is very small when good substitutes are readily available for the commodity. C) It usually increases over time. D) It is a positive number because price and quantity demanded move in the same direction. E) It is higher for an entire group of related products than it is for a particular product in that group. Answer: C Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 39) Suppose you are shown two intersecting demand curves that are drawn on the same scale. At the point of intersection, one of the demand curves is steeper than the other. Which of the following could explain the difference in slopes? A) The steeper one has a higher income elasticity of demand. B) The steeper one is probably the demand curve for a luxury good. C) The steeper one applies for the short run, whereas the flatter one applies for the long run. D) The flatter one is for a good with no close substitutes. E) It is not possible to compare the slopes of different demand curves. Answer: C Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative

40) Suppose egg producers succeed in permanently raising the price of their product by 15%, and as a result the quantity demanded falls by 15% in the short run. In the long run we can expect the quantity demanded to fall by A) 0%. B) 15%. C) between 0 and 15%. D) more than 15%. E) 100%. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 41) Suppose the quantity demanded of a good rises from 40 units to 60 units per month when the price falls from $1.05 to 95 cents per unit. The price elasticity of demand for this product is A) 0.5. B) 1.0. C) 1.5. D) 2.0. E) 4.0. Answer: E Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 42) Which of the following statements would you expect to be true about price elasticities of demand for T-shirts and clothing? A) Compared with clothing, T-shirts have a lower price elasticity of demand because they are specifically defined. B) Because T-shirts are clothing, but not all clothing is T-shirts, T-shirts would have a lower price elasticity of demand than clothing. C) Clothing has a higher price elasticity of demand because it is a necessity. D) T-shirts would have the same price elasticity of demand as clothing. E) Clothing has a lower price elasticity of demand because it is more broadly defined. Answer: E Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative

43) Suppose the quantity demanded of paperback novels rises from 80 000 to 120 000 units per month when the price falls from $11 to $9 per unit. The price elasticity of demand for this product is A) 1/3. B) 1. C) 2/3. D) 3/2. E) 2. Answer: E Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative

44) Demand Schedule for Ski Tickets

Price ($) 120 110 100 90 80 70 60 50 40 30 20 10 0

Quantity Demanded (no. of tickets) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200

TABLE 4-2 Refer to Table 4-2. Using the data provided to plot the demand curve for ski tickets results in a ________ demand curve. Price elasticity along this demand curve is therefore ________ as price is falling. A) horizontal; constant at a value of 8 B) vertical; constant at a value of 0 C) rectangular hyperbola; constant at a value of 1 D) downward sloping and linear; continuously increasing E) downward sloping and linear; continuously decreasing Answer: E Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Table Category: Quantitative

45) Demand Schedule for Ski Tickets

Price ($) 120 110 100 90 80 70 60 50 40 30 20 10 0

Quantity Demanded (no. of tickets) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200

TABLE 4-2 Refer to Table 4-2. Total expenditure for ski tickets reaches a maximum at a price/quantity demanded combination of A) $30/90. B) $60/600. C) $100/200. D) $20/1000. E) $80/400. Answer: B Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Table Category: Quantitative

46) Demand Schedule for Ski Tickets

Price ($) 120 110 100 90 80 70 60 50 40 30 20 10 0

Quantity Demanded (no. of tickets) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200

TABLE 4-2 Refer to Table 4-2. The price elasticity of demand over the interval of the demand curve between prices of $40 and $20 is A) 3.0. B) -3.0. C) 1.0. D) 0.33. E) 0. Answer: D Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Table Category: Quantitative

47) Demand Schedule for Ski Tickets

Price ($) 120 110 100 90 80 70 60 50 40 30 20 10 0

Quantity Demanded (no. of tickets) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200

TABLE 4-2 Refer to Table 4-2. Price elasticity over the interval of the demand curve between prices of $90 and $70 is A) 0.5. B) 2.0. C) -0.5. D) 4.0. E) 1.0. Answer: B Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Table Category: Quantitative

48)

FIGURE 4-2 Refer to Figure 4-2. In diagram 1, the elasticity of demand over the price range $14 to $16 is A) 0. B) less than 1. C) 1. D) greater than 1. E) infinity. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Quantitative

49)

FIGURE 4-2 Refer to Figure 4-2. In diagram 1, the elasticity of demand over the price range $12 to $14 is A) 0. B) less than 1. C) 1. D) greater than 1. E) infinity. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Quantitative

50)

FIGURE 4-2 Refer to Figure 4-2. In diagram 1, the elasticity of demand for prices below $10 is A) 0. B) less than 1. C) 1. D) greater than 1. E) infinity. Answer: B Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Quantitative

51)

FIGURE 4-2 Refer to Figure 4-2. In diagram 1, the elasticity of demand at $10 is A) 0. B) less than 1. C) exactly 1. D) greater than 1. E) infinity. Answer: C Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Quantitative

52)

FIGURE 4-2 Refer to Figure 4-2. In diagram 3, the elasticity of demand between prices $10 and $20 is A) 0. B) less than 1. C) exactly 1. D) greater than 1. E) infinity. Answer: C Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Quantitative

53)

FIGURE 4-2 Refer to Figure 4-2. In diagram 3, the elasticity of demand between prices $5 and $10 is A) 0. B) less than 1. C) exactly 1. D) greater than 1. E) infinity. Answer: C Diff: 1 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Quantitative

54)

FIGURE 4-2 Refer to Figure 4-2. In diagram 2, the price elasticity of demand is A) 0. B) less than -1. C) exactly 1. D) greater than 1. E) infinity. Answer: A Diff: 1 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Quantitative

55)

FIGURE 4-2 Refer to Figure 4-2. The price elasticity of demand is continuously decreasing as the price falls in diagram(s) A) 1. B) 2. C) 1, 2, and 3. D) 2, 3, and 4. E) 1 and 2. Answer: A Diff: 1 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Qualitative

56)

FIGURE 4-2 Refer to Figure 4-2. The price elasticity of demand is continuously increasing as the price falls in A) diagram 1. B) diagram 2. C) diagrams 1, 2, and 3. D) diagrams 2, 3, and 4. E) none of the diagrams. Answer: E Diff: 1 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Qualitative

57)

FIGURE 4-2 Refer to Figure 4-2. The price elasticity of demand is constant as price changes in A) diagram 1. B) diagram 2. C) diagrams 1, 2, and 3. D) diagrams 2, 3, and 4. E) none of the diagrams. Answer: D Diff: 1 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Qualitative

58)

FIGURE 4-2 Refer to Figure 4-2. Demand is inelastic A) over the entire demand curve in diagram 1. B) over the entire demand curve in diagram 3. C) over section (a) of the demand curve in diagram 1. D) over section (b) of the demand curve in diagram 1. E) at the midpoint between sections (a) and (b) of the demand curve in diagram 1. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Qualitative

59)

FIGURE 4-2 Refer to Figure 4-2. There is good reason to suppose that, of the four goods whose demand curves are shown in diagrams 1-4 of the figure, the good that has the fewest close substitutes is shown in A) diagram 1. B) diagram 2. C) diagram 3. D) diagram 4. E) There is not enough information to determine this. Answer: B Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Qualitative

60)

FIGURE 4-2 Refer to Figure 4-2. There is good reason to suppose that, of the four goods whose demand curves are shown in the figure, the good that has an almost perfect substitute is shown in A) diagram 1 B) diagram 2 C) diagram 3 D) diagram 4 E) There is not enough information to determine this. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Graphics: Graph Category: Qualitative

61) Suppose you are advising the government on changes in the gasoline market. The current price is $1.00 per litre and the quantity demanded is 2.5 million litres per day. Short-run price elasticity of demand is constant at 0.3. If the supply of gasoline is reduced so that the price rises to $1.50 per litre, then quantity demanded is predicted to fall in the short run by A) 15%, and total expenditure will rise. B) 15%, and total expenditure will fall. C) 50%, and total expenditure will fall. D) 12%, and total expenditure will rise. E) 13.3%, and total expenditure will rise. Answer: D Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative 62) Suppose you are advising the government on changes in the gasoline market. The current price is $1.00 per litre and the quantity demanded is 2.5 million litres per day. Long-run price elasticity of demand is constant at 0.8. If the supply of gasoline is reduced so that the price rises to $1.50 per litre, then quantity demanded is predicted to fall in the long run by A) 12%, and total expenditure will fall. B) 32%, and total expenditure will rise. C) 15%, and total expenditure will rise. D) 15%, and total expenditure will fall. E) 50%, and total expenditure will rise. Answer: B Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative

63) Suppose you are advising the government on changes in the gasoline market. The current price is $1.00 per litre and the long-run price elasticity of demand is constant at 0.8. If a tax on gasoline causes the price to rise to $1.50 per litre, then quantity demanded is predicted to fall in the long run by A) 12% and total expenditure will fall. B) 24% and total expenditure will fall. C) 32% and total expenditure will rise. D) 24% and total expenditure will rise. E) 50% and total expenditure will rise. Answer: C Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative 64) Suppose a fast-food chain determines that the price elasticity of demand for its hamburgers is 1.7, and the price of the hamburger is currently $4.00. What will be the effect on quantity demanded and total expenditure on this chain's hamburgers if the price is increased to $6.00? A) Quantity demanded will fall by 68%, and total expenditure will decrease. B) Quantity demanded will fall by 11.76%, and total expenditure will decrease. C) Quantity demanded will fall by 17%, and total expenditure will increase. D) Quantity demanded will fall by 1.7%, and total expenditure will increase. E) Quantity demanded will fall by 34%, and total expenditure will decrease. Answer: A Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative

65) Suppose a fast-food chain determines that the price elasticity of demand for its hamburgers is 0.75, and the price of the hamburger is currently $4.00. What will be the effect on quantity demanded and total expenditure on this chain's hamburgers if the price is increased to $6.00? A) Quantity demanded will fall by 30%, and total expenditure will increase. B) Quantity demanded will fall by 40%, and total expenditure will increase. C) Quantity demanded will fall by 75%, and total expenditure will increase. D) Quantity demanded will fall by 0.3%, and total expenditure will decrease. E) Quantity demanded will fall by 0.4%, and total expenditure will decrease. Answer: A Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative 66) Rania is selling boxes of cookies door to door in her neighbourhood. At a price of $10 per box she sold 40 boxes per day. When the price was reduced to $4 per box she sold 100 boxes per day. Assuming that the demand conditions were unchanged, what is the price elasticity of demand for Rania's cookies? A) -1.7 B) 0 C) 0.85 D) 1 E) 1.17 Answer: D Diff: 3 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 67) Every month Olivier buys exactly 6 take-out pizzas even though the price may fluctuate significantly. Apparently, Olivier's price elasticity of demand for take-out pizza is A) -1. B) 0. C) 1. D) 6. E) infinity. Answer: B Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand.

Category: Quantitative

68) Suppose the price of take-out pizza has been stable for many months at exactly $12.50 per pizza - and Olivier buys 6 pizzas per month at this price. When the price rises to $12.55 per pizza, Olivier's quantity demanded drops to zero. Apparently, Olivier's price elasticity of demand for take-out pizza is A) -1. B) 0. C) 100 D) 6. E) higher than 10 000. Answer: E Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 69) Suppose an analysis of the possible effects of increases in university tuition fees predicts that a 10% increase in tuition fees will result in a 3% decline in enrolment. What is the implied price elasticity of demand for university attendance? A) 0 B) 0.3 C) 3 D) 7 E) 10 Answer: B Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Quantitative 70) Elasticity of demand for prescription drugs is estimated to be much lower than elasticity of demand for one particular brand of over-the-counter cough medicine. One reason for this is A) there are many substitutes for prescription drugs in the short run. B) there are many substitutes for prescription drugs in the long run. C) there are no substitutes for one brand of cough medicine in the short run. D) there are no substitutes for one brand of cough medicine in the long run. E) there are few substitutes for the broad category of prescription drugs while there are many substitutes for one brand of cough medicine. Answer: E Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative

71) Which of the following situations could explain why product X has a relatively high price elasticity of demand in the short run? A) The price of product X is too low. B) The price of product X is too high. C) The prices of substitute products are constant. D) There are many substitutes for product X, and consumers have an ability to switch quickly to those substitutes. E) There are few substitutes for product X in the short run. Answer: D Diff: 2 Type: MC Topic: 4.1a. price elasticity of demand Skill: Applied Learning Obj.: 4-1 Explain and calculate price elasticity of demand. Category: Qualitative 72) Suppose an analysis of the possible effects of increases in university tuition fees predicts that a 10% increase in tuition fees will result in a 3% decline in enrolment. Given the information this provides about price elasticity of demand, what is the predicted effect on total expenditure on tuition fees? A) Total expenditure will decrease. B) Total expenditure will decrease by 7%. C) Total expenditure will decrease by 3%. D) Total expenditure will increase. E) Total expenditure will remain constant. Answer: D Diff: 3 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative

73)

FIGURE 4-2 Refer to Figure 4-2. As price decreases, total expenditure increases, reaches a maximum, and then decreases for the demand curve in diagram(s) A) 1. B) 2. C) 3. D) 4. E) 1 and 3. Answer: A Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Graphics: Graph Category: Qualitative

74)

FIGURE 4-2 Refer to Figure 4-2. As price decreases, total expenditure remains constant in diagram(s) A) 1. B) 2. C) 3. D) 4. E) 2 and 4. Answer: C Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Graphics: Graph Category: Qualitative

75) A demand curve for which any price-quantity combination yields the same total expenditure reveals a price elasticity of demand equal to A) infinity. B) zero. C) one. D) some value greater than one but less than infinity. E) not enough information to know. Answer: C Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Qualitative 76) If price elasticity of demand for good X is equal to 0.4, then an increase in price will cause total expenditure on good X to A) increase. B) remain constant. C) decrease. D) fall to zero. E) be negative. Answer: A Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Recall Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Qualitative 77) When a product's price has an inverse relationship with total expenditure, then demand has a price elasticity of A) zero. B) less than one. C) greater than one. D) one. E) inverse proportions. Answer: C Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative

78) If total expenditure on a product rises and falls directly with a product's price, then demand for this product has an elasticity of A) zero. B) less than one. C) greater than one. D) one. E) direct proportions. Answer: B Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Qualitative 79) Suppose the demand curve for printer cartridges is unchanging. If the total expenditure on printer cartridges increases when the price of printer cartridges rises, the price elasticity of demand is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) equal to one (demand is unit elastic). D) exactly zero. E) not determinable from the information given. Answer: B Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Qualitative 80) If the total expenditure on perfume increases when the price of perfume falls, the price elasticity of demand is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) unity (demand is unit elastic). D) exactly zero. E) not determinable from the information given. Answer: A Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Qualitative

81) If the total expenditure on cars increases when the price of cars rises, the price elasticity of demand for cars is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) equal to one (demand is unit elastic). D) exactly zero. E) not determinable from the information given. Answer: B Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative 82) Suppose the quantity exchanged of some good is 100 units. If market demand is inelastic at that quantity, total expenditure on this product would be higher if quantity was A) maximized. B) kept constant. C) greater than 100 units. D) less than 100 units. E) minimized. Answer: D Diff: 3 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative 83) The president of a major nickel-producing company says that an increase in the price of nickel would have no effect on the total amount spent on nickel. If this is true, the price elasticity of demand for nickel is A) more than one. B) exactly one. C) less than zero. D) infinitely elastic. E) not calculable from the information given. Answer: B Diff: 3 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative

84) Suppose Statistics Canada reports that total income earned by Canadian barley farmers has declined as a result of a partial crop failure that has driven up the Canadian price of barley. We can conclude that the price elasticity of demand for barley in Canada is A) greater than one. B) exactly one. C) less than zero. D) less than one. E) exactly zero. Answer: A Diff: 3 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative 85) If the total expenditure on clothing decreases when the price of clothing falls, the price elasticity of demand is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) unity (demand is unit elastic). D) exactly zero. E) not determinable from the information given. Answer: B Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Qualitative 86) If household expenditures on electricity remain constant when the price of electricity increases, the price elasticity for electricity is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) one (demand is unit elastic). D) exactly zero. E) not determinable from the information given. Answer: C Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Qualitative

87) If the total revenue of producers rises for an initial cut in the price of their product but falls for further reductions in price, the price elasticity of demand for the product A) declines as price falls. B) is zero. C) is unity. D) rises as price falls. E) rises and then falls. Answer: A Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Qualitative 88) What does the following statement imply about price elasticity of demand? "Cherry producers in British Columbia experienced a healthy increase in revenues this year, despite a reduced harvest due to poor weather conditions." A) elastic demand for B.C. cherries B) elasticity of demand equal to one for B.C. cherries C) inelastic demand for B.C. cherries D) elasticity of demand equal to zero for B.C. cherries E) infinite elasticity of demand for B.C. cherries Answer: C Diff: 3 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative 89) What does the following statement imply about price elasticity of demand? "Airlines experiencing higher traffic with reduced fares, but are struggling with fall in revenue." A) Demand for airline travel is price inelastic. B) Elasticity of demand for airline travel is equal to one. C) Elasticity of demand for airline travel is constant. D) Elasticity of demand for airline travel is equal to zero. E) Demand for airline travel is price elastic. Answer: A Diff: 3 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative

90) What does the following statement imply about price elasticity of demand? "An unexpected spike in world oil prices leads to dramatic increase in revenue for the world's oil producers." A) Short-run demand for oil is inelastic. B) Short-run demand for oil is elastic. C) Elasticity of demand for oil is equal to one. D) Elasticity of demand for oil is constant. E) Elasticity of demand for oil is equal to zero. Answer: A Diff: 3 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Quantitative 91) What does the following statement imply about price elasticity of demand? "Consumers unfazed by 400 percent increase in price of table salt—grocers see no change in sales!" A) Elasticity of demand for salt is equal to one. B) Demand for salt is elastic. C) Salt is too narrowly defined to determine price elasticity of demand. D) Demand for salt is almost perfectly inelastic in the relevant price range. E) Salt is too broadly defined to determine price elasticity of demand. Answer: D Diff: 2 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand. Category: Qualitative 92) What does the following statement imply about price elasticity of demand? "Government tries to reduce cigarette consumption with an extra 50 cent tax per pack. Policy raises government revenue but fails to curb smoking." A) Demand for cigarettes is elastic. B) Demand for cigarettes is inelastic. C) Elasticity of demand for cigarettes is equal to one. D) Elasticity of demand for cigarettes is close to infinity. E) Elasticity of demand for cigarettes equals 0.5. Answer: B Diff: 3 Type: MC Topic: 4.1b. elasticity and total expenditure Skill: Applied Learning Obj.: 4-2 Explain the relationship between total expenditure and price elasticity of demand.

Category: Quantitative

4.2 Price Elasticity of Supply 1) The elasticity of supply for a given commodity is calculated as A) . B)

.

C)

.

D) E)

. .

Answer: A Diff: 1 Type: MC Topic: 4.2a. price elasticity of supply Skill: Recall Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative 2) A value of zero for the elasticity of supply of some product implies that A) the supply curve is horizontal. B) supply is highly responsive to price. C) the supply curve is vertical. D) the product will not be supplied at any price. E) there is no supply. Answer: C Diff: 1 Type: MC Topic: 4.2a. price elasticity of supply Skill: Recall Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative 3) If the demand for some good fluctuates, but supply is constant, then which of the following combinations would generally yield the greatest price fluctuations? A) small demand fluctuations and elastic supply B) large demand fluctuations and elastic supply C) small demand fluctuations and inelastic supply D) large demand fluctuations and inelastic supply E) small demand fluctuations and a unit elastic supply Answer: D Diff: 2 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative

4) If the demand for some good fluctuates, but the supply curve is stable, then which of the following combinations would generally yield the greatest quantity fluctuations? A) large demand fluctuations and inelastic supply B) small demand fluctuations and unit elastic supply C) small demand fluctuations and inelastic supply D) small demand fluctuations and elastic supply E) large demand fluctuations and elastic supply Answer: E Diff: 2 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative 5) The elasticity of supply for some product will tend to be larger A) the higher is the elasticity of demand for the product. B) the lower is the elasticity of demand for the product. C) the harder it is for firms to shift from the production of this product to another. D) the easier it is for firms to shift from the production of this product to another. E) the less time firms have to adjust to price changes. Answer: D Diff: 2 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative 6) Consider the price elasticity of supply. If firms' costs rise rapidly as quantity supplied increases, the A) supply curve will tend to be flat. B) demand curve will tend to be steep. C) elasticity of demand will tend to be low. D) price elasticity of supply will tend to be high. E) price elasticity of supply will tend to be low. Answer: E Diff: 3 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative

7) An upward-sloping straight-line supply curve through the origin has an elasticity of A) one. B) greater than one. C) less than one. D) infinity. E) zero. Answer: A Diff: 3 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Quantitative 8) A value of infinity for the elasticity of supply of some product implies that A) the supply curve is horizontal. B) supply is very unresponsive to price. C) the supply curve is vertical. D) the product will be supplied at any price. E) no product will be supplied at any price. Answer: A Diff: 1 Type: MC Topic: 4.2a. price elasticity of supply Skill: Recall Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative 9) Consider an industry in which sellers are prepared to sell all they can at the current price. We could say that elasticity of supply is A) infinite. B) equal to zero. C) between zero and one. D) less than one. E) less than zero. Answer: A Diff: 3 Type: MC Topic: 4.2a. price elasticity of supply Skill: Recall Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative

10) Consider the market supply curve for an agricultural commodity, which is almost perfectly horizontal at the world price of $450 per tonne. We can conclude that sellers in this market A) will supply no amount of the product if the price rises above $450 per tonne. B) will sell almost no amount of the product if the price drops below $450 per tonne. C) will supply an infinite amount of the product regardless of the price. D) will continue to supply the same quantity regardless of the price. E) will not be responsive to a change in the world price. Answer: B Diff: 3 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative 11) Suppose that as the price of some product increases from $4.00 to $5.00 per unit the quantity supplied rises from 500 to 1000 units per month. The price elasticity of supply for this product is A) 0.33. B) 2.0. C) 2.5. D) 3.0. E) 1.0. Answer: D Diff: 3 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Quantitative 12) Suppose an increase in world demand for potash (used in the production of fertilizer) increases the price by 22 percent. Annual Canadian production increases by 33 percent. What is the elasticity of supply of Canadian potash? A) 0.22 B) 0.33 C) 0.67 D) 1.0 E) 1.5 Answer: E Diff: 2 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Quantitative

13) Suppose a decrease in world demand for potash (used in the production of fertilizer) decreases the price by 5 percent. Annual Canadian production decreases by 2 percent. What is the elasticity of supply of Canadian potash? A) 0.2 B) 0.4 C) 0.5 D) 1.0 E) 2.5 Answer: B Diff: 2 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Quantitative 14) Suppose an increase in world demand for potash (used in the production of fertilizer) increases the price from $285 per tonne to $315 per tonne. Annual Canadian production increases from 15 million tonnes to 17 million tonnes. What is the elasticity of supply of Canadian potash? A) 0.5 B) 0.8 C) 1.0 D) 1.25 E) 2.5 Answer: D Diff: 2 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Quantitative 15) Suppose a decrease in world demand for potash (used in the production of fertilizer) decreases the price from $400 per tonne to $240 per tonne. Annual Canadian production decreases from 12 million tonnes to 8 million tonnes. What is the elasticity of supply of Canadian potash? A) 0.4 B) 0.8 C) 0.75 D) 1.0 E) 1.25 Answer: B Diff: 2 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Quantitative

16) Given that elasticity of supply changes over time, in the short run an increase in demand will generally cause A) the price to rise above its long-run equilibrium value. B) the price to rise to a level below its long-run equilibrium value. C) the quantity exchanged to rise above its long-run equilibrium value. D) both price and quantity exchanged to rise above their long-run equilibrium values. E) supply to change. Answer: A Diff: 3 Type: MC Topic: 4.2b. short-run and long-run responses Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative 17) Suppose an increase in demand for web-design service in Canada increases the price from $95 per hour to $105 per hour and hours of service delivered increases from 400 000 hours to 800 000. What is the elasticity of supply of this service? A) 0.15 B) 0.167 C) 4.2 D) 6.67 E) 16.67 Answer: D Diff: 3 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Quantitative 18) Suppose an increase in demand for web-design service in Canada increases the price from $95 per hour to $105 per hour and hours of service delivered increases from 400 000 hours to 800 000 hours. Which of the following can you conclude about the elasticity of supply of web-design service in Canada? A) It is inelastic. B) It is perfectly inelastic. C) It is elastic. D) It is perfectly elastic. E) Not enough information to determine Answer: C Diff: 3 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Quantitative

19) Suppose an increase in demand for web-design service in Canada increases the price from $110 per hour to $140 per hour and hours of service delivered increases from 350 000 hours to 650 000 hours. What is the elasticity of supply for this service? A) 0.23 B) 0.4 C) 2.3 D) 2.5 E) 4.4 Answer: D Diff: 3 Type: MC Topic: 4.2a. price elasticity of supply Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Quantitative

20)

FIGURE 4-3 Refer to Figure 4-3, which shows a demand shift and the short-run and long-run supply curves for some good. The diagram illustrates the general principle that A) supply is less elastic in the long run. B) demand is less elastic in the long run. C) supply is more elastic in the long run. D) both demand and supply are less elastic in the long run. E) demand is more elastic in the long run. Answer: C Diff: 1 Type: MC Topic: 4.2b. short-run and long-run responses Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Graphics: Graph Category: Qualitative

21)

FIGURE 4-3 Refer to Figure 4-3, which shows a shift of the demand curve from D0 to D1, and the short-run and long-run supply curves for some good. In the new short-run equilibrium at ES, producers' revenue A) is unambiguously lower than in the long-run equilibrium at EL. B) could be higher or lower than at E0, depending on the short-run elasticity of supply. C) is unambiguously higher than at E0. D) is unambiguously lower than at E0. E) is unambiguously higher than at EL. Answer: C Diff: 3 Type: MC Topic: 4.2b. short-run and long-run responses Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Graphics: Graph Category: Qualitative

22)

FIGURE 4-3 Refer to Figure 4-3, which shows a demand shift and the short-run and long-run supply curves for some product. In the new long-run equilibrium at EL, producers' revenue A) is unambiguously lower than at ES. B) could be higher or lower than at ES, depending on the price elasticity of demand. C) is unambiguously lower than at E0. D) could be higher or lower than at E0, depending on the price elasticity of demand. E) is unambiguously higher than at ES. Answer: B Diff: 3 Type: MC Topic: 4.2b. short-run and long-run responses Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Graphics: Graph Category: Quantitative

23)

FIGURE 4-3 Refer to Figure 4-3, which shows a demand shift and the short-run and long-run supply curves for some product . Which of the following best explains why the long-run supply curve (SL) is more elastic than the short-run supply curve (SS)? A) Firms have less ability to adjust output levels to changes in price in the long run. B) In the long run, firms have less ability to adjust the quantity of inputs to production. C) Firms are more able to adjust levels of production in the long run than in the short run. D) In the long run, firms prefer to adjust to changes in demand by adjusting the price of their product. E) Firms can more easily adjust their supply in the short run than in the long run. Answer: C Diff: 3 Type: MC Topic: 4.2b. short-run and long-run responses Skill: Applied Learning Obj.: 4-3 Explain and calculate price elasticity of supply. Category: Qualitative

4.3 Elasticity Matters for Excise Taxes 1) The imposition of an excise tax usually causes the price paid by consumers to ________, while the price received by sellers ________. A) rise; remains unchanged B) rise; falls C) rise; rises D) fall; remains unchanged E) fall; falls Answer: B Diff: 2 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Qualitative 2) Consumers will bear a larger burden of an excise tax if A) demand is relatively elastic and supply is relatively inelastic. B) demand is relatively inelastic and supply is relatively elastic. C) both demand and supply are relatively inelastic. D) both demand and supply are relatively elastic. E) the tax is collected by firms rather than remitted directly to the government by consumers. Answer: B Diff: 2 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Qualitative 3) The imposition of an excise tax will cause the least burden on consumers when demand is A) elastic. B) unit elastic. C) perfectly inelastic. D) perfectly elastic. E) vertical. Answer: D Diff: 2 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Qualitative

4) The "economic incidence" of an excise tax illustrates A) who is legally responsible for paying it to the government. B) the legislative process through which it must be passed. C) the economic costs associated with avoiding the tax. D) who bears the burden of the tax. E) the political process for implementing a tax. Answer: D Diff: 1 Type: MC Topic: 4.3. burden of an excise tax Skill: Recall Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Qualitative 5) Suppose a market is in equilibrium at price P0, and then an excise tax of t dollars per unit of the good is imposed. At a price of (P0 + t) there will be excess ________ for the good unless the demand curve is ________. A) supply; horizontal B) supply; vertical C) demand; horizontal D) demand; vertical E) tax; unit elastic Answer: B Diff: 3 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Qualitative 6) Suppose the market supply curve for some good is upward sloping. If the imposition of an excise tax causes no change in the equilibrium quantity sold in the market, the good's demand curve must be ________, meaning that the burden of the tax has fallen completely on the ________. A) vertical; firms B) vertical; consumers C) horizontal; firms D) horizontal; consumers E) unit elastic; government Answer: B Diff: 2 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Qualitative

7) Producers will bear a larger burden of a sales tax if A) demand is relatively elastic and supply is relatively inelastic. B) demand is relatively inelastic and supply is relatively elastic. C) both demand and supply are relatively inelastic. D) both demand and supply are relatively elastic. E) the tax is collected by firms rather than remitted directly to the government by consumers. Answer: A Diff: 2 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Qualitative 8) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P = $15, Q = 100). The city government imposes a tax of $3 per car parked per day. Market equilibrium adjusts to P = $16 and Q = 95. How much tax revenue does the city government collect per day? A) $95 B) $100 C) $285 D) $300 E) $1710 Answer: C Diff: 3 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Quantitative

9) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P = $15, Q = 100). The city government imposes a tax of $3 per car parked per day. Market equilibrium adjusts to P = $16 and Q = 95. After imposition of the tax, what is the daily after-tax price received by the seller per car parked? A) $1 B) $3 C) $13 D) $15 E) $16 Answer: C Diff: 3 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Quantitative 10) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P = $15, Q = 100). The city government imposes a tax of $3 per car parked per day. Market equilibrium adjusts to P = $16 and Q = 95. What is the total after-tax revenue received per day by the seller after imposition of the tax? A) $1235 B) $1600 C) $1500 D) $1520 E) $1425 Answer: A Diff: 3 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Quantitative

11) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked per day. (P = $15, Q = 100). The city government then imposes a tax of $3 per car parked per day. Market equilibrium adjusts to P = $16 and Q = 95. Which of the following statements about the burden of the tax is correct? A) Supply is less elastic relative to demand and therefore more of the burden falls on the consumer. B) Supply is more elastic relative to demand and therefore more of the burden falls on the seller. C) Supply is more elastic relative to demand and therefore more of the burden falls on the consumer. D) Supply is less elastic relative to demand and therefore more of the burden falls on the seller. E) The burden of the tax is shared equally by consumers and sellers. Answer: D Diff: 3 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Quantitative 12) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P = $15, Q = 100). The city government imposes a tax of $3 per car parked per day. Market equilibrium adjusts to P = $18 and Q = 100. Which of the following statements about the burden of the tax is correct? A) Price elasticity of supply is 0 and therefore the entire burden of the tax falls on the consumer. B) Elasticity of demand is 0 and therefore the entire burden of the tax falls on the consumer. C) Elasticity of supply is 1 and therefore the entire burden of the tax falls on the seller. D) Price elasticity of demand is 1 and therefore the entire burden of the tax falls on the seller E) The burden of the tax is shared equally by the seller and the consumer. Answer: B Diff: 3 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Category: Quantitative

13) There have been proposals that a tax be imposed on sugar-laden soft drinks in an attempt to reduce their consumption. Assume for simplicity that all bottled soft drinks are the same size. Suppose the initial market equilibrium is P = $2.00 and Q = 1000.

FIGURE 4-4 Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft drink purchased. The price paid by the consumer becomes A) $1.80. B) $2.00. C) $2.20. D) $2.40. E) $2.60. Answer: D Diff: 1 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Graphics: Graph Category: Quantitative

14) There have been proposals that a tax be imposed on sugar-laden soft drinks in an attempt to reduce their consumption. Assume for simplicity that all bottled soft drinks are the same size. Suppose the initial market equilibrium is P = $2.00 and Q = 1000.

FIGURE 4-4 Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft-drink purchased. The after-tax price received by the seller becomes A) $1.80. B) $2.00. C) $2.20. D) $2.40. E) $2.60. Answer: A Diff: 1 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Graphics: Graph Category: Quantitative

15) There have been proposals that a tax be imposed on sugar-laden soft drinks in an attempt to reduce their consumption. Assume for simplicity that all bottled soft drinks are the same size. Suppose the initial market equilibrium is P = $2.00 and Q = 1000.

FIGURE 4-4 Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft drink purchased. The change in total expenditure by consumers on soft drinks is A) a decrease of $80. B) a decrease of $160. C) an increase of $320. D) an increase of $480. E) No change in total expenditure. Answer: A Diff: 3 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Graphics: Graph Category: Quantitative

16) There have been proposals that a tax be imposed on sugar-laden soft drinks in an attempt to reduce their consumption. Assume for simplicity that all bottled soft drinks are the same size. Suppose the initial market equilibrium is P = $2.00 and Q = 1000.

FIGURE 4-4 Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft drink purchased. Given the change in total expenditure on soft drinks after imposition of the excise tax, what do we know about the price elasticity of demand (η) for soft drinks? A) η is equal to 1 B) η is equal to 0 C) η is greater than 1 D) η is less than 1 E) There is not enough information to determine. Answer: C Diff: 3 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Graphics: Graph Category: Quantitative

17) There have been proposals that a tax be imposed on sugar-laden soft drinks in an attempt to reduce their consumption. Assume for simplicity that all bottled soft drinks are the same size. Suppose the initial market equilibrium is P = $2.00 and Q = 1000.

FIGURE 4-4 Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft drink purchased. Which of the following statements most accurately describes the economic incidence of this tax? A) The consumer bears more of the burden because demand is elastic relative to supply. B) The seller bears more of the burden because supply is inelastic relative to demand. C) The consumer bears more of the burden because demand is inelastic relative to supply. D) The seller bears more of the burden because supply is elastic relative to demand. E) The burden is shared equally between consumer and seller because the slopes of the supply and demand curves are the same. Answer: C Diff: 3 Type: MC Topic: 4.3. burden of an excise tax Skill: Applied Learning Obj.: 4-4 See how elasticity of demand and supply determine the effects of an excise tax. Graphics: Graph Category: Quantitative

4.4 Other Demand Elasticities 1) The formula for income elasticity of demand may be written as which of the following? A) B) C) D) E) Answer: C Diff: 1 Type: MC Topic: 4.4a. income elasticity Skill: Recall Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative 2) Income elasticity measures the change in quantity demanded of some product with respect to changes in A) the demand of the product. B) the price of another related product. C) its price. D) the supply of the product. E) households' income. Answer: E Diff: 1 Type: MC Topic: 4.4a. income elasticity Skill: Recall Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative

3) Income elasticity of demand measures the extent to which A) the price of a good changes when there is a change in income. B) the quantity demanded of a good changes when income changes. C) real household income changes when there is a change in the price of a good. D) one household's income changes when there is a change in the income of another household. E) quantity demanded changes when there is a change in price. Answer: B Diff: 1 Type: MC Topic: 4.4a. income elasticity Skill: Recall Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative 4) If a product's income elasticity of demand is -1.7, then we can conclude that A) an increase in income will lead to an increase in demand for the product. B) the product is certainly a necessity. C) the product is a luxury good. D) a decrease in income will lead to an increase in demand for the product. E) the product is a normal good. Answer: D Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative 5) If a product's income elasticity of demand is 1.7, we can conclude that A) an increase in income will lead to an increase in demand for the product. B) the product is certainly a necessity. C) the product is an inferior good. D) a decrease in income will lead to an increase in demand for the product. E) an increase in income will lead to an increase in quantity demanded of this product by 1.7%. Answer: A Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative

6) Nancy's income has just risen from $950 per week to $1050 per week. As a result, she decides to double the number of movies she attends each week. Nancy's demand for movies is A) price elastic. B) income elastic. C) price inelastic. D) income inelastic. E) positively cross inelastic. Answer: B Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative 7) If the income elasticity of demand for some good is 2.4, a 10% increase in income results in A) a 24% increase in the quantity demanded. B) a 2.4% increase in the quantity demanded. C) a 240% increase in the quantity demanded. D) a 24% decrease in quantity demanded. E) a 240% decrease in quantity demanded. Answer: A Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative 8) When national income falls, sales of vacation packages also fall, even at constant prices. This fact suggests that the ________ elasticity of demand for vacation packages is ________. A) income; positive B) income; negative C) price; positive D) price; negative E) cross; positive Answer: A Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative

9) For a normal good, the quantity demanded A) responds inversely to changes in income. B) rises when income rises. C) rises when income falls. D) falls when income rises. E) does not change when income rises or falls. Answer: B Diff: 1 Type: MC Topic: 4.4a. income elasticity Skill: Recall Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative 10) Which of the following tends to be true of the income elasticity of demand for food? A) It tends to be well below unity only at low levels of income. B) It tends to be well above unity only at high levels of income. C) At low levels of income, it tends to be fairly high; but as the level of income rises, it tends to fall. D) It tends to remain fairly constant at all levels of income. E) It is usually zero, since we can only eat so much. Answer: C Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative 11) If the demand for a product has an income elasticity of -3.4, we can conclude that A) an increase in income will lead to an increase in demand for the product. B) the product is certainly a necessity. C) the product is a normal good. D) the product has a rising income-consumption curve. E) a decrease in income will lead to an increase in demand for the product. Answer: E Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative

12) If the income elasticity of demand for a good is 1.25, a 10% increase in income results in A) a 12.5% increase in the quantity demanded. B) a 12.5% decrease in the quantity demanded. C) a 125% increase in the quantity demanded. D) a decrease in quantity demanded. E) There is not enough information to answer this question. Answer: A Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative 13) Consider the income elasticity of demand for sport-utility vehicles (SUVs). An increase in income will A) increase the demand for SUVs if SUVs are inferior goods. B) always increase the demand for SUVs. C) increase the supply of SUVs. D) decrease the demand for SUVs if SUVs have a very low price. E) increase the demand for SUVs if SUVs are normal goods. Answer: E Diff: 1 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative 14) We can expect that the income elasticity of demand for gourmet catered meals would be ________ the income elasticity of demand for basic groceries. A) equivalent to B) not comparable to C) less than D) higher than E) lower than Answer: D Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative

15) If Vicky's income increases by 8% and she increases her consumption of take-out meals by 4%, then her income elasticity of demand for take-out meals is A) 4.0. B) -0.5. C) -2.0. D) 2.0. E) 0.5. Answer: E Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative 16) Consider the following data for a hypothetical economy.

Year 2012 2013

Average Household Income ($) 78 000 82 000

Price of Gasoline ($/litre) 1.30 1.30

Quantity Demanded of Gasoline (millions of litres) 1940 2060

TABLE 4-3 Refer to Table 4-3. The income elasticity of demand for gasoline in this economy is A) 6.0. B) 0.5. C) 0.6. D) 8.3. E) 1.2. Answer: E Diff: 3 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Graphics: Table Category: Quantitative

17) Consider the following data for a hypothetical economy.

Year 2012 2013

Average Household Income ($) 78 000 82 000

Price of Transit Passes ($) 60 60

Quantity Demanded Transit Passes 99 000 101 000

TABLE 4-4 Refer to Table 4-4. The income elasticity of demand for transit passes in this economy is A) 0.4. B) 0.5. C) 2.5. D) 2.5%. E) 3.0%. Answer: A Diff: 3 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Graphics: Table Category: Quantitative 18) Suppose the supply curve for breakfast cereals is upward sloping. Suppose also that as average household income increases we observe a fall in the price of breakfast cereal. We can conclude that breakfast cereal is a(n) A) luxury good. B) substitute good. C) inferior good. D) normal good. E) necessity good. Answer: C Diff: 3 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative

19) Which of the following statements correctly describes a normal good? Normal goods A) have positive income elasticity of demand. B) have negative income elasticity of demand. C) have negative elasticity of supply. D) do not have elasticity of demand. E) are sometimes also inferior goods. Answer: A Diff: 1 Type: MC Topic: 4.4a. income elasticity Skill: Recall Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative 20) Which of the following statements correctly describes an inferior good? An inferior good has A) a positive income elasticity of demand. B) a negative income elasticity of demand. C) an income elasticity of demand greater than zero but less than 1. D) a positive income elasticity of demand and a price elasticity of demand greater than 1. E) a negative price elasticity of demand. Answer: B Diff: 1 Type: MC Topic: 4.4a. income elasticity Skill: Recall Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative 21) If a producer knew his product to be an inferior good and he also knew average household income was falling, he might A) decrease output because the demand for his product would rise. B) increase output because the demand for his product would rise. C) keep his output the same. D) cut output immediately because the demand for his product would surely fall. E) close down, because inferior goods are the first to be eliminated from household budgets when income falls. Answer: B Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Qualitative

22) Suppose national income is rising steadily at 2% per year over a 5-year period. Over the same time period, suppose quantity demanded for iPhones increases at 5% per year, but no other relevant variables are changing. We can conclude that the income elasticity for this product is ________ and that this product is a(n) ________ good. A) 0.4; inferior B) 4.0; normal C) 2.5; luxury D) 10.0; necessities E) 4.0; necessities Answer: C Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative 23) If the income elasticity of demand for a good is -3.4, a 25% increase in income results in A) a 4% increase in quantity demanded. B) a 0.85% increase in quantity demanded. C) an 8.5% decrease in quantity demanded. D) an 85% decrease in the quantity demanded. E) There is not enough information to answer this question. Answer: D Diff: 3 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative 24) If the income elasticity of demand for a good is 0.75, a 25% increase in income results in A) an 18.75% increase in quantity demanded. B) a 3% increase in quantity demanded. C) a 0.1875% increase in quantity demanded. D) a 3% decrease in quantity demanded. E) There is not enough information to answer. Answer: A Diff: 3 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative

25) Suppose the price elasticity of demand for good X is 1.5. If household income increases by 25%, ceteris paribus, what is the change in quantity demanded for good X? A) a 37.5% increase in quantity demanded B) a 3.75% increase in quantity demanded C) a 0.375% increase in quantity demanded D) no change in quantity demanded E) There is not enough information to answer this question. Answer: E Diff: 3 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative 26) Suppose empirical analysis concludes that the income elasticity of demand for Kraft Dinner (KD) is -0.2. The interpretation of this result is that A) a 10% increase in income will lead to a 2% decrease in quantity demanded of KD. B) a 10% increase in income will lead to a 20% decrease in quantity demanded of KD. C) a 10% increase in income will lead to a 0.2% decrease in quantity demanded of KD. D) a 10% increase in income will lead to a 2% increase in quantity demanded of KD. E) a 10% increase in income will lead to a 20% increase in quantity demanded of KD. Answer: A Diff: 2 Type: MC Topic: 4.4a. income elasticity Skill: Applied Learning Obj.: 4-5 Calculate the income elasticity of demand and distinguish between normal and inferior goods. Category: Quantitative

27) Cross-price elasticity of demand may be defined as A) . B)

.

C)

.

D)

.

E)

.

Answer: C Diff: 1 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Recall Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Qualitative 28) If two goods, X and Y, have a negative cross elasticity of demand, then we know that they A) are substitutes. B) are complements. C) are both inferior goods. D) each have a price elasticity greater than one. E) are both normal goods. Answer: B Diff: 1 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Recall Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Qualitative 29) If two goods, X and Y, have a positive cross elasticity of demand, then we know that they A) are both normal goods. B) are complements. C) are both inferior goods. D) each have a price elasticity greater than one. E) are substitutes. Answer: E Diff: 1 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Recall Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between

substitute and complement goods. Category: Qualitative 30) Suppose the cross elasticity of demand between two goods, X and Y, is negative. If the price of X decreases, the quantity demanded will A) rise for both goods. B) fall for both goods. C) rise for X and fall for Y. D) fall for X and rise for Y. E) not change. Answer: A Diff: 2 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Qualitative 31) Suppose the cross elasticity of demand for two goods, X and Y, is positive. If the price of Y falls, then quantity demanded will A) rise for both goods. B) fall for both goods. C) rise for X and fall for Y. D) fall for X and rise for Y. E) remain the same for both goods. Answer: D Diff: 2 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Qualitative 32) If pizza and beer are complementary goods, we can conclude that A) the income elasticity of demand is positive. B) their cross-elasticity of demand is positive. C) both goods are inferior goods. D) the income elasticity of demand is negative. E) their cross-elasticity of demand is negative. Answer: E Diff: 2 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Qualitative

33) For which of the following pairs of products would we expect the cross elasticity of demand to be negative? A) printers and toner cartridges B) iPhones and Android smartphones C) butter and margarine D) LCD TVs and plasma TVs E) acetaminophen and ibuprofen Answer: A Diff: 2 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Quantitative 34) During the 1970s, OPEC's output restrictions caused gasoline prices to increase sharply. Coincidentally, demand for gas-guzzling cars fell. A likely explanation for these observations is that gasoline and cars had a(n) ________ elasticity of demand that was ________. A) cross; negative B) cross; positive C) income; negative D) income; positive E) price; negative Answer: A Diff: 2 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Qualitative

35) Suppose the cross-price elasticity of demand between raspberry jam and strawberry jam is 7.5. The interpretation of this result is that A) a 10% increase in the price of strawberry jam leads to a 7.5% increase in quantity demanded of raspberry jam. B) a 10% increase in the price of strawberry jam leads to a 0.75% increase in quantity demanded of raspberry jam. C) a 10% increase in the price of strawberry jam leads to a 75% increase in quantity demanded of raspberry jam. D) a 10% increase in the price of strawberry jam leads to a 7.5% decrease in quantity demanded of raspberry jam. E) a 10% increase in the price of strawberry jam leads to a 75% decrease in quantity demanded of raspberry jam. Answer: C Diff: 2 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Qualitative 36) The price of apples at a local market rises from $2.95 to $3.05 per kilogram, and as a result the quantity of oranges that households purchase increases from 3950 to 4050 kilograms per week. The cross-price elasticity is A) -1.33. B) -0.75. C) 0.75. D) 1.33. E) 1.5. Answer: C Diff: 3 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Quantitative

37) Suppose the cross-elasticity of demand for two goods, domestic cheese and imported cheese, is positive. If the price of imported cheese falls, then quantity demanded will A) rise for both domestic and imported cheese. B) fall for both domestic and imported cheese. C) rise for domestic cheese and fall for imported cheese. D) fall for domestic cheese and rise for imported cheese. E) There is not enough information to answer this question. Answer: D Diff: 3 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Category: Qualitative 38) Consider the following data for a hypothetical economy.

Year 2018 2019

Average Household Income ($) 80 000 80 000

Price of Transit Passes ($) 60 60

Quantity Demanded of Transit Passes 99 000 101 000

Price of Gasoline ($/litre) 0.95 1.05

Quantity Demanded of Gasoline (millions of litres) 1940 2060

TABLE 4-5 Refer to Table 4-5. The cross-price elasticity of demand for transit passes in terms of the price of gasoline is ________. We can therefore conclude that these two goods are ________. A) 0.5; substitutes B) 0.2; substitutes C) 5.0; complements D) 0.2; complements E) 0.33; substitutes Answer: B Diff: 3 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Graphics: Table Category: Quantitative

39) Consider the following data for a hypothetical economy.

Year 2018 2019

Average Household Income ($) 80 000 80 000

Price of Transit Passes ($) 60 60

Quantity Demanded of Transit Passes 99 000 101 000

Price of Gasoline ($/litre) 0.95 1.05

Quantity Demanded of Gasoline (millions of litres) 1940 2060

TABLE 4-5 Refer to Table 4-5. The cross-price elasticity of demand for transit passes in terms of the price of gasoline is ________. A rise in the price of gasoline causes the demand curve for transit passes to shift to the ________. A) 5.0; right B) 0.33; right C) 0.33; left D) 0.2; right E) 0.2; left Answer: D Diff: 3 Type: MC Topic: 4.4b. cross elasticity of demand Skill: Applied Learning Obj.: 4-6 Measure cross elasticity of demand and distinguish between substitute and complement goods. Graphics: Table Category: Quantitative Economics - Canadian Edition, 16e (Ragan) Chapter 5 Price Controls and Market Efficiency 5.1 Government-Controlled Prices 1) At any disequilibrium price, whether government controlled or not, the quantity actually exchanged is determined by A) the elasticity of supply. B) the elasticity of demand. C) government decree. D) the lesser of quantity demanded and quantity supplied. E) the greater of quantity demanded and quantity supplied. Answer: D Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect

equilibrium price and quantity. Category: Qualitative 2) Government price controls are policies that attempt to maintain the A) quantity bought at less than the quantity sold. B) quantity sold at less than the quantity bought. C) the price at some disequilibrium value. D) market price at equilibrium. E) price requested by the seller. Answer: C Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 3) In a market where we observe a disequilibrium, quantity exchanged is determined by A) the quantity demanded. B) the greater of quantity demanded and quantity supplied. C) neither quantity demanded nor quantity supplied. D) the lesser of quantity demanded and quantity supplied. E) the quantity supplied. Answer: D Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 4) Which of the following statements about government price controls is most accurate. They A) act as a guideline to producers as to what is a fair price. B) inform consumers what is the maximum price they should pay. C) usually set upper or lower limits on prices. D) ensure that the actual price is at its free-market equilibrium. E) ensure that transactions take place at a fair price. Answer: C Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

5) The price of a good or a service can be determined by free interaction of demand and supply or by a government price regulation. One important difference between these two price-determining methods is A) there are no shortages or surpluses at the free-market equilibrium price. B) regulated prices are fairer since more people can then afford the goods or services. C) that a regulated price above the equilibrium price will always result in shortages. D) the government is in the best position to know the needs of the people. E) one is capitalist and the other is communist. Answer: A Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 6) Consider a market in which there is a government-set price. If there is excess demand at this price, A) the market is in its free-market equilibrium. B) the market is in disequilibrium. C) there are unsuccessful sellers. D) the product has not reached the point of saturation. E) none of the product will be exchanged. Answer: B Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

7) In competitive markets, price floors and price ceilings usually lead to A) shortages. B) a reduction in quantities exchanged. C) surpluses. D) production control by the government. E) more equitable distributions of commodities. Answer: B Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 8) In free and competitive markets, shortages are eliminated by A) government price controls. B) rationing. C) black markets. D) price increases. E) price decreases. Answer: D Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 9) In free and competitive markets, surpluses are eliminated by A) government price controls. B) government purchases. C) black markets. D) price increases. E) price decreases. Answer: E Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

10) Consider a competitive labour market. The likely consequence of a binding minimum wage in this labour market is A) a labour shortage. B) a lower wage for all individuals. C) a higher wage for all individuals. D) excess demand for workers. E) unemployment. Answer: E Diff: 1 Type: MC Topic: 5.1a. price controls Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 11) If the government fixes the price of good X above its free-market equilibrium level, we should expect A) a surplus of good X to occur. B) a shortage of good X to occur. C) an excess demand for good X. D) a black market to arise for good X. E) a new free-market equilibrium price to be established. Answer: A Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 12) A minimum permissible price established by the government is called A) the equilibrium price. B) the margin price. C) a price ceiling. D) a price floor. E) the fair price. Answer: D Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

13) A maximum permissible price established by the government is called A) a price floor. B) a price support. C) an excise price. D) a price ceiling. E) a government price. Answer: D Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 14) Which of the following best describes a binding price floor? A) a minimum price, below equilibrium, below which price is not allowed to fall B) a maximum price, above equilibrium, which price is not allowed to exceed C) a minimum price, above equilibrium, below which price is not allowed to fall D) a maximum price, below equilibrium, which price is not allowed to exceed E) any minimum price below which price is not allowed to fall Answer: C Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 15) Which of the following best describes a legal price floor? A) a price set by the government at which all goods or services must be legally sold B) a maximum price above which sales cannot legally be made C) a minimum price below which sales cannot legally be made D) a price above which there would be no demand E) a price below which there would be no supply Answer: C Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

16) In which type of market would a government be most likely to establish a "legal" price floor? A) housing market B) labour market C) diamond market D) electricity market E) natural gas market Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 17) For a price floor to be binding, it must be set A) very low. B) at the free-market equilibrium price. C) below the free-market equilibrium price. D) at a level such that there exists some unsatisfied demand. E) above the free-market equilibrium price. Answer: E Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 18) Consider the market for pulp and paper. Suppose, in an attempt to help this industry, the government sets a price floor above the free-market equilibrium price. The result will be A) a continuation of the market-determined equilibrium price and quantity. B) the quantity demanded will exceed quantity supplied and there will be a shortage in the market. C) the quantity supplied will exceed quantity demanded and there will be a surplus in the market. D) a new free-market equilibrium at a higher price and lower output level. E) increased government revenue. Answer: C Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

19) Consider the market for iron ore, an important industrial input. Suppose the government sets a price floor below the free-market equilibrium price. The result will be A) a continuation of the free-market equilibrium price and quantity. B) the quantity demanded will exceed quantity supplied and there will be a shortage in the market. C) the quantity supplied will exceed quantity demanded and there will be a surplus in the market. D) a new free-market equilibrium at a lower price and higher output level. E) increased government revenue. Answer: A Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 20) An excess supply of some product is the same thing as A) a surplus. B) an excess demand. C) a shortage. D) scarcity. E) price floor. Answer: A Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 21) An excess demand for some product is the same thing as A) a surplus. B) an excess supply. C) a shortage. D) black market. E) price ceiling. Answer: C Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

22) Suppose the government establishes a binding price floor for some product. At the price floor, A) although sellers are selling all of the product that they desire, consumers are not able to buy all that they desire. B) a new free-market equilibrium price and quantity will be established. C) both sellers and buyers are satisfied with the quantity that is being exchanged. D) both sellers and buyers are exchanging the free-market equilibrium quantity. E) although consumers are purchasing all of the product they desire at this price, the sellers are not selling all they desire. Answer: E Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 23) Suppose the government decides to eliminate a binding price floor that it had previously imposed on a particular good. It can be expected that A) the price would increase, the quantity demanded would decrease and the quantity supplied would increase. B) the price would increase, the quantity demanded would increase and the quantity supplied would decrease. C) the price would decrease, the quantity demanded would decrease and the quantity supplied would increase. D) the price would decrease, the quantity demanded would increase and the quantity supplied would decrease. E) no changes would take place. Answer: D Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

24) Suppose the government decides to eliminate a binding price ceiling that it had previously imposed on a particular good. It can be expected that A) the price would increase, quantity demanded would decrease, and quantity supplied would decrease. B) the price would increase, quantity demanded would decrease, and quantity supplied would increase. C) the price would decrease, quantity demanded would decrease, and quantity supplied would increase. D) the price would decrease, quantity demanded would increase, and quantity supplied would decrease. E) no change would take place Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 25) A binding minimum wage established by the government A) is essentially a price ceiling that creates a shortage of workers. B) will be effective only if the minimum wage is set below the free-market equilibrium wage. C) will have no effect on the quantity of labour employed. D) will affect adversely only those workers whose value of productivity is greater than this minimum wage. E) is a price floor that will create a surplus of workers if the labour market is competitive. Answer: E Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

26) If the equilibrium wage in a competitive labour market is $14 per hour, and the government raises the minimum wage from $11 to $12 per hour, what will be the effect in this market? A) The level of employment will decrease. B) Unemployment will increase. C) Unemployment will decrease. D) There will be no effect on employment. E) The average wage paid to workers will increase. Answer: D Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 27) For a legislated minimum wage to be binding in a competitive labour market, it must be set A) below the free-market wage. B) equal to the free-market wage. C) above the free-market wage. D) at or below the free-market wage. E) such that no worker can earn more than the established minimum wage. Answer: C Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 28) A price ceiling set below the free-market equilibrium price will result in A) a clearing of the market. B) greater quantity exchanged. C) surpluses. D) excess demand. E) excess supply. Answer: D Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

29) Suppose the free-market equilibrium price for ice time at privately operated hockey arenas is $250 per hour. If the municipal government imposes a price ceiling of $130 per hour, we can expect to see A) an adjustment of the free-market equilibrium price to $130. B) an excess supply of ice time. C) a black market price below the free-market equilibrium price. D) that neither excess supply nor excess demand is created. E) an excess demand for ice time. Answer: E Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 30) In a competitive market, a legal price ceiling set above the free-market equilibrium price will result in A) a continuation of the free-market equilibrium price and quantity. B) the quantity demanded exceeding quantity supplied and thus a shortage in the market. C) the quantity supplied exceeding quantity demanded and thus a surplus in the market. D) a new free-market equilibrium at a higher price and lower output level. E) increased profits to the firms in the industry. Answer: A Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 31) In a competitive market, a price ceiling set below the free-market equilibrium price will result in A) a continuation of the free-market equilibrium price and quantity. B) the quantity demanded exceeding quantity supplied and thus a shortage in the market. C) the quantity supplied exceeding quantity demanded and thus a surplus in the market. D) a new free-market equilibrium at a lower price and higher output level. E) excess supply. Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

32) Which of the following statements best differentiates price ceilings and price floors? A) Price ceilings represent minimum prices, while price floors represent maximum prices. B) Binding price ceilings are always set below the equilibrium price, whereas binding price floors are always set above the equilibrium price. C) Price ceilings are always effective, whereas price floors are rarely effective. D) Price floors cause shortages to appear, whereas price ceilings have the opposite effect. E) Price ceilings and price floors have the same effects. Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Recall Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 33) Suppose the free-market equilibrium price of natural gas would be $2.00 per unit, but in an effort to protect consumers the government has fixed the price at $1.50. At this ceiling price the quantity ________ will be greater than the quantity ________, resulting in a ________ of natural gas. A) demanded; supplied; surplus B) supplied; demanded; surplus C) demanded; supplied; shortage D) supplied; demanded; shortage E) demanded; supplied; reduction in equilibrium price Answer: C Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

34) Suppose the free-market equilibrium price of downtown-to-airport taxi service would be $45 per trip, but in an effort to protect taxi owners the government has fixed the price at $60 per trip. At this legislated price, the quantity ________ will be greater than the quantity ________, resulting in a ________ of downtown-to-airport taxi services. A) demanded; supplied; surplus B) supplied; demanded; surplus C) demanded; supplied; shortage D) supplied; demanded; shortage E) demanded; supplied; reduction in equilibrium price Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 35) If the free-market equilibrium price for some product is $25, then a legal price ceiling set at $15 will bring about A) the same general effects as a price ceiling of $25. B) the same general effects as an equilibrium price of $15. C) no change in the market outcomes. D) a surplus of the good. E) a shortage of the good. Answer: E Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 36) With respect to some commodity, X, if government objectives are to (1) restrict production and (2) keep prices down to protect consumers, then legislated price ceilings will A) be a dismal failure as neither goal can ever be achieved with price ceilings. B) satisfy both goals but only if a black market develops. C) satisfy only the second goal if a black market develops. D) only have an effect on commodities at the international level. E) satisfy both goals as long as a black market does not develop. Answer: E Diff: 3 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity.

Category: Qualitative 37) Which of the following is an example of a black-market transaction? A) A person buys a hotdog on a street corner. B) A person buys a product at a price greater than the government-imposed ceiling price. C) A person buys a product at a price below the government-imposed ceiling price. D) A person places a bet at a racetrack. E) A person buys a product at a price greater than the government-imposed price floor. Answer: B Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 38) If the government imposes a price ceiling for some product, and a black market subsequently develops that gains control of all of the reduced output of the product, then A) the black market price will be lower than the ceiling price. B) excess profits will flow back to consumers. C) the quantity demanded will exceed quantity supplied at the black market price. D) the black market price will be higher than the free-market equilibrium price. E) consumers will be better off than they would be in the absence of the black market. Answer: D Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 39) If a binding price floor is in place and if the demand curve for the product shifts rightward, one consequence would be A) an increase in the amount of excess demand. B) a decrease in the amount of excess demand. C) an increase in the amount of excess supply. D) a decrease in the amount of excess supply. E) a decrease in the quantity exchanged. Answer: D Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

40) If a binding price ceiling is in place and if the demand curve for the product shifts rightward, one consequence would be A) the quantity exchanged would increase. B) the quantity exchanged would remain constant. C) the quantity exchanged would decrease. D) an increase in the amount of excess supply. E) a decrease in the amount of excess demand. Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 41) Consider a market for some good where a binding price floor is in place. The surpluses associated with this binding price floor will be the smallest when A) both supply and demand are highly elastic. B) both supply and demand are highly inelastic. C) supply is highly elastic and demand is highly inelastic. D) supply is highly inelastic and demand is highly elastic. E) both supply and demand are unit elastic. Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 42) Consider a market for some good where a binding price ceiling is in place. The shortages associated with this binding price ceiling will be the smallest when A) both supply and demand are highly elastic. B) both supply and demand are highly inelastic. C) supply is highly elastic and demand is highly inelastic. D) supply is highly inelastic and demand is highly elastic. E) none of the above—the size of the shortage has nothing to do with demand and supply elasticities. Answer: B Diff: 3 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

43) If the equilibrium price for some product is $1000, a price ceiling of $1200 will result in A) the same general effects as a price floor of $1200. B) the same general effects as an administered price of $1200. C) the same general effects as a price ceiling of $600. D) massive surpluses of the good. E) no effects because the price ceiling is not binding at that price. Answer: E Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 44) If the equilibrium price for some product is $1000, a price ceiling of $800 will result in A) the same general effects as a price ceiling of $1200. B) the same general effects as a price floor of $1200. C) the same general effects as a price ceiling of $600. D) massive surpluses of the good. E) no effects because the price ceiling is not binding at that price. Answer: C Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

45)

FIGURE 5-1 Refer to Figure 5-1. In this market, suppose the government announces that the price must be P2 or higher. This price (P2) is referred to as A) a price ceiling. B) a price floor. C) a non-binding price floor. D) a binding price ceiling. E) an equilibrium price. Answer: B Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

46)

FIGURE 5-1 Refer to Figure 5-1. In this market, suppose the government announces that the price must be P3 or lower. This price (P3) is referred to as A) a non-binding price ceiling. B) a binding price floor. C) an equilibrium price. D) a price ceiling. E) a price floor. Answer: D Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

47)

FIGURE 5-1 Refer to Figure 5-1. If the government imposes an administered price at P2, the result will be a A) surplus of BD. B) shortage of AC. C) shortage of FD. D) surplus of AF. E) surplus of 0D. Answer: A Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

48)

FIGURE 5-1 Refer to Figure 5-1. If the diagram applies to the labour market, and P3 represents a legislated minimum wage, A) there will be excess demand of AC in the labour market. B) there will be unemployment of AC in the labour market. C) the free-market equilibrium wage is P0 and the labour market is unaffected by the minimum wage. D) the labour market is in disequilibrium. E) the amount of labour employed will rise from quantity F to quantity C. Answer: C Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

49)

FIGURE 5-1 Refer to Figure 5-1. To be binding, a legal price ceiling must lie A) above P0 but below P2. B) anywhere above P0. C) below P0 but above P3. D) anywhere below P0. E) anywhere above 0. Answer: D Diff: 1 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

50)

FIGURE 5-1 Refer to Figure 5-1. With a price ceiling of P3, how large will the resulting shortage be? A) FD B) AF C) AC D) BC E) FC Answer: C Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

51)

FIGURE 5-2 Refer to Figure 5-2. A price floor set at $2.50 will result in A) a shortage of 5 units. B) a shortage of 10 units. C) a surplus of 10 units. D) a surplus of 5 units. E) no change to the market outcomes. Answer: C Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Quantitative

52)

FIGURE 5-2 Refer to Figure 5-2. A price floor set at a price of $1.00 will result in A) a shortage of 10 units. B) a shortage of 20 units. C) a surplus of 10 units. D) a surplus of 20 units. E) no change in the market outcomes. Answer: E Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Quantitative

53)

FIGURE 5-2 Refer to Figure 5-2. A price ceiling set at a price of $1.00 per unit will result in A) a shortage of 10 units. B) a shortage of 20 units. C) a surplus of 10 units. D) a surplus of 20 units. E) no change to the market outcomes. Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Quantitative

54)

FIGURE 5-2 Refer to Figure 5-2. A price ceiling set at a price of $2.50 per unit will result in A) a shortage of 5 units. B) a shortage of 10 units. C) a surplus of 5 units. D) a surplus of 10 units. E) no change in the market outcomes. Answer: E Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Quantitative

55)

FIGURE 5-3 Refer to Figure 5-3. P2 represents a minimum price imposed by the government. What quantity of this good would be exchanged in the market? A) Q0 B) Q1 C) Q2 D) Q3 E) Q4 Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

56)

FIGURE 5-3 Refer to Figure 5-3. To be effective, a price floor must lie A) above P1 but below P2. B) anywhere above P1. C) below P1 but above P3. D) anywhere below P1. E) within the boundaries of P2 and P3. Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

57)

FIGURE 5-3 Refer to Figure 5-3. Suppose P3 represents a maximum price permitted by the government. The result would be A) excess supply of Q3Q4. B) excess supply of Q3Q0. C) excess demand of Q0Q2. D) excess demand of Q1Q2. E) excess demand of Q3Q4. Answer: E Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

58)

FIGURE 5-3 Refer to Figure 5-3. If the government imposes a price floor at P3, the result would be a price and quantity combination of A) P3 and Q3. B) P3 and Q4. C) P2 and Q1. D) P1 and Q0. E) P3 and Q0. Answer: D Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Graph Category: Qualitative

59) Suppose the demand for eggs is inelastic and that the market-clearing price is $1.50 per dozen. Now suppose the government imposes a minimum price of $2.00 per dozen. Why might the government implement such a policy? A) to make consumers better off B) to increase the incomes of egg farmers C) to increase excess demand in the egg market D) to reduce excess supply in the egg market E) to decrease tax revenues from egg farmers Answer: B Diff: 3 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative 60) Concert promoters often set ticket prices below what they expect the market-clearing price to be. They are effectively imposing a ________ and the result is often ________ at a considerably higher price. A) price ceiling; ticket scalping B) price floor; ticket scalping C) price ceiling; a surplus D) price floor; a shortage E) fair price; excess tickets Answer: A Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Category: Qualitative

61) Demand and Supply Schedules for Chocolate Bars Price ($) 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40

Quantity Demanded (thousands per week) 1500 1600 1700 1800 1900 2000 2100 2200 2300

Quantity Supplied (thousands per week) 2100 2050 2000 1950 1900 1850 1800 1750 1700

TABLE 5-1 Refer to Table 5-1. Suppose that as a public-health measure the government wants to reduce the number of chocolate bars children consume. To achieve this outcome the government could implement which of the following policies? A) Impose an equilibrium price of $1.80. B) Impose a price floor of $1.80. C) Impose a price ceiling of $1.80. D) Impose an equilibrium price of $1.20. E) Impose a price ceiling of $2.00. Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Table Category: Qualitative

62) Demand and Supply Schedules for Chocolate Bars Price ($) 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40

Quantity Demanded (thousands per week) 1500 1600 1700 1800 1900 2000 2100 2200 2300

Quantity Supplied (thousands per week) 2100 2050 2000 1950 1900 1850 1800 1750 1700

TABLE 5-1 Refer to Table 5-1. Suppose the government imposed a price of $0.60 per chocolate bar. The result would be A) excess demand of 450 chocolate bars per week. B) excess supply of 450 chocolate bars per week. C) excess supply of 1750 chocolate bars per week. D) excess demand of 2200 chocolate bars per week. E) stockpiling of unsold chocolate bars. Answer: A Diff: 3 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Table Category: Quantitative

63) Demand and Supply Schedules for Chocolate Bars Price ($) 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40

Quantity Demanded (thousands per week) 1500 1600 1700 1800 1900 2000 2100 2200 2300

Quantity Supplied (thousands per week) 2100 2050 2000 1950 1900 1850 1800 1750 1700

TABLE 5-1 Refer to Table 5-1. Suppose the government imposed a price of $1.80 per chocolate bar. A likely result from this policy is A) the development of a black market in chocolate bars. B) the allocation of chocolate bars by sellers preference. C) the allocation of chocolate bars on a first-come, first-serve basis. D) the stockpiling of unsold inventories of chocolate bars. E) the rationing of chocolate bars. Answer: D Diff: 3 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Table Category: Qualitative

64) Demand and Supply Schedules for Chocolate Bars Price ($) 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40

Quantity Demanded (thousands per week) 1500 1600 1700 1800 1900 2000 2100 2200 2300

Quantity Supplied (thousands per week) 2100 2050 2000 1950 1900 1850 1800 1750 1700

TABLE 5-1 Refer to Table 5-1. Suppose the government established a price floor of $1.00 per chocolate bar. How many thousands of chocolate bars would be exchanged per week? A) 2000 B) 1850 C) 1900 D) 1800 E) 2100 Answer: C Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Table Category: Quantitative

65) Demand and Supply Schedules for Chocolate Bars Price ($) 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40

Quantity Demanded (thousands per week) 1500 1600 1700 1800 1900 2000 2100 2200 2300

Quantity Supplied (thousands per week) 2100 2050 2000 1950 1900 1850 1800 1750 1700

TABLE 5-1 Refer to Table 5-1. Suppose the government established a price ceiling of $1.00 per chocolate bar. How many thousands of chocolate bars would be exchanged per week? A) 1800 B) 1850 C) 1900 D) 2000 E) 2100 Answer: B Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Table Category: Quantitative

66) Demand and Supply Schedules for Chocolate Bars Price ($) 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40

Quantity Demanded (thousands per week) 1500 1600 1700 1800 1900 2000 2100 2200 2300

Quantity Supplied (thousands per week) 2100 2050 2000 1950 1900 1850 1800 1750 1700

TABLE 5-1 Refer to Table 5-1. Suppose that as a public health measure the government wants to reduce the number of chocolate bars consumed by children. If the government imposes a price of $1.60 per chocolate bar, how many fewer chocolate bars will be consumed each week, relative to the competitive equilibrium? A) 200 B) 300 C) 1700 D) 2000 E) 1800 Answer: A Diff: 2 Type: MC Topic: 5.1b. price floors and ceilings Skill: Applied Learning Obj.: 5-1 Describe how legislated price ceilings and price floors affect equilibrium price and quantity. Graphics: Table Category: Quantitative

5.2 Rent Controls: A Case Study of Price Ceilings 1)

FIGURE 5-1 Refer to Figure 5-1. If the diagram applies to the market for rental housing and P3 represents the maximum rent that can be charged, then A) there will be an excess supply of rental units equal to BD. B) units supplied will be reduced relative to the competitive equilibrium by AF rental units. C) windfall profits will be earned by landlords. D) there will be excess demand for rental units equal to FC. E) there will be excess demand for rental units equal to AF. Answer: B Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Graphics: Graph Category: Qualitative

2) In the presence of binding rent controls, the shortage of housing is smaller A) the higher is the elasticity of demand for housing. B) the lower is the elasticity of supply of housing. C) the longer is the length of time the rent controls are in place. D) the greater is the difference between the equilibrium price and the rent-controlled price. E) the more elastic is the long-run supply of housing. Answer: B Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative 3) Consider the market for rental accommodation. In the short run, the supply of this product tends to be A) infinitely price elastic. B) very price elastic. C) unit price elastic. D) very or completely price inelastic. E) irrelevant to the housing market price. Answer: D Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative 4) Which of the explanations below best describes why a government might choose to impose binding rent controls? A) To prevent landlords from making excess profits and to protect low-income tenants from increases in the cost of housing. B) To prevent landlords from making excess profits and to reduce the long-term quantity of rental housing. C) To increase the demand for rental housing and to discourage private ownership of low-cost rental housing developments. D) To stabilize volatile rents, and thus to make the investment climate less uncertain for prospective investors in this sector. E) To stimulate employment in the construction industry through the increased demand for new houses. Answer: A Diff: 1 Type: MC Topic: 5.2. rent controls Skill: Recall Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative

5) Suppose the government establishes a ceiling on the price of rental accommodation that is lower than the free-market equilibrium price. In this case, A) construction of new rental units will be encouraged. B) the rental housing market will be unaffected. C) those people who obtain rental units at the ceiling price will benefit. D) a surplus of current rental units will develop. E) the current stock of rental housing will be better maintained as there is a shortage of housing. Answer: C Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative 6) Assume the long-run supply of housing is highly elastic. The imposition of binding rent controls will lead to A) a reduction in the housing shortage over time. B) a worsening of the housing shortage over time. C) no significant change in the housing shortage over time. D) only a temporary housing shortage. E) the price of rental housing reverting back to its free-market equilibrium level. Answer: B Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative 7) Which of the following statements best describes the typical effects of legislated rent controls? A) There is no effect on the distribution of income between tenants and landlords or on the availability of rental accommodations. B) The distribution of income between tenants and landlords changes but there is no effect on the supply of rental accommodations. C) There is no effect on the distribution of income between tenants and landlords but the supply of rental accommodations changes. D) The distribution of income between tenants and landlords changes and the availability of rental accommodations is reduced. E) There are much worse effects in the short run than in the long run. Answer: D Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Recall Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative

8) Suppose the government imposes a price ceiling on rental housing that is below the market-clearing price. The resulting shortage will be A) greater the more recently the controlled price went into effect. B) smaller the longer the controlled price has been in effect. C) greater the more elastic the demand for rental housing. D) smaller the more elastic the demand for rental housing. E) diminished over time. Answer: C Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative 9) Assuming that the long-run supply of housing is more ________ than the short-run supply, the imposition of binding rent controls will generally ________. A) inelastic; lead to a reduction in the housing shortage over time B) elastic; lead to a worsening of the housing shortage over time C) inelastic; lead to no significant change in the housing shortage D) elastic; lead to only a temporary housing shortage E) elastic; lead the price of rental housing to revert back to its equilibrium level Answer: B Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative 10) Who are likely to be the biggest beneficiaries of rent controls? A) landlords B) prospective tenants C) current tenants D) construction companies E) No group will benefit from the controls. Answer: C Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Recall Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative

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FIGURE 5-4 Refer to Figure 5-4. Suppose the government imposes a rent-controlled price of $600 per month on apartments in this city. In the short run we can expect the shortage of apartments to be ________ units. A) 0 B) 200 C) 300 D) 800 E) 1000 Answer: C Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Graphics: Graph Category: Quantitative

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FIGURE 5-4 Refer to Figure 5-4. Suppose the government imposes a rent-controlled price of $600 per month on apartments in this city. In the long run we can expect the shortage of apartments to be ________ units. A) 0 B) 200 C) 300 D) 800 E) 1000 Answer: D Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Graphics: Graph Category: Quantitative

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FIGURE 5-4 Refer to Figure 5-4. Suppose the government sets a rent ceiling at $900. In this situation, the rental price for an apartment is A) $600. B) $900. C) any rent above $900. D) the same as the free-market equilibrium rental price. E) any rent below $600. Answer: D Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Graphics: Graph Category: Quantitative

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FIGURE 5-4 Refer to Figure 5-4. The difference between supply curve S1 and supply curve S2 in this market for apartments is that A) S1 is not affected by a government controlled rental price. B) S2 is not affected by a government controlled rental price. C) S1 is more elastic than S2. D) S1 is a short-run supply curve and S2 is a long-run supply curve. E) S1 is a long-run supply curve and S2 is a short-run supply curve. Answer: D Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Graphics: Graph Category: Quantitative

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FIGURE 5-4 Refer to Figure 5-4. What is the significance of the difference in the slopes of the shortrun supply curve ( ) and the long-run supply curve ( ) for apartments? A) Over time, the supply of apartments shrinks in response to the controlled prices - the elasticity of supply decreases. B) Over time, the demand for apartments shrinks in response to the controlled prices - the elasticity of supply increases. C) Over time, the demand for apartments increases in response to the controlled prices the elasticity of supply increases. D) Over time, the supply of apartments increases in response to the controlled prices - the elasticity of demand increases. E) Over time, the supply of apartments shrinks in response to the controlled prices - the elasticity of supply increases. Answer: E Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Applied Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Graphics: Graph Category: Qualitative

16) The short-run supply for rental housing is quite ________ while the long-run supply for housing is quite ________. A) elastic; inelastic B) inelastic; elastic C) flat; steep D) inelastic; inelastic E) elastic; elastic Answer: B Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Recall Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative 17) The long-run elasticity of supply of rental housing is greater than the short-run elasticity of supply because A) changes in supply can occur very quickly, especially when rent controls are in place. B) investment in new rental housing has such a short payback period. C) changes in supply occur only after investment decisions are made regarding, for example, new construction or conversion of rental housing to other uses. D) in the long run, landlords have no incentive to alter the supply of rental housing. E) the demand for rental housing is changing continuously. Answer: C Diff: 2 Type: MC Topic: 5.2. rent controls Skill: Recall Learning Obj.: 5-2 Compare the short-run and long-run effects of legislated rent controls. Category: Qualitative

5.3 An Introduction to Market Efficiency 1) Consider the demand curve for a product such as movie tickets, which shows how many tickets consumers wish to purchase at each possible price. Alternatively, we could view this demand curve in the following way: A) For each quantity of movie tickets, the price on the demand curve shows the value that consumers place on that particular movie ticket. B) For each quantity of movie tickets, the demand curve shows the economic surplus generated by the purchase of the tickets. C) For each possible price, the demand curve shows the economic surplus generated by the purchase of the tickets. D) For each quantity of movie tickets, the demand curve shows the extent of market inefficiency and deadweight loss. E) For each quantity of movie tickets, the demand curve shows the additional cost to the producer of supplying that particular movie ticket. Answer: A Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative 2) Consider the supply curve for a product such as shipping crates, which shows how many crates producers want to sell at each possible price. Alternatively, we could view this supply curve in the following way: A) For each quantity of shipping crates, the supply curve shows the economic surplus generated by the provision of that ticket. B) For each possible price, the supply curve shows the economic surplus generated by the provision of those crates. C) For each quantity of shipping crates, the supply curve shows the extent of market inefficiency and deadweight loss. D) For each quantity of shipping crates, the supply curve shows the value that consumers place on that particular crate. E) For each quantity of shipping crates, the price on the supply curve shows the additional cost to the producer of supplying that crate. Answer: E Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative

3) Suppose a downward-sloping demand curve intersects the horizontal axis at a point where quantity demanded equals 1250 units. What is the "value" that consumers place on the 1250th unit of this good? A) a negative value B) a positive value C) $0 D) $1250 E) It depends on the position of the supply curve. Answer: C Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative 4) Suppose a negatively sloped demand curve and a positively sloped supply curve intersect at a price and quantity combination of $100 and 600 units of the good. But suppose that producers actually produce and sell 610 units. What can we correctly say about market efficiency in this case? A) The value placed on the final 10 units of the good by consumers exceeds the additional costs associated with their production — this market is not efficient. B) The production and consumption of the additional 10 units of the good increases total economic surplus and increases market efficiency. C) This market is efficient because economic surplus is maximized as production and consumption increase simultaneously. D) This market is not efficient because quantity demanded for the good exceeds quantity supplied. E) The value placed on the final 10 units of the good by consumers is less than the additional costs associated with their production — this market is not efficient. Answer: E Diff: 3 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Quantitative

5) When economists describe a market for a specific product as being economically "efficient," what do they mean? A) Production techniques are such that resources are used in the most technologically efficient manner. B) Consumption of the product is such that economic surplus is maximized. C) Production of the product is such that economic surplus is maximized. D) The quantity of the product produced and consumed is such that the economic surplus is maximized. E) There are no price controls in place in that market. Answer: D Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Recall Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative 6) Consider a competitive market for good X. A binding price floor and a binding price ceiling in this market would be similar to each other in that A) each type of price control will lead to a reduction in deadweight loss and therefore an increase in efficiency in the market for good X. B) the units of good X that will no longer be produced or consumed will not generate any economic surplus. C) each type of price control results in a higher price paid by consumers, and therefore to a reduction in economic surplus. D) each type of price control results in a lower price received by sellers, and therefore to a reduction in economic surplus. E) additional units of good X will be produced and consumed, leading to an increase in economic surplus. Answer: B Diff: 3 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative

7) Each point on a demand curve shows the ________ price that consumers will pay to consume that quantity. The demand curve therefore shows the ________ to consumers from consuming the product. A) maximum; cost B) minimum; cost C) maximum; value D) minimum; value E) equilibrium; equilibrium price Answer: C Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Recall Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative 8) Each point on a supply curve shows the ________ acceptable price to firms for selling that unit; this price reflects ________ to firms from producing that unit. A) minimum; the equilibrium price B) maximum; the additional value C) minimum; the additional value D) maximum; the additional cost E) minimum; the additional cost Answer: E Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Recall Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative 9) Geoff is willing to pay $13 for a sixth entrance to a mountain bike park. The market price for entrance is $10.50. The bike park is willing to accept $8.75. The total economic surplus generated from Geoff's sixth trip to the bike park is A) $1.75. B) $2.50. C) $13.00. D) $10.50. E) $4.25. Answer: E Diff: 2 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative

10) Consider a market that is in equilibrium with a market-clearing price. Economic surplus is shown by A) the intersection of the supply and demand curves. B) the area that is both below the demand curve and above the supply curve. C) the area that is both above the demand curve and below the supply curve. D) the area to the right of the market-clearing price and quantity. E) the area below the supply curve up to the equilibrium quantity and below the demand curve beyond the equilibrium quantity. Answer: B Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Recall Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative 11) If 10 000 snow tires are produced and purchased in the month of November, we can say that economic surplus is A) the net value that society as a whole receives by producing and consuming those 10 000 snow tires. B) the number of snow tires that are produced in excess of the equilibrium quantity. C) the profit earned by the producers of those 10 000 snow tires. D) the price at which the tires are sold multiplied by 10 000. E) the net value to those consumers who purchased the 10 000 snow tires. Answer: A Diff: 3 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative

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FIGURE 5-5 Refer to Figure 5-5. At the market-clearing price and quantity of $30 per hour and 4000 hours of gardening services purchased, the economic surplus is A) the sum of the areas below the demand curve, but above the market-clearing price of $30 — i.e., areas 1, 2, 6. B) the sum of the areas below the demand curve — i.e., areas 1, 2, 3, 4, 5, 6, 7, 8, 9. C) the sum of the areas above the supply curve, but below the market-clearing price of $30 — i.e., areas 3, 4, 7. D) the sum of the areas above the supply curve and below the demand curve — i.e., areas 1, 2, 3, 4, 6, 7. E) the sum of the areas below the demand curve, up to 4000 hours — i.e., areas 1, 2, 3, 4, 5, 6, 7, 8. Answer: D Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Graphics: Graph Category: Qualitative

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FIGURE 5-5 Refer to Figure 5-5. At the market-clearing price and quantity of $30 per hour and 4000 hours of gardening services, we can say that A) economic surplus could be increased at a lower price because there would be more value to consumers. B) economic surplus could be increased at a higher price because firms would generate more revenue. C) economic surplus is maximized and the market is efficient. D) the market is inefficient because there are some consumers who are not purchasing at this price. E) the market is efficient because the government has imposed a market-clearing price and quantity. Answer: C Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Graphics: Graph Category: Qualitative

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FIGURE 5-5 Refer to Figure 5-5. Suppose this market for gardening services is in a free-market equilibrium. If the government then imposes a price floor of $50 per hour for gardening services, the result would be A) a loss of economic surplus of the areas 6 and 7. B) a loss of economic surplus of the areas 2 and 6. C) a loss of economic surplus of the area 1. D) a loss of economic surplus of the areas 2, 3, 4, 6, and 7. E) a loss of economic surplus of the areas 1, 2, 3, and 4. Answer: A Diff: 3 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Graphics: Graph Category: Qualitative

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FIGURE 5-5 Refer to Figure 5-5. If production and consumption of gardening services were 5000 hours per month, A) the value placed by consumers on the last 1000 hours is less than the additional costs associated with their provision. B) the provision of the last 1000 hours would decrease the amount of economic surplus in this market. C) the resources going into the last 1000 hours of gardening service would be more highly valued elsewhere. D) this market is not achieving efficiency. E) all of the above. Answer: E Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Graphics: Graph Category: Qualitative

16) In general (and in the absence of market failures), economic surplus will be maximized and economic efficiency will be achieved A) when the government is able to impose an equilibrium price. B) when consumers and producers can agree on the most advantageous division of economic surplus. C) when resources are allocated such that production of the good is maximized. D) when the government successfully determines what is best for society as a whole. E) in a competitive market where price is free to achieve its market-clearing equilibrium level. Answer: E Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Applied Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative 17) Which of the following statements most accurately describes the concept of deadweight loss? A) the loss of production that occurs when a binding price floor or ceiling is imposed B) the loss of consumption that occurs when a binding price floor or ceiling is imposed C) the overall loss of economic surplus that occurs when a market is inefficient D) the total market value of the goods no longer produced when quantity exchanged is below the equilibrium quantity E) the loss of economic surplus to consumers Answer: C Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Recall Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative 18) Which of the following is the best measure of the extent of market inefficiency? A) how far market price deviates from equilibrium B) how far quantity exchanged deviates from equilibrium C) the size of the economic surplus D) the size of the deadweight loss E) the difference between total economic surplus and deadweight loss Answer: D Diff: 2 Type: MC Topic: 5.3a. economic surplus and market efficiency Skill: Recall Learning Obj.: 5-3 Describe the relationship between economic surplus and the efficiency of a market. Category: Qualitative

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FIGURE 5-6 Refer to Figure 5-6. The market for good X is in equilibrium at P 0 and Q0. Economic surplus is represented by A) areas 1 and 5. B) areas 2, 3, 4, 6, 7, 8. C) areas 1, 2, 3, 5, 6. D) areas 1, 2, 3, 4, 5, 6, 7, 8. E) areas 2, 3, 4, 6, 7, 8, 9. Answer: C Diff: 2 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Qualitative

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FIGURE 5-6 Refer to Figure 5-6. The market for good X is in equilibrium at P 0 and Q0. Now suppose the government imposes a ________ at P1. One result would be ________. A) price ceiling; an increase in economic surplus represented by areas 5 and 6 B) price ceiling; a deadweight loss represented by areas 5, 6, 7 and 8 C) price floor; a deadweight loss represented by areas 5, 6, 7 and 8 D) price floor; a deadweight loss represented by areas 2, 6 and 7 E) price ceiling; a deadweight loss represented by areas 5 and 6 Answer: E Diff: 2 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Qualitative

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FIGURE 5-7 Refer to Figure 5-7. The market for good X is in equilibrium at P 0 and Q0. Now suppose the government imposes a ________ at P2. One result would be ________. A) price floor; an increase in economic surplus represented by area 1 B) price floor; a deadweight loss represented by areas 5 and 6 C) price ceiling; an increase in economic surplus represented by areas 2 and 5 D) price floor; a deadweight loss represented by area 8 E) price ceiling; a deadweight loss represented by areas 5 and 6 Answer: B Diff: 2 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Qualitative

22) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Assume the market for product X is at its free-market equilibrium. What is the weekly amount of consumer surplus in this market? A) $1800 B) $900 C) $450 D) $1350 E) $2700 Answer: D Diff: 2 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

23) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Assume the market for product X is at its free-market equilibrium. What is the weekly amount of producer surplus in this market? A) $1800 B) $900 C) $450 D) $1350 E) $2700 Answer: D Diff: 2 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

24) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Assume the market for product X is at its free-market equilibrium. What is the weekly amount of economic surplus in this market? A) $5400 B) $2700 C) $1800 D) $900 E) $450 Answer: B Diff: 2 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

25) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Suppose the government has imposed a price floor at $4.00 per unit in this market. With this price floor in place, what is the weekly amount of consumer surplus in this market? A) $150 B) $300 C) $450 D) $600 E) $1200 Answer: D Diff: 3 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

26) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Suppose the government has imposed a price floor at $4.00 per unit in this market. With this price floor in place, what is the weekly amount of producer surplus in this market? A) $150 B) $300 C) $450 D) $1200 E) $1800 Answer: E Diff: 3 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

27) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Suppose the government has imposed a price floor at $4.00 per unit in this market. With this price floor in place, what is the weekly amount of economic surplus in this market? A) $2400 B) $1200 C) $600 D) $300 E) $150 Answer: A Diff: 3 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

28) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Suppose the government has imposed a price floor at $4.00 per unit in this market. With this price floor in place, what is the weekly amount of deadweight loss in this market? A) $2400 B) $1200 C) $600 D) $300 E) $150 Answer: D Diff: 3 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

29) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Suppose the government has imposed a price ceiling at $1.00 per unit in this market. With this price ceiling in place, what is the weekly amount of consumer surplus in this market? A) $150 B) $450 C) $1200 D) $1350 E) $1500 Answer: D Diff: 3 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

30) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Suppose the government has imposed a price ceiling at $1.00 per unit in this market. With this price ceiling in place, what is the weekly amount of producer surplus in this market? A) $150 B) $450 C) $1200 D) $1350 E) $1500 Answer: A Diff: 3 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

31) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Suppose the government has imposed a price ceiling at $1.00 per unit in this market. With this price ceiling in place, what is the weekly amount of economic surplus in this market? A) $150 B) $450 C) $1200 D) $1350 E) $1500 Answer: E Diff: 3 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

32) The diagram below shows the market for some agricultural product, X.

FIGURE 5-8 Refer to Figure 5-8. Suppose the government has imposed a price ceiling at $1.00 per unit in this market. With this price ceiling in place, what is the weekly amount of deadweight loss in this market? A) $150 B) $450 C) $1200 D) $1350 E) $1500 Answer: C Diff: 3 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Quantitative

33) In competitive markets, binding price floors and binding price ceilings lead to A) a reduction in deadweight loss. B) fairer prices for consumers and producers, and therefore are better for society as a whole. C) an overall increase in economic surplus, and therefore to market efficiency. D) a maximization of economic surplus. E) an overall reduction in economic surplus, and therefore to market inefficiency. Answer: E Diff: 1 Type: MC Topic: 5.3b. price controls and market efficiency Skill: Recall Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Category: Qualitative 34) Output quotas are commonly used in markets for A) financial products. B) exported goods. C) imported goods. D) agricultural products. E) textiles. Answer: D Diff: 1 Type: MC Topic: 5.3c. output quotas Skill: Recall Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Category: Qualitative 35) Consider the Canadian market for barley. Suppose a marketing board sets a production quota which is below the equilibrium quantity. The quota will cause the price of barley to ________ and the total revenue earned by Canadian barley farmers to ________. A) rise; rise if demand is inelastic B) rise; rise if demand is elastic C) fall; fall if demand is inelastic D) fall; fall if demand is elastic E) remain unchanged; remain unchanged Answer: A Diff: 3 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Category: Qualitative

36) Consider Canada's east coast lobster fishery. Suppose the government sets a production quota which is below the equilibrium quantity. Relative to the free-market equilibrium, we can expect the result to be A) an increase in price and a decrease in deadweight loss. B) a decrease in price and a decrease in deadweight loss. C) the free-market equilibrium price and quantity because the quota is not binding. D) an increase in price and the introduction of a deadweight loss. E) a decreased price. Answer: D Diff: 2 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Category: Qualitative 37) Suppose a binding output quota is imposed in a previously competitive market with free-market equilibrium price and quantity. The result is A) higher price and higher quantity exchanged. B) higher price and lower quantity exchanged. C) lower price and lower quantity exchanged. D) lower price and higher quantity exchanged. E) no change in price or quantity exchanged. Answer: B Diff: 2 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Category: Qualitative

38) The diagram below shows the market for litres of milk.

FIGURE 5-9 Refer to Figure 5-9. Suppose a binding output quota is imposed on this market at quantity Q1. The loss in economic surplus due to the quota is equal to A) areas 5 and 6. B) areas 5, 6 and 7. C) areas 2 and 5. D) area 1. E) areas 1, 2 and 3. Answer: A Diff: 2 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Qualitative

39) The diagram below shows the market for litres of milk.

FIGURE 5-9 Refer to Figure 5-9. After the imposition of a milk quota at quantity Q1, economic surplus is represented by A) areas 1, 2 and 5. B) areas 3 and 4. C) areas 1, 2 and 3. D) areas 1, 2, 3, 4, 5, 6 and 7. E) areas 2, 3, 5 and 6. Answer: C Diff: 2 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Qualitative

40) The diagram below shows the market for litres of milk.

FIGURE 5-9 Refer to Figure 5-9. After the imposition of a milk quota at quantity , the deadweight loss in this market is represented by A) area 1. B) areas 1 and 4. C) areas 1, 2, and 5. D) areas 5 and 6. E) areas 5, 6, and 7. Answer: D Diff: 2 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Graph Category: Qualitative

41) Consider the following demand and supply schedules for some agricultural commodity. Price $10 $30 $50 $70 $90 $110

Quantity Supplied 300 500 700 900 1100 1300

Quantity Demanded 1100 900 700 500 300 100

TABLE 5-2 Refer to Table 5-2. Total farmers' revenue under the free-market equilibrium is A) $3000. B) $15 000. C) $35 000. D) $63 000. E) $75 000. Answer: C Diff: 2 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Table Category: Quantitative

42) Consider the following demand and supply schedules for some agricultural commodity. Price $10 $30 $50 $70 $90 $110

Quantity Supplied 300 500 700 900 1100 1300

Quantity Demanded 1100 900 700 500 300 100

TABLE 5-2 Refer to Table 5-2. Consider the market-clearing equilibrium. If the government then imposes a production quota of 500 units, the price of this commodity will ________ relative to the free-market equilibrium price. A) remain unchanged B) rise by $20 C) fall by $20 D) rise by $40 E) fall by $40 Answer: B Diff: 3 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Table Category: Quantitative

43) Consider the following demand and supply schedules for some agricultural commodity. Price $10 $30 $50 $70 $90 $110

Quantity Supplied 300 500 700 900 1100 1300

Quantity Demanded 1100 900 700 500 300 100

TABLE 5-2 Refer to Table 5-2. Consider the market-clearing equilibrium. If the government then imposes a production quota of 500 units, the deadweight loss that is created is equal to A) $1000. B) $2000. C) $3000. D) $4000. E) $5000. Answer: D Diff: 3 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Table Category: Quantitative

44) Consider the following demand and supply schedules for some agricultural commodity. Price $10 $30 $50 $70 $90 $110

Quantity Supplied 300 500 700 900 1100 1300

Quantity Demanded 1100 900 700 500 300 100

TABLE 5-2 Refer to Table 5-2. Consider the market-clearing equilibrium. If the government then required that production increase to 900 units, the deadweight loss that is created is equal to A) $1000. B) $2000. C) $3000. D) $4000. E) $5000. Answer: D Diff: 3 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Table Category: Quantitative

45) Consider the following demand and supply schedules for some agricultural commodity. Price $10 $30 $50 $70 $90 $110

Quantity Supplied 300 500 700 900 1100 1300

Quantity Demanded 1100 900 700 500 300 100

TABLE 5-2 Refer to Table 5-2. Suppose we begin in a free-market equilibrium. If the government then imposes a production quota of 500 units, total farmers' income A) increases by $800. B) increases by $500. C) remains unchanged. D) decreases by $500. E) decreases by $700. Answer: C Diff: 3 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Graphics: Table Category: Quantitative 46) Consider the market for any agricultural commodity for which there exists a binding output quota and demand is inelastic. Any individual producer has a clear financial incentive to A) produce a small amount beyond their individual quota amount. B) leave the market. C) give away their quota. D) stop producing. E) limit production of the commodity. Answer: A Diff: 3 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Category: Qualitative

47) Consider the market for any agricultural commodity for which there exists a binding output quota and demand is inelastic. One outcome of this situation is that A) the price and quantity adjust back to the free-market equilibrium levels. B) producers who were in this industry before the introduction of the quota are harmed. C) producers leave this industry because total revenues fall as a result of the the quota. D) it is difficult for new producers to enter this industry because the quotas are very expensive. E) producers who enter this industry after the introduction of the quota benefit. Answer: D Diff: 3 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Category: Qualitative 48) In Canada we have government intervention in the dairy market in the form of quotas on milk production. What are two predicted economic effects of this policy? A) a redistribution of income from consumers of dairy products to dairy farmers; and a reduction in the total amount of economic surplus in the dairy market B) a redistribution of income from consumers of dairy products to dairy farmers; and a reduction in deadweight loss in the dairy market C) a redistribution of income from dairy farmers to consumers of dairy products; and a reduction in the total amount of economic surplus in the dairy market D) a redistribution of income from dairy farmers to consumers of dairy products; and an increase in the total amount of economic surplus in the dairy market E) an equitable distribution of income between dairy farmers and consumers of dairy products; and a reduction in the total amount of economic surplus in the dairy market Answer: A Diff: 2 Type: MC Topic: 5.3c. output quotas Skill: Applied Learning Obj.: 5-4 Explain why price controls and output quotas tend to be inefficient for society as a whole. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 6 Consumer Behaviour 6.1 Marginal Utility and Consumer Choice 1) In economics, the term "utility" is defined as the A) system of basing the price of a good on its usefulness to society. B) usefulness of a good. C) total consumer satisfaction received from consumption of a good. D) usefulness of a theory to explain price determination. E) a service such as sewer and water or electricity.

Answer: C Diff: 1 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Recall Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative 2) Which of the following statements best describes an important assumption economists make about consumers? Consumers A) are motivated to maximize their profit. B) are poor judges of what is best for them. C) spend all of their current income. D) usually save as much as possible of their income. E) are motivated to maximize their utility. Answer: E Diff: 1 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Recall Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative 3) Economists use the term "marginal utility" to describe the A) change in total satisfaction caused by consumption of an additional unit of a good. B) average utility of each unit of a good consumed. C) inverse of the measure of total utility. D) total satisfaction received from consumption of a good. E) price paid for every unit consumed. Answer: A Diff: 1 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Recall Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative

4) The idea that the utility a consumer derives from successive units of a good diminishes as total consumption of the good increases is known as A) the paradox of value. B) the utility theory of demand. C) utility maximization. D) diminishing marginal utility. E) diminishing total utility. Answer: D Diff: 1 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Recall Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative 5) The "law" of diminishing marginal utility implies that the A) first unit of a good consumed will contribute most to the consumer's satisfaction. B) last unit of a good consumed will contribute most to the consumer's satisfaction. C) total utility is negative. D) total utility is constant as more units are consumed. E) marginal utility of a good diminishes as the consumer gets older. Answer: A Diff: 1 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Recall Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative 6) If consumption of an extra unit of some good generates a marginal utility of zero, then consumption of that additional unit would mean that total utility would A) also be zero. B) not change. C) be increasing. D) be decreasing. E) be negative. Answer: B Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative

7) If total utility from the consumption of some product is increasing as more units are consumed, then marginal utility must be A) decreasing at an increasing rate. B) negative. C) increasing. D) increasing at an increasing rate. E) positive. Answer: E Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Recall Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative 8) If total utility from the consumption of some product is decreasing as more units are consumed, then marginal utility must be A) positive. B) negative. C) decreasing. D) decreasing at an increasing rate. E) increasing at a decreasing rate. Answer: B Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative

9)

FIGURE 6-1 Refer to Figure 6-1. The marginal utility of the second unit of the good consumed is A) 10. B) 20. C) 30. D) 40. E) 50. Answer: B Diff: 1 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Graphics: Graph Category: Quantitative

10)

FIGURE 6-1 Refer to Figure 6-1. The total utility from consuming two units of the good is A) 20. B) 40. C) 60. D) 80. E) 140. Answer: D Diff: 1 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Graphics: Graph Category: Quantitative

11)

FIGURE 6-1 Refer to Figure 6-1. The consumer's total utility is A) increasing at an increasing rate. B) increasing at a decreasing rate. C) decreasing at an increasing rate. D) decreasing at a decreasing rate. E) constant. Answer: B Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Graphics: Graph Category: Quantitative

12)

FIGURE 6-1 Refer to Figure 6-1. If this figure represents the utility obtained from consuming units of a good, how many units would this consumer consume if the good were free? A) 1 B) 2 C) 3 D) 4 E) at least 5 Answer: E Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Graphics: Graph Category: Qualitative

13)

FIGURE 6-1 Refer to Figure 6-1. The total utility curve in this figure illustrates the law of A) maximizing utility. B) increasing partial utility. C) diminishing total utility. D) diminishing marginal utility. E) increasing marginal utility. Answer: D Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Graphics: Graph Category: Qualitative

14)

FIGURE 6-1 Refer to Figure 6-1. Marginal utility is zero when total utility is A) equal to zero. B) is decreasing. C) is increasing. D) equal to marginal utility. E) at its maximum. Answer: E Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Graphics: Graph Category: Qualitative

15)

FIGURE 6-1 Refer to Figure 6-1. Total utility is at its maximum when marginal utility is A) equal to zero. B) negative. C) positive. D) equal to total utility. E) at the maximum. Answer: A Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Graphics: Graph Category: Qualitative

16) If consumption of an extra unit of a product delivers a positive marginal utility, then consumption of that additional unit would mean A) that total utility is also zero. B) that total utility would not change. C) that total utility is increasing. D) that total utility is decreasing. E) that the consumer would no longer receive any satisfaction from any consumption of this good. Answer: C Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Recall Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative 17) A basic hypothesis of marginal utility theory is that the utility a consumer derives from successive units of a good diminishes as total consumption of the good increases. This hypothesis is known as A) the paradox of value. B) the utility theory of demand. C) utility maximization. D) the law of diminishing marginal utility. E) the law of diminishing total utility. Answer: D Diff: 1 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Recall Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative 18) Which of the following statements is the best description of marginal utility theory? Marginal utility theory is about A) the consumer behaviour that underlies the theory of demand. B) proving that demand curves are always downward sloping. C) the total satisfaction resulting from the consumption of some good by the consumer. D) how producers allocate their scarce resources. E) calculating consumer surplus. Answer: A Diff: 1 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Recall Learning Obj.: 6-1 Distinguish between marginal and total utility. Category: Qualitative

19) The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1-week period.

Units 1 2 3 4 5 6 7

Toffee (bars) Marginal Total Utility Utility 10 10 8 18 5 23 3 26 1 27 0 27 0 27

Cashews (bags) Marginal Total Utility Utility 12 12 10 22 7 29 5 34 2 36 1 37 0 27

TABLE 6-1 Refer to Table 6-1. If this consumer purchases 3 toffee bars and 4 bags of cashews per week, his/her total utility will be A) 7. B) 23. C) 31. D) 54. E) 57. Answer: E Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Graphics: Table Category: Quantitative

20) The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1-week period.

Units 1 2 3 4 5 6 7

Toffee (bars) Marginal Total Utility Utility 10 10 8 18 5 23 3 26 1 27 0 27 0 27

Cashews (bags) Marginal Total Utility Utility 12 12 10 22 7 29 5 34 2 36 1 37 0 27

TABLE 6-1 Refer to Table 6-1. The maximum utility that a consumer can obtain from toffee bars and bags of cashews per week is A) 22. B) 54. C) 56. D) 64. E) 74. Answer: D Diff: 2 Type: MC Topic: 6.1a. marginal utility and total utility Skill: Applied Learning Obj.: 6-1 Distinguish between marginal and total utility. Graphics: Table Category: Quantitative

21) The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1-week period.

Units 1 2 3 4 5 6 7

Toffee (bars) Marginal Total Utility Utility 10 10 8 18 5 23 3 26 1 27 0 27 0 27

Cashews (bags) Marginal Total Utility Utility 12 12 10 22 7 29 5 34 2 36 1 37 0 27

TABLE 6-1 Refer to Table 6-1. If the prices of toffee bars and bags of cashews are both $1 and this consumer has $7 per week to spend on these two snacks, how many of each will he/she purchase to maximize utility? A) 2 toffee bars and 5 bags of cashews B) 3 toffee bars and 4 bags of cashews C) 4 toffee bars and 3 bags of cashews D) 5 toffee bars and 2 bags of cashews E) 6 toffee bars and 1 bag of cashews Answer: B Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Table Category: Quantitative

22) The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1-week period.

Units 1 2 3 4 5 6 7

Toffee (bars) Marginal Total Utility Utility 10 10 8 18 5 23 3 26 1 27 0 27 0 27

Cashews (bags) Marginal Total Utility Utility 12 12 10 22 7 29 5 34 2 36 1 37 0 27

TABLE 6-1 Refer to Table 6-1. If the price of toffee bars is $1 each, bags of cashews are $2 each, and this consumer has $7 per week to spend on these two snacks, how many of each will he/she purchase to maximize utility? A) 0 toffee bars and 3 bags of cashews B) 1 toffee bars and 3 bags of cashews C) 2 toffee bars and 2 bags of cashews D) 3 toffee bars and 2 bags of cashews E) 7 toffee bars and 0 bags of cashews Answer: D Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Table Category: Quantitative

23) The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1-week period.

Units 1 2 3 4 5 6 7

Toffee (bars) Marginal Total Utility Utility 10 10 8 18 5 23 3 26 1 27 0 27 0 27

Cashews (bags) Marginal Total Utility Utility 12 12 10 22 7 29 5 34 2 36 1 37 0 27

TABLE 6-1 Refer to Table 6-1. If the prices of toffee bars and bags of cashews are both $1 and this consumer has $11 per week to spend on snacks, how many of each will he/she purchase? A) 3 toffee bars and 8 bags of cashews B) 4 toffee bars and 7 bags of cashews C) 5 toffee bars and 5 bags of cashews D) 5 toffee bars and 6 bags of cashews E) 6 toffee bars and 5 bags of cashews Answer: D Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Table Category: Quantitative

24) The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1-week period.

Units 1 2 3 4 5 6 7

Toffee (bars) Marginal Total Utility Utility 10 10 8 18 5 23 3 26 1 27 0 27 0 27

Cashews (bags) Marginal Total Utility Utility 12 12 10 22 7 29 5 34 2 36 1 37 0 27

TABLE 6-1 Refer to Table 6-1. If the prices of both toffee bars and bags of cashews are $2 and this consumer has $14 per week to spend on these two snacks, what is the maximum total utility achievable? A) 10 B) 15 C) 33 D) 45 E) 57 Answer: E Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Table Category: Quantitative 25) A consumer maximizes his or her utility when expenditures are allocated such that A) the total utility from each good is equal. B) the total number of dollars spent on each good is equal. C) the utility received from the last unit of each good is equal. D) the utility received per dollar spent on the last unit of each good is equal. E) the marginal utility is zero for each good consumed utility. Answer: D Diff: 2 Type: MC Topic: 6.1b. utility maximization Skill: Recall Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Qualitative

26) The condition required for a consumer to be maximizing utility, for any pair of products, X and Y, is A) PX(MUX) = PY(MUY). B) MUX = MUY. C) MUX/PX = MUY/PY. D) MUX/PY = MUY/PX. E) PX = PY. Answer: C Diff: 2 Type: MC Topic: 6.1b. utility maximization Skill: Recall Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Qualitative 27) If a consumer is faced with a choice of products A, B, C, ..., and has a given money income, the consumer's utility will be maximized when A) MUA/PA = MUB/PB = MUC/PC = ... B) PA = PB = PC = ... C) MUA = MUB = MUC = ... D) TUA = TUB = TUC = ... E) MUA = PA; MUB = PB; MUC = PC; ... Answer: A Diff: 2 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Qualitative 28) Consider marginal utility theory. If all consumers in an economy have maximized their utility, and they face a given set of market prices, then each consumer will have identical A) total utilities for each good. B) marginal utilities for each good. C) marginal utilities per unit of each good. D) ratios of marginal utility to price for each good. E) consumption of each good. Answer: D Diff: 2 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Qualitative

29)

FIGURE 6-2 Refer to Figure 6-2. If the price of X is $2 and the price of Y is $1 and the consumer is buying 4 units of X and 2 units of Y, the consumer's total utility is A) 8. B) 10. C) 52. D) 56. E) 69. Answer: E Diff: 2 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Quantitative

30)

FIGURE 6-2 Refer to Figure 6-2. Suppose the price of X is $2, the price of Y is $1, and the consumer's income is $10. The consumer is currently buying 4 units of good X and 2 units of good Y. In order to maximize his utility, he should A) make no changes — he is already maximizing his total utility. B) buy the same amount of X but less Y. C) buy more of X but the same amount Y. D) buy more of X and less Y. E) buy more Y and less X. Answer: E Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Quantitative

31)

FIGURE 6-2 Refer to Figure 6-2. Suppose the price of Y is $1, the consumer's income is $10, and the consumer is currently buying 3 units of good X and 4 units of good Y. If this consumer is maximizing her utility, then the price of X must be A) $1. B) $2. C) $3. D) $4. E) Impossible to tell with the given information. Answer: B Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Quantitative

32)

FIGURE 6-2 Refer to Figure 6-2. Suppose the price of X is $2, the price of Y is $1, the consumer's income is $10, and the consumer is buying 3 units of good X and 4 units of good Y. What is the total utility the consumer obtains from this combination of X and Y? A) 18 B) 30 C) 40 D) 60 E) 70 Answer: E Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Quantitative

33)

FIGURE 6-2 Refer to Figure 6-2. Suppose the price of X is $2, the price of Y is $1, and the consumer's income is $10. The consumer is currently buying 3 units of good X and 4 units of good Y. In order to maximize his/her utility, the consumer should A) not change his/her behaviour. B) buy the same amount of X but less Y. C) buy more of X but the same amount Y. D) buy more of X and less Y. E) buy less of X and more Y. Answer: A Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Quantitative

34)

FIGURE 6-2 Refer to Figure 6-2. Suppose the price of Y is $1 and the consumer's income is $10. Initially, the price of X is $2 and the consumer is buying 3 units of good X and 4 units of good Y. If the price of X then falls to $1, what quantities of X and Y will he/she now purchase in order to maximize total utility? A) 2 X and 8 Y. B) 3 X and 7 Y. C) 4 X and 6 Y. D) 5 X and 5 Y. E) 6 X and 4 Y. Answer: E Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Quantitative

35)

FIGURE 6-2 Refer to Figure 6-2. Suppose the price of Y is $1 and the consumer's income is $10. Initially, the price of X is $2 and the consumer is buying 4 units of good Y. If the price of X then falls to $1, which of the following pairs of quantities of X correctly completes the demand schedule below? Price of X: $1 $2 Quantity Demanded of X: ________ ________ A) 2; 4 B) 4; 4 C) 4; 3 D) 6; 3 E) 6; 4 Answer: D Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph

Category: Quantitative 36) Christine is allocating her household expenditure between cleaning services and gardening services in order to maximize the household's total utility. For the quantities of cleaning and gardening services she has chosen, an increase in the price of cleaning service will, ceteris paribus, A) increase the marginal utility of a unit of cleaning service. B) reduce the marginal utility per dollar spent on cleaning service. C) reduce the marginal utility of a unit of cleaning service. D) increase the marginal utility per dollar spent on cleaning service. E) have no effect on the marginal utility per dollar spent on cleaning service. Answer: B Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Qualitative 37) John is allocating his household expenditure between groceries and housing in order to maximize total utility. For the quantities of groceries and housing he has chosen, an increase in the price of housing will, ceteris paribus, A) increase the marginal utility of a unit of housing. B) increase the marginal utility per dollar spent on housing. C) reduce the marginal utility of a unit of housing. D) reduce the marginal utility per dollar spent on housing. E) have no effect on the marginal utility per dollar spent on housing. Answer: D Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Quantitative 38) Consider a consumer who divides his income between spending on good X and good Y. The opportunity cost of good X in terms of good Y is reflected by the A) absolute price of good X. B) absolute price of good Y. C) ratio of the price of X to the price of Y. D) ratio of the price of Y to the price of X. E) price of good X relative to the prices of all other goods. Answer: C Diff: 2 Type: MC Topic: 6.1b. utility maximization Skill: Recall

Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Qualitative 39) The Smith family is allocating its monthly household expenditure between only two goods, food and clothing. Suppose the price of food is $5 per unit, the price of clothing is $10 per unit, and the marginal utility the family is receiving from its consumption of food is currently 25. What is the family's marginal utility from its consumption of clothing if it is maximizing its utility? A) 5 B) 10 C) 12.5 D) 25 E) 50 Answer: E Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Quantitative 40) The Smith family is allocating its monthly household expenditure between only two goods, food and clothing. Suppose the price of food is $12 per unit, the price of clothing is $16 per unit, and the marginal utility the family is receiving from its consumption of clothing is currently 200. What is the family's marginal utility from its consumption of food if it is maximizing its utility? A) 200 B) 150 C) 75 D) 16 E) 12 Answer: B Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Quantitative

41) Bjorn is a student with a monthly budget of $500, which he allocates between transportation services and "all other goods." Suppose the price of transportation is $5 per unit, and the price of "all other goods" is $20 per unit. The marginal utility he currently receives from his consumption of transportation services is 60. What is his marginal utility from the consumption of "all other goods" if he is maximizing his utility? A) 5 B) 20 C) 25 D) 200 E) 240 Answer: E Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Quantitative 42) Bjorn is a student with a monthly budget of $500, which he allocates between transportation services and "all other goods." Suppose the price of transportation is $5 per unit, and the price of "all other goods" is $20 per unit. The marginal utility he currently receives from his consumption of transportation services is 60. How many units of "all other goods" is he consuming if he is maximizing his utility? A) 25 B) 60 C) 200 D) 240 E) There is not enough information to determine. Answer: E Diff: 3 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Quantitative

43) Laurie spends all of her money buying bread and cheese. The marginal utility she receives from the last loaf of bread is 60 and from the last block of cheese is 30. The price of bread is $3 and the price of cheese is $2. Laurie A) is buying bread and cheese in utility-maximizing amounts. B) should buy more bread and less cheese in order to maximize her utility. C) should buy more cheese and less bread in order to maximize her utility. D) is spending too much money on bread and cheese. E) should buy more bread and more cheese in order to maximize her utility. Answer: B Diff: 2 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Quantitative 44) Marginal utility analysis predicts a downward-sloping demand curve for good X because A) as PX falls, the ratio MUX/PX becomes smaller, causing the consumer to purchase more of good X. B) as PX rises, the consumer increases purchases of X such that MU X/PX is equal to MU/P for all other products. C) utility-maximizing consumers equate marginal utility received for each product consumed. D) all demand curves are downward sloping, regardless of the behaviour of consumers. E) as PX falls, the consumer increases purchases of X until MU X/PX is equal to MU/P for all other products. Answer: E Diff: 2 Type: MC Topic: 6.1b. utility maximization Skill: Recall Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Qualitative

45) If John consumes only two goods, A and B, and he is maximizing his utility subject to his budget constraint, A) MUA/MUB is at a maximum. B) MUA/MUB equals the ratio of the total utility of A to the total utility of B. C) MUA/MUB equals 1. D) MUA/MUB equals zero. E) MUA/MUB equals the ratio of the price of A to the price of B. Answer: E Diff: 2 Type: MC Topic: 6.1b. utility maximization Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Qualitative 46) The market demand curve is derived from A) the vertical summation of individual demand curves. B) the average quantity demanded of all individuals in the economy. C) a weighted average of the quantity demanded of all individuals in the economy at each price. D) the horizontal summation of individual demand curves. E) market data provided by Statistics Canada. Answer: D Diff: 1 Type: MC Topic: 6.1c. market demand curve Skill: Recall Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Category: Qualitative

47) Diagrams A, B, and C show 3 individual consumers' demand curves for cement. Consumers A, B, and C constitute the entire monthly cement market in this region.

FIGURE 6-3 Refer to Figure 6-3. What is the market demand (in cubic metres per month) for cement at a price of $80 per cubic metre? A) 0 B) 1000 C) 2000 D) 3000 E) 4000 Answer: B Diff: 2 Type: MC Topic: 6.1c. market demand curve Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Quantitative

48) Diagrams A, B, and C show 3 individual consumers' demand curves for cement. Consumers A, B, and C constitute the entire monthly cement market in this region.

FIGURE 6-3 Refer to Figure 6-3. What is the market demand (in cubic metres per month) for cement at a price of $60 per cubic metre? A) 0 B) 1000 C) 2000 D) 3000 E) 4000 Answer: D Diff: 2 Type: MC Topic: 6.1c. market demand curve Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Quantitative

49) Diagrams A, B, and C show 3 individual consumers' demand curves for cement. Consumers A, B, and C constitute the entire monthly cement market in this region.

FIGURE 6-3 Refer to Figure 6-3. What is the market demand (in cubic metres per month) for cement at a price of $20 per cubic metre? A) 0 B) 4000 C) 5000 D) 10 000 E) 14 000 Answer: E Diff: 2 Type: MC Topic: 6.1c. market demand curve Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Quantitative

50) Diagrams A, B, and C show 3 individual consumers' demand curves for cement. Consumers A, B, and C constitute the entire monthly cement market in this region.

FIGURE 6-3 Refer to Figure 6-3. On the regional market demand curve for cement (not shown), at which price level(s) is there a "kink" in the demand curve? A) $10 B) $20 and $30 C) $30 and $70 D) $40 and $70 E) $80 Answer: C Diff: 3 Type: MC Topic: 6.1c. market demand curve Skill: Applied Learning Obj.: 6-2 Explain how utility‐maximizing consumers adjust their expenditure until the marginal utility per dollar spent is equalized across products. Graphics: Graph Category: Qualitative

6.2 Income and Substitution Effects of Price Changes 1) Consider the income and substitution effects of price changes. The substitution effect is the change in quantity demanded that occurs A) as a result of a change in absolute prices, with real income held constant. B) as a result of a change in relative prices, with money income held constant. C) as a result of a change in relative prices, with real income held constant. D) when one good is substituted for another. E) with a change in the relative prices of two or more goods. Answer: C Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Recall Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 2) Consider the income and substitution effects of price changes. The income effect refers to the change in quantity demanded that occurs as a result of a change in A) money income, with relative prices held constant. B) real income, with relative prices held constant. C) relative prices, with real income held constant. D) marginal utility, with real income held constant. E) preferences, with real income held constant. Answer: B Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Recall Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 3) Consider the income and substitution effects of price changes. If the price of a normal good changes, the income effect of the price change will A) always be larger than the substitution effect. B) always be to increase quantity demanded. C) reinforce the substitution effect. D) produce a positively sloped demand curve. E) oppose the substitution effect. Answer: C Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Recall Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative

4) Suppose a consumer can purchase only two goods, soap and apples. If the price of soap falls and the consumption of apples increases, we can conclude that the increased consumption of apples is due to A) neither the income effect nor the substitution effect. B) both the income effect and the substitution effect. C) the income effect only. D) the substitution effect only. E) the deflation effect. Answer: C Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 5) Suppose there are only two goods, A and B, and that consumer income is constant. If the price of good A falls and the consumption of good B rises, we can conclude that A) A is a normal good. B) B is a normal good. C) A is an inferior good. D) B is an inferior good. E) both A and B are normal goods. Answer: B Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 6) A demand curve for a normal good is downward sloping due to A) the income effect. B) the substitution effect. C) the combination of income and substitution effects. D) neither the substitution effect nor the income effect. E) the Giffen effect. Answer: C Diff: 1 Type: MC Topic: 6.2. income and substitution effects Skill: Recall Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative

7) Consider the income and substitution effects of price changes. For a product with an income elasticity greater than one, a price increase will cause the consumer's real income to A) rise and the quantity purchased to fall. B) fall and the quantity purchased to fall. C) rise and the quantity purchased to rise. D) fall and the quantity purchased to rise. E) remain constant. Answer: B Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 8) Consider the income and substitution effects of price changes. Suppose the price of potatoes falls and we observe a decrease in an individual's purchases of potatoes. Which of the following can we infer? A) The income effect is negative and outweighs the substitution effect. B) The income effect is negative and reinforces the substitution effect. C) The income effect just offsets the substitution effect. D) The income effect is positive and exceeds the substitution effect. E) The substitution effect outweighs the income effect. Answer: A Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 9) The substitution effect of a price change A) will result in the consumer buying less of a good at a lower price. B) will result in the consumer buying less of a good at a higher price. C) outweighs the income effect for Giffen goods. D) is equal to the income effect for normal goods. E) is equal to the income effect for inferior goods. Answer: B Diff: 1 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative

10) If the income effect of a price change is negative and larger in absolute terms than the substitution effect, then the demand curve will be A) upward sloping. B) downward sloping. C) vertical. D) horizontal. E) of indeterminate slope. Answer: A Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 11) The demand curve for a good with an income elasticity of less than one A) must be downward sloping. B) must be upward sloping. C) will be upward sloping only if the substitution effect outweighs the income effect. D) will be upward sloping only if the income effect outweighs the substitution effect. E) indicates a normal good. Answer: D Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 12) Which of the following statements best describes the substitution effect of a price change? A) The change in quantity demanded that occurs as a result of a change in absolute prices, with real income held constant. B) The change in quantity demanded that occurs as a result of a change in relative prices with money income held constant. C) The change in quantity demanded that occurs as a result of a change in relative prices with real income held constant. D) The change in quantity demanded that occurs when one good is substituted for another. E) The change in the relative prices of two or more goods. Answer: C Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Recall Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve.

Category: Qualitative

13) In which of the following situations will an individual's purchasing power be unaffected? A) Money income is cut in half, and the prices of all goods and services fall by 50%. B) Money income falls, and the price of one good falls. C) Money income doubles, and the prices of all goods and services are cut in half. D) Money income doubles, and the prices of all goods and services remain constant. E) Money income is cut in half, and prices of all goods and services remain constant. Answer: A Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Quantitative 14) In which of the following situations will an individual's purchasing power be unaffected? A) Money income doubles, and the prices of all goods and services are cut in half. B) Money income remains constant, and the prices of all goods and services double. C) Money income is cut in half, and the prices of all goods and services double. D) Money income is cut in half, and the prices of all goods and services remains constant. E) Money income doubles, and the prices of all goods and services double. Answer: E Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Quantitative 15) In which of the following situations will an individual's purchasing power be unaffected? A) All absolute prices fall by 15%, and money income falls by 15%. B) All relative prices fall by 15%, and money income falls by 15%. C) All relative prices rise by 15%, and money income falls by 15%. D) All absolute prices remain constant, and money income falls by 15%. E) All relative prices remain constant, and money income rises by 15%. Answer: A Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative

16) Suppose a consumer can purchase only two goods, beef and chicken. If the price of beef falls (with all other variables held constant), and the consumption of chicken increases, we can conclude that the increased consumption of chicken is due to A) neither the income effect nor the substitution effect. B) both the income effect and the substitution effect. C) the income effect only. D) the substitution effect only. E) a change in the consumer's preference toward chicken. Answer: C Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative

17)

FIGURE 6-4 Refer to Figure 6-4. For both goods, the price falls from P0 to P1. The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good X is certainly a(n) ________ good. A) normal B) inferior C) luxury D) necessity E) Giffen Answer: B Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Graphics: Graph Category: Qualitative

18)

FIGURE 6-4 Refer to Figure 6-4. For both goods, the price falls from P0 to P1. The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good Y is certainly a(n) ________ good. A) normal B) inferior C) luxury D) necessity E) Giffen Answer: A Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Graphics: Graph Category: Qualitative

19)

FIGURE 6-4 Refer to Figure 6-4. The price of good X falls from P0 to P1. The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Which of the following statements best describes the combination of the two effects on the change in quantity demanded of good X? A) The income effect reinforces the substitution effect. B) The income effect partially offsets the substitution effect. C) The income effect fully offsets the substitution effect. D) The income effect is zero. E) The income and substitution effects are of equal magnitude. Answer: B Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Graphics: Graph Category: Qualitative

20)

FIGURE 6-4 Refer to Figure 6-4. The price of good Y falls from P0 to P1. The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Which of the following statements best describes the combination of the two effects on the change in quantity demanded of good Y? A) The income effect reinforces the substitution effect. B) The income effect partially offsets the substitution effect. C) The income effect fully offsets the substitution effect. D) The income effect is zero. E) The income and substitution effects are of equal magnitude. Answer: A Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Graphics: Graph Category: Qualitative

21)

FIGURE 6-5 Refer to Figure 6-5. For both goods, the price increases from P0 to P1. The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good X is certainly a(n) ________ good. A) normal B) inferior C) luxury D) necessity E) Giffen Answer: B Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Graphics: Graph Category: Qualitative

22)

FIGURE 6-5 Refer to Figure 6-5. For both goods, the price increases from P0 to P1. The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good Y is certainly a(n) ________ good. A) inferior B) normal C) luxury D) necessity E) Giffen Answer: B Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Graphics: Graph Category: Qualitative

23)

FIGURE 6-5 Refer to Figure 6-5. The price of good X increases from P0 to P1. The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Which of the following statements best describes the combination of the two effects on the change in quantity demanded of good X? A) The income effect reinforces the substitution effect. B) The income effect partially offsets the substitution effect. C) The income effect fully offsets the substitution effect. D) The income effect is zero. E) The income and substitution effects are of equal magnitude. Answer: B Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Graphics: Graph Category: Qualitative

24)

FIGURE 6-5 Refer to Figure 6-5. The price of good Y increases from P0 to P1. The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Which of the following statements best describes the combination of the two effects on the change in quantity demanded of good Y? A) The income effect reinforces the substitution effect. B) The income effect partially offsets the substitution effect. C) The income effect fully offsets the substitution effect. D) The income effect is zero. E) The income and substitution effects are of equal magnitude. Answer: A Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Graphics: Graph Category: Qualitative

25) Assume you are consuming two goods, X and Y. X and Y are both normal goods but they are not close complements. The price of good X increases but the price of Y remains unchanged. However, you are given enough additional income to ensure that your utility remains unchanged. What happens to your consumption of good X? A) It increases. B) It stays the same. C) It increases or decreases. D) It decreases. E) It increases over the long run. Answer: D Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 26) Assume you are consuming two goods, X and Y. Suppose the money prices for X and Y remain unchanged, but your income increases by 20%. What happens to your consumption of good X? A) It increases. B) It stays the same. C) It increases or decreases, depending on whether it is normal or inferior. D) It decreases. E) It increases by 20%. Answer: C Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Quantitative

27) Assume you are consuming two goods, X and Y. Suppose the absolute prices for X and Y remain unchanged, but your money income falls by 50%. What happens to your consumption of good X? A) It increases. B) It stays the same. C) It increases or decreases, depending on whether it is normal or inferior. D) It decreases. E) It decreases by 50%. Answer: C Diff: 3 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Quantitative 28) The substitution effect of a price change leads consumers to ________ their demand for goods whose prices have risen. The income effect leads consumers to buy less of all ________ goods whose prices have risen. A) reduce; normal B) increase; inferior C) increase; normal D) reduce; Giffen E) reduce; complement Answer: A Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Recall Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 29) Consider the substitution and income effects of a 15% increase in the price of a good. Of the goods listed below, which is most likely to have the smallest income effect? A) groceries B) restaurant meals C) gasoline D) paperclips E) dishwashers Answer: D Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative

30) Consider the substitution and income effects of a 15% increase in the price of a good. Of the goods listed below, which is most likely to have the largest income effect? A) salt B) paperclips C) socks D) tennis balls E) electricity Answer: E Diff: 2 Type: MC Topic: 6.2. income and substitution effects Skill: Applied Learning Obj.: 6-3 Explain how the income and substitution effects of a price change determine the slope of a demand curve. Category: Qualitative 6.3 Consumer Surplus 1) What is consumer surplus? A) the sum of the marginal values to the consumer B) the total value that a consumer receives from the purchase of a particular good C) a measure of the gains that a consumer forgoes by buying this product rather than another D) the difference between what the consumer is willing to pay for all the units consumed and what he or she actually paid E) the consumption of a commodity above and beyond the amount required by the consumer Answer: D Diff: 1 Type: MC Topic: 6.3a. consumer surplus Skill: Recall Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Category: Qualitative 2) What is consumer surplus? A) It is the same as Karl Marx's notion of surplus value. B) It is the same concept as total utility. C) It is the sum of the extra value placed on each unit of a commodity above the market price paid for each. D) It is the total value that consumers place on their purchases. E) It is the marginal value that consumers place on their purchases. Answer: C Diff: 1 Type: MC Topic: 6.3a. consumer surplus Skill: Recall

Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Category: Qualitative 3) Consider the pizza market, with a downward-sloping demand curve and an upwardsloping supply curve. Suppose 100 pizzas are purchased at the free-market equilibrium price. The consumer surplus on the 100th pizza is A) positive. B) negative. C) non-negative. D) unknown. E) zero. Answer: E Diff: 1 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Category: Qualitative 4) Given a typical downward-sloping demand curve in a market that has reached its equilibrium, the consumer surplus A) is measured by the area above the market price and under the demand curve. B) is measured by the area below the market price and under the demand curve. C) is measured by the area immediately above the demand curve. D) is calculated as the product of market price and quantity consumed. E) cannot be measured given the information. Answer: A Diff: 1 Type: MC Topic: 6.3a. consumer surplus Skill: Recall Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Category: Qualitative 5) Given a particular market demand curve, consumer surplus is A) less the lower the price and the smaller the output. B) less the lower the price and the larger the output. C) greater the higher the price and the smaller the output. D) greater the lower the price and the smaller the output. E) greater the lower the price and the larger the output. Answer: E Diff: 1 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by

paying less for the product than the maximum price he or she is willing to pay. Category: Qualitative

6) Assume a person reveals the following demand conditions. At a price of $10, quantity demanded is zero; and at a price of $1, quantity demanded is 10 units. A) The consumer surplus will be zero at a price of $10. B) The consumer surplus will be the area under the entire demand curve. C) The consumer surplus is zero at a price of $1. D) The higher the price, the larger the consumer surplus. E) The lower the price the smaller the consumer surplus. Answer: A Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Category: Qualitative 7) An individual's consumer surplus from some product can be eliminated entirely by: 1. raising the price until very few units are bought. 2. charging a price for each unit that is equal to the individual's marginal value for each unit. 3. raising the price until zero units are purchased. A) 1 only B) 2 only C) 3 only D) 2 or 3 E) 1 or 2, but not 3. Answer: D Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Category: Qualitative 8) Assume an individual with a downward-sloping demand curve is paying a single price for each unit of some commodity. He will experience consumer surplus on A) all units that were not bought at that particular price. B) all of the units bought. C) all units bought with the possible exception of the last unit. D) the first unit only. E) none of the units. Answer: C Diff: 3 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay.

Category: Qualitative 9) At a garage sale, Ken purchases a used bicycle for $8 when he was willing to pay $25. If the bicycle costs $75 new, Ken's consumer surplus is A) $0. B) $17. C) $33. D) $50. E) $67. Answer: B Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Category: Quantitative 10) At a garage sale, Dominique purchases a sewing machine for $30 when she was willing to pay $55. If the sewing machine costs $200 new, Dominique's consumer surplus would be A) $0. B) $25. C) $120. D) $145. E) $170. Answer: B Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Category: Quantitative 11) The total value that Doug places on his consumption of computer games equals A) the price multiplied by quantity demanded. B) his marginal utility multiplied by quantity demanded. C) price times marginal value. D) the total amount he pays for all the games he purchases. E) his total expenditure on computer games plus his consumer surplus. Answer: E Diff: 3 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Category: Qualitative

12)

FIGURE 6-6 Refer to Figure 6-6. Suppose the market price is p*. In this case, consumer surplus is outlined by the area A) ACDE. B) ABDF. C) ACF. D) BCD. E) ADE. Answer: D Diff: 1 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Graph Category: Qualitative

13)

FIGURE 6-6 Refer to Figure 6-6. Suppose the market price is p*. In this case, the total value consumers place on consuming Q* units is outlined by the area A) BCD. B) ABD. C) ADE. D) ACDE. E) ABDF. Answer: D Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Graph Category: Qualitative

14)

FIGURE 6-7 Refer to Figure 6-7. Suppose that price is P0. Total consumer surplus is then given by the area A) under the demand curve to the left of Q0. B) below P0 and to the left of Q0. C) under the demand curve to the left of Q0, but above P0. D) under the entire demand curve. E) above the market price. Answer: C Diff: 1 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Graph Category: Qualitative

15)

FIGURE 6-7 Refer to Figure 6-7. Suppose that price is P0. The total value placed on all units of the commodity consumed is given by the area A) under the demand curve to the left of Q0. B) under the demand curve to the left of Q0, but above P0. C) below P0 and to the left of Q0. D) under the demand curve and above P0. E) under the demand curve and to the right of Q0. Answer: A Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Graph Category: Qualitative

16)

FIGURE 6-7 Refer to Figure 6-7. Suppose that price is P0. The market value of the quantity purchased is given by the area A) under the demand curve to the left of Q0. B) under the demand curve. C) below P0 and to the left of Q0. D) under the demand curve and above P0. E) under the demand curve and to the right of Q0. Answer: C Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Graph Category: Qualitative

17) Dave's Consumer Surplus on Movie Rentals per Week Number of Amount Dave is willing Dave's consumer surplus movies rented to pay to rent this movie on each movie rental if per week ($) price is $5 each 1st 10.00 2nd 8.00 3rd 6.50 4th 5.50 5th 5.00 6th 4.50 7th 4.25 TABLE 6-2 Refer to Table 6-2. If Dave rents 3 movies in one week, his total consumer surplus is ________ and the total amount he pays is ________. A) $24.50; $24.50 B) $19.50; $15.00 C) $9.50; $15.00 D) $6.50; $5.00 E) $5.50; $5.00 Answer: C Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Table Category: Quantitative

18) Dave's Consumer Surplus on Movie Rentals per Week Number of Amount Dave is willing Dave's consumer surplus movies rented to pay to rent this movie on each movie rental if per week ($) price is $5 each 1st 10.00 2nd 8.00 3rd 6.50 4th 5.50 5th 5.00 6th 4.50 7th 4.25 TABLE 6-2 Refer to Table 6-2. If Dave rents 5 movies in one week, his total consumer surplus is ________ and the total amount he pays is ________. A) $5; $25 B) $0; $25 C) $9.50; $5 D) $9.50; $25 E) $10; $25 Answer: E Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Table Category: Quantitative

19) Dave's Consumer Surplus on Movie Rentals per Week Number of Amount Dave is willing Dave's consumer surplus movies rented to pay to rent this movie on each movie rental if per week ($) price is $5 each 1st 10.00 2nd 8.00 3rd 6.50 4th 5.50 5th 5.00 6th 4.50 7th 4.25 TABLE 6-2 Refer to Table 6-2. How many movies will Dave rent per week such that the consumer surplus on the last unit is zero? A) 1 B) 3 C) 5 D) 6 E) 7 Answer: C Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Table Category: Quantitative

20) Dave's Consumer Surplus on Movie Rentals per Week Number of Amount Dave is willing Dave's consumer surplus movies rented to pay to rent this movie on each movie rental if per week ($) price is $5 each 1st 10.00 2nd 8.00 3rd 6.50 4th 5.50 5th 5.00 6th 4.50 7th 4.25 TABLE 6-2 Refer to Table 6-2. Assuming Dave maximizes his utility when the price is $5, his consumer surplus (in dollars) on each movie rental in order from 1 through 7 is as follows: A) 10.00, 18.00, 24.50, 30.00, 35.00, 39.50, 43.75. B) 5.00, 3.00, 1.50, 0.50, 0, 0, 0. C) 10.00, 8.00, 6.50, 5.50, 5.00, 4.50, 4.25. D) 5.00 on all units. E) 0 on all units. Answer: B Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Table Category: Quantitative

21) The table below shows the total value (in dollars) that Andrew gets from playing 9hole rounds of golf. Rounds of Golf per Month 0 1 2 3 4 5 6 7

Total Value ($) 0 40 70 92 108 120 130 130

TABLE 6-3 Refer to Table 6-3. Andrew values the 4th round of golf at a marginal value of A) $16. B) $92. C) $108. D) $310. E) $430. Answer: A Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Table Category: Quantitative

22) The table below shows the total value (in dollars) that Andrew gets from playing 9hole rounds of golf. Rounds of Golf per Month 0 1 2 3 4 5 6 7

Total Value ($) 0 40 70 92 108 120 130 130

TABLE 6-3 Refer to Table 6-3. If the price of a 9-hole round of golf is $19, then Andrew will play ________ rounds per month. A) 2 B) 3 C) 4 D) 5 E) 6 or more Answer: B Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Table Category: Quantitative

23) The table below shows the total value (in dollars) that Andrew gets from playing 9hole rounds of golf. Rounds of Golf per Month 0 1 2 3 4 5 6 7

Total Value ($) 0 40 70 92 108 120 130 130

TABLE 6-3 Refer to Table 6-3. If the price of a 9-hole round of golf is $9, then Andrew will play ________ rounds per month. A) 2 B) 3 C) 4 D) 5 E) 6 Answer: E Diff: 2 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Table Category: Quantitative

24) The table below shows the total value (in dollars) that Andrew gets from playing 9hole rounds of golf. Rounds of Golf per Month 0 1 2 3 4 5 6 7

Total Value ($) 0 40 70 92 108 120 130 130

TABLE 6-3 Refer to Table 6-3. If the price of a 9-hole round of golf is $16, and Andrew is maximizing his utility, then his consumer surplus will be A) $310. B) $108. C) $92. D) $44. E) $16. Answer: D Diff: 3 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Table Category: Quantitative

25) The table below shows the total value (in dollars) that Andrew gets from playing 9hole rounds of golf. Rounds of Golf per Month 0 1 2 3 4 5 6 7

Total Value ($) 0 40 70 92 108 120 130 130

TABLE 6-3 Refer to Table 6-3. If the price of a 9-hole round of golf is $22, and Andrew is maximizing his utility, then his consumer surplus will be A) $202. B) $108. C) $92. D) $26. E) $22. Answer: D Diff: 3 Type: MC Topic: 6.3a. consumer surplus Skill: Applied Learning Obj.: 6-4 See that consumer surplus is the "bargain" the consumer gets by paying less for the product than the maximum price he or she is willing to pay. Graphics: Table Category: Quantitative 26) Since there is a limited supply of diamonds in the world, the consumption of diamonds A) takes place at relatively low marginal value. B) takes priority over some other good. C) is no less important than consumption of water. D) takes place at relatively high marginal value. E) should be regulated by the government. Answer: D Diff: 1 Type: MC Topic: 6.3b. paradox of value Skill: Applied Learning Obj.: 6-5 Explain the "paradox of value." Category: Qualitative

27) Since there is a relatively plentiful supply of water in Canada (this is not true in many parts of the world), the consumption of water in Canada A) takes place at a relatively low marginal value. B) takes priority over all other goods. C) takes place at a relatively high marginal value. D) should be regulated by the government. E) should be unlimited at a price of $0. Answer: A Diff: 1 Type: MC Topic: 6.3b. paradox of value Skill: Applied Learning Obj.: 6-5 Explain the "paradox of value." Category: Qualitative 28) The paradox in "the paradox of value" refers to the A) confusion between supply curves and demand curves. B) fact that goods with high total values command high prices. C) fact that goods with low total values command low prices. D) situation where a good with a low total value commands a low price, while a good with a high total value commands a high price. E) situation where a good with a low total value commands a high price, while a good with a high total value commands only a low price. Answer: E Diff: 1 Type: MC Topic: 6.3b. paradox of value Skill: Recall Learning Obj.: 6-5 Explain the "paradox of value." Category: Qualitative 29) At typical consumption levels of water and diamonds, the good with the higher marginal utility is ________; the good with the higher total utility is ________; and the good with the greatest consumer surplus is ________. A) water; diamonds; water B) water; water; water C) water; water; diamonds D) diamonds; water; water E) diamonds; water; diamonds Answer: D Diff: 2 Type: MC Topic: 6.3b. paradox of value Skill: Applied Learning Obj.: 6-5 Explain the "paradox of value." Category: Qualitative

30) Which of the following concepts in economics best explains a situation where a superstar NBA player earns many millions of dollars per year while a heart surgeon is paid a fraction of the basketball player's salary? A) paradox of value B) diminishing marginal utility C) law of diminishing returns D) relative and absolute prices E) downward sloping production possibilities boundary Answer: A Type: MC Topic: 6.3b. paradox of value Skill: Applied Learning Obj.: 6-5 Explain the "paradox of value." Category: Qualitative 6A-1 Indifference Curves 1) An indifference curve plotted for two different goods, one on each axis, A) shifts when real income changes. B) shows all combinations of the two goods that give the same level of utility. C) changes its slope as the relative prices of the two goods change. D) shows the combinations of the two goods that will just use up a consumer's income. E) shows the different combinations of two goods that the same income can purchase. Answer: B Diff: 1 Type: MC Topic: 6-appendix.1. indifference curves Skill: Applied Learning Obj.: 6-6A-1 Indifference curves Category: Qualitative 2) As a consumer moves along an indifference curve, A) the combination of goods the consumer prefers will remain constant, but the level of satisfaction will vary. B) the combination of goods and the consumer's income level will remain constant. C) the combination of goods will vary but the level of utility remains constant. D) his level of utility will vary as the combinations of goods varies. E) the combination of goods will vary, but the level of money income remains constant. Answer: C Diff: 1 Type: MC Topic: 6-appendix.1. indifference curves Skill: Recall Learning Obj.: 6-6A-1 Indifference curves Category: Qualitative

3) Given a particular consumer's indifference map, the further the indifference curve is from the origin, A) the lower the marginal rate of substitution. B) the higher the marginal rate of substitution. C) the lower the level of satisfaction. D) the higher the level of satisfaction. E) the more goods are included. Answer: D Diff: 1 Type: MC Topic: 6-appendix.1. indifference curves Skill: Recall Learning Obj.: 6-6A-1 Indifference curves Category: Qualitative 4) What is the marginal rate of substitution? A) the rate of substitution between the marginal values of any two goods B) the rate of substitution between the total utility of any two goods C) the amount of one good the consumer is willing to give up in exchange for another so as to keep total satisfaction unchanged D) the amount of one good the consumer is willing to give up in exchange for another so as to keep total expenditure unchanged E) the substitution of one good for another as we move along the budget line Answer: C Diff: 2 Type: MC Topic: 6-appendix.1. indifference curves Skill: Recall Learning Obj.: 6-6A-1 Indifference curves Category: Qualitative 5) The marginal rate of substitution measures the tradeoff between the A) prices of two goods along a budget line. B) different values that two consumers place on a good. C) amount of one good the consumer is willing to give up in exchange for another good along an indifference curve. D) different indifference curves. E) amount of one good the consumer is willing to purchase and its own price. Answer: C Diff: 2 Type: MC Topic: 6-appendix.1. indifference curves Skill: Recall Learning Obj.: 6-6A-1 Indifference curves Category: Qualitative

6) Suppose Arun consumes only 2 goods — books and CDs — and has a set of downward-sloping indifference curves. As Arun moves from one point to another on a particular indifference curve, A) the combination of books and CDs will vary, but the level of utility remains constant. B) the combination of books and CDs that Arun prefers will remain constant, but the level of satisfaction will vary. C) the combination of books and CDs and Arun's income level will remain constant. D) Arun's level of satisfaction will vary as the combinations of books and CDs varies. E) Arun is consuming the same combination of goods, but with varying levels of income. Answer: A Diff: 2 Type: MC Topic: 6-appendix.1. indifference curves Skill: Applied Learning Obj.: 6-6A-1 Indifference curves Category: Qualitative 7) Which of the following best describes the assumption on which indifference theory is based? A) Consumers are not able to rank consumption bundles in order of preference. B) Consumers can always say which of two consumption bundles they prefer without having to say by how much they prefer it. C) The consumer has equated the marginal utilities of all products, and is therefore indifferent between consumption bundles. D) The consumer is able to quantify the difference in total utility received from two different consumption bundles. E) The consumer receives the same utility and is therefore indifferent between any two consumption bundles. Answer: B Diff: 1 Type: MC Topic: 6-appendix.1. indifference curves Skill: Recall Learning Obj.: 6-6A-1 Indifference curves Category: Qualitative

6A-2 The Budget Line 1) Consider a household's budget line. If money income is reduced by half, and the prices of all goods consumed by the household are reduced by half, the budget line will A) not change. B) shift inward. C) shift outward. D) become steeper. E) become flatter. Answer: A Diff: 2 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Category: Qualitative 2) Consider a household's budget line. An equal and proportional increase in money income and all money prices will A) shift the budget line to the left parallel to the original budget line. B) shift the budget line to the right parallel to the original budget line. C) leave the position of the budget line unchanged. D) rotate the budget line inward from the vertical axis. E) rotate the budget line inward from the horizontal axis. Answer: C Diff: 2 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Category: Qualitative

3) The diagram below shows a set of budget lines facing a household.

FIGURE 6-8 Refer to Figure 6-8. The movement of the budget line from ab to ac could be caused by A) an increase in money income. B) an increase in the price of food. C) an increase in the price of housing. D) a decrease in the price of food. E) a decrease in the price of housing. Answer: D Diff: 2 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Graphics: Graph Category: Qualitative

4) The diagram below shows a set of budget lines facing a household.

FIGURE 6-8 Refer to Figure 6-8. The movement of the budget line from ab to db could be caused by A) a decrease in money income. B) an increase in the price of housing. C) a decrease in the price of housing. D) an increase in the price of food. E) a decrease in the price of food. Answer: B Diff: 2 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Graphics: Graph Category: Qualitative

5) The diagram below shows a set of budget lines facing a household.

FIGURE 6-8 Refer to Figure 6-8. The movement of the budget line from ab to ef could be caused by A) a decrease in money income. B) a decrease in the price of either food or housing. C) an equal percentage decrease in the price of both food and housing. D) an equal percentage increase in the price of both food and housing. E) an increase in the price of either food or housing. Answer: C Diff: 3 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Graphics: Graph Category: Qualitative

6) The diagram below shows a set of budget lines facing a household.

FIGURE 6-8 Refer to Figure 6-8. The movement of the budget line from ab to ef could be caused by A) a decrease in real income. B) an increase in money income. C) an equal percentage increase in the price of both food and housing. D) a decrease in the price of either food or housing. E) an increase in the price of either food or housing. Answer: B Diff: 3 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Graphics: Graph Category: Quantitative

7) A parallel shift in the consumer's budget line must indicate a change in A) at least one money price. B) money income. C) real income. D) tastes. E) both prices. Answer: C Diff: 2 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Category: Qualitative 8) In indifference curve analysis, a point to the left of the consumer's budget line A) indicates consumption spending beyond current income. B) implies the household is paying above-market prices for the goods in question. C) implies the household is paying below-market prices for the goods in question. D) implies that the household is not spending all of its income on the goods in question. E) shows a combination of goods that are beyond the income of the household. Answer: D Diff: 2 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Category: Qualitative 9) In indifference curve analysis, any consumption point that is on the budget line A) indicates consumption spending beyond current income. B) implies the household is paying above-market prices for the goods in question. C) implies the household is paying below-market prices for the goods in question. D) implies that the household is not spending all of its income on the goods in question. E) implies that the household is spending all of its income on the goods in question. Answer: E Diff: 2 Type: MC Topic: 6-appendix.2. budget line Skill: Recall Learning Obj.: 6-6A-2 The budget line Category: Qualitative

10) Assume the quantity of good X is measured on the horizontal axis and the quantity of good Y on the vertical axis. Initial prices are PX = $5 and PY = $10. The consumer's income is $100. If PY increases to $20, then A) the entire budget line shifts parallel toward the origin. B) the budget line will rotate toward the origin, slope remaining constant. C) the budget line will rotate toward the origin with the slope changing from 1/2 to 1/4 (in absolute values). D) the entire budget line shifts parallel away from the origin. E) the budget line will rotate away from the origin with the slope changing from 1/4 to 1/2 (in absolute values). Answer: C Diff: 3 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Category: Quantitative 11) Suppose a consumer can purchase only two goods, pasta and cheese. Let the quantity of pasta be measured on the vertical axis and the quantity of cheese be measured on the horizontal axis. If the price of pasta falls, with no change in the price of cheese or in the consumer's money income, then the budget line for the consumer will rotate A) toward the origin and become flatter. B) toward the origin and become steeper. C) away from the origin and become flatter. D) away from the origin and become steeper. E) outward parallel to the existing budget line. Answer: D Diff: 2 Type: MC Topic: 6-appendix.2. budget line Skill: Applied Learning Obj.: 6-6A-2 The budget line Category: Qualitative

6A-3 The Consumer's Utility‐Maximizing Choices 1) When a consumer's marginal rate of substitution between X and Y is equal to the ratio of prices for X and Y, and when the consumer is spending all available income, then A) the budget line is tangent to an indifference curve. B) the consumer is not maximizing his utility. C) a higher indifference curve can be reached given the existing budget line. D) the budget line is tangent to the indifference curve at all quantities of X and Y. E) all budget lines are tangent to all indifference curves. Answer: A Diff: 2 Type: MC Topic: 6-appendix.3. utility maximization (indiff. curves) Skill: Applied Learning Obj.: 6-6A-3 The consumer's utility‐maximizing choices Category: Qualitative 2) In indifference curve analysis, the consumer's utility-maximizing point is where A) each indifference curve has the same slope as the relevant budget line. B) the indifference curve farthest from the origin intersects with the budget line that is farthest from the origin. C) the consumer's marginal utility curve is tangent to the relevant budget line. D) one indifference curve is tangent to the relevant budget line. E) the price-consumption line is tangent to the budget line. Answer: D Diff: 2 Type: MC Topic: 6-appendix.3. utility maximization (indiff. curves) Skill: Recall Learning Obj.: 6-6A-3 The consumer's utility‐maximizing choices Category: Qualitative

3)

FIGURE 6-9 Refer to Figure 6-9. In part (i), the consumer is able to move from point A to point B because of A) a decrease in the price of milk. B) a decrease in the price of bread. C) a decrease in money income. D) an increase in real income. E) a decrease in the price of one good and an increase in money income. Answer: D Diff: 2 Type: MC Topic: 6-appendix.3. utility maximization (indiff. curves) Skill: Applied Learning Obj.: 6-6A-3 The consumer's utility‐maximizing choices Graphics: Graph Category: Qualitative

4)

FIGURE 6-9 Refer to Figure 6-9. In part (ii), the consumer's move from point Z to point Y is caused by A) a change in the consumer's preferences towards milk. B) an increase in the price of milk. C) an increase in the price of bread. D) a decrease in the price of bread. E) a decrease in money income. Answer: C Diff: 2 Type: MC Topic: 6-appendix.3. utility maximization (indiff. curves) Skill: Applied Learning Obj.: 6-6A-3 The consumer's utility‐maximizing choices Graphics: Graph Category: Qualitative

5)

FIGURE 6-9 Refer to Figure 6-9. In part (ii), the consumer's move from point X to point Z is caused by A) a change in the consumer's preferences towards bread. B) an increase in money income. C) an increase in the price of bread. D) a decrease in the price of milk. E) a decrease in the price of bread. Answer: E Diff: 2 Type: MC Topic: 6-appendix.3. utility maximization (indiff. curves) Skill: Applied Learning Obj.: 6-6A-3 The consumer's utility‐maximizing choices Graphics: Graph Category: Quantitative

6A-4 Deriving the Demand Curve 1)

FIGURE 6-9 Refer to Figure 6-9. In part (i), the line joining points A, B, and C is known as ________, which shows how ________. A) a price-consumption line; consumption changes as relative prices change, with money income constant B) an income-consumption line; consumption changes as income changes, with relative prices held constant C) a price-consumption line; consumption changes as money income and relative prices change D) an income-consumption line; consumption changes with changing relative prices and constant income E) an indifference map; the value of various combinations of two goods changes Answer: B Diff: 2 Type: MC Topic: 6-appendix.4. deriving the demand curve (indiff. curves) Skill: Recall Learning Obj.: 6-6A-4 Deriving the consumer's demand curve Graphics: Graph Category: Qualitative

2)

FIGURE 6-9 Refer to Figure 6-9. In part (ii), the line joining points X, Y, and Z is known as ________, which shows how ________. A) a price-consumption line; consumption changes as relative prices change, with money income constant B) an income-consumption line; consumption changes as income changes, with relative prices held constant C) a price-consumption line; consumption changes as money income and relative prices change D) an income-consumption line; consumption changes with changing relative prices and constant income E) an indifference map; the value of various combinations of two goods changes Answer: A Diff: 2 Type: MC Topic: 6-appendix.4. deriving the demand curve (indiff. curves) Skill: Recall Learning Obj.: 6-6A-4 Deriving the consumer's demand curve Graphics: Graph Category: Qualitative

3) The figures below show Chris's consumption of cappuccinos per week.

FIGURE 6-10 Refer to Figure 6-10. The line connecting points A, B and C is ________. The line connecting points D, E and F is ________. A) the price-consumption line; the demand curve B) the income-consumption line; the demand curve C) the income-consumption line; the budget line D) the budget line; the price-consumption line E) the demand curve; the budget line Answer: A Diff: 1 Type: MC Topic: 6-appendix.4. deriving the demand curve (indiff. curves) Skill: Applied Learning Obj.: 6-6A-4 Deriving the consumer's demand curve Graphics: Graph

Category: Qualitative 4) The figures below show Chris's consumption of cappuccinos per week.

FIGURE 6-10 Refer to Figure 6-10. The two diagrams in Figure 6-10 are showing A) the change in Chris's preferences toward cappuccino. B) that Chris is indifferent between bundles A, B and C. C) the derivation of Chris's demand curve for cappuccino. D) that Chris is indifferent between points D, E and F. E) the derivation of Chris's indifference curve for cappuccino. Answer: C Diff: 2 Type: MC Topic: 6-appendix.4. deriving the demand curve (indiff. curves) Skill: Applied Learning Obj.: 6-6A-4 Deriving the consumer's demand curve

Graphics: Graph Category: Qualitative 5) The figures below show Chris's consumption of cappuccinos per week.

FIGURE 6-10 Refer to Figure 6-10. Suppose Chris's income is such that he is able to buy no more than 10 cappuccinos per week. If Chris is maximizing his utility at this level of income, how many cappuccinos is he consuming per week? A) 2 B) 4 C) 5 D) 6 E) 10 Answer: B Diff: 2 Type: MC Topic: 6-appendix.4. deriving the demand curve (indiff. curves)

Skill: Applied Learning Obj.: 6-6A-4 Deriving the consumer's demand curve Graphics: Graph Category: Quantitative 6) The figures below show Chris's consumption of cappuccinos per week.

FIGURE 6-10 Refer to Figure 6-10. In general, the absolute value of the slope of the budget lines is equal to A) the relative price ratio (Pcappuccino/Pall other goods). B) the relative price ratio (Pall other goods/Pcappuccino). C) the quantity of all other goods consumed divided by the quantity of cappuccinos consumed. D) $15/value of all other goods.

E) the dollar value of all other goods divided by the number of cappuccinos consumed per week. Answer: A Diff: 3 Type: MC Topic: 6-appendix.4. deriving the demand curve (indiff. curves) Skill: Applied Learning Obj.: 6-6A-4 Deriving the consumer's demand curve Graphics: Graph Category: Qualitative 7) The figures below show Chris's consumption of cappuccinos per week.

FIGURE 6-10 Refer to Figure 6-10. The slope of the budget line reflects the ________ of cappuccinos in terms of all other goods. A) demand

B) quantity C) opportunity cost D) absolute price E) substitution Answer: C Diff: 2 Type: MC Topic: 6-appendix.4. deriving the demand curve (indiff. curves) Skill: Applied Learning Obj.: 6-6A-4 Deriving the consumer's demand curve Graphics: Graph Category: Quantitative 6A-5 Income and Substitution Effects 1)

FIGURE 6-11 Refer to Figure 6-11. Suppose the consumer begins at E1. The income and substitution effects of the reduction in the price of X are represented as follows: A) The distance Q1d shows the substitution effect and the distance Q2e shows the income effect. B) The distance de shows the income effect and the distance cd shows the substitution effect. C) The distance Q1Q2 shows the income effect and the distance Q2Q3 shows the substitution effect. D) The distance Q1Q2 shows the substitution effect and the distance Q2Q3 shows the income effect. E) The distance Q1Q3 shows the substitution effect and the distance Q2Q3 shows the income effect.

Answer: D Diff: 3 Type: MC Topic: 6-appendix.5. income and sub'n effects (indiff. curves) Skill: Applied Learning Obj.: 6-6A-5 Income and substitution effects (indifference curves) Graphics: Graph Category: Qualitative

2)

FIGURE 6-11 Refer to Figure 6-11. The line joining points E1 and E3 is known as ________, which shows how ________. A) a price consumption line; consumption changes as one price changes, with money income held constant B) an income consumption line; consumption changes as income changes, with relative prices held constant C) a price consumption line; consumption changes as money income and relative prices change D) an income consumption line; consumption changes with changing relative prices and constant income Answer: A Diff: 3 Type: MC Topic: 6-appendix.5. income and sub'n effects (indiff. curves) Skill: Applied Learning Obj.: 6-6A-5 Income and substitution effects (indifference curves) Graphics: Graph Category: Qualitative

3) Sophie consumes two goods — paperback novels and visits to the movies.

FIGURE 6-12 Refer to Figure 6-12. Sophie's movement from point A to point B is the A) substitution effect of a decrease in the price of paperback novels. B) total effect of an increase in the price of paperback novels. C) income effect of an increase in the price of paperback novels. D) result of a change in her preferences between movies an paperback novels. E) total effect of a decrease in income. Answer: B Diff: 2 Type: MC Topic: 6-appendix.5. income and sub'n effects (indiff. curves) Skill: Applied Learning Obj.: 6-6A-5 Income and substitution effects (indifference curves) Graphics: Graph Category: Qualitative

4) Sophie consumes two goods — paperback novels and visits to the movies.

FIGURE 6-12 Refer to Figure 6-12. Sophie's movement from point A to point C is A) the income effect of an increase in the price of paperback novels. B) the total effect of a decrease in the price of paperback novels. C) the income effect of a decrease in the price of paperback novels. D) the substitution effect of an increase in the price of paperback novels. E) the total effect of a change in money income. Answer: D Diff: 3 Type: MC Topic: 6-appendix.5. income and sub'n effects (indiff. curves) Skill: Applied Learning Obj.: 6-6A-5 Income and substitution effects (indifference curves) Graphics: Graph Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 7 Producers in the Short Run 7.1 What Are Firms? 1) A single proprietorship is a form of business organization which A) has one owner-manager who is personally responsible for the firm's actions and debts. B) has a single owner but has directors who are responsible for the firm's debts. C) has limited liability. D) has unlimited access to money capital. E) allows easy transferability of ownership by the trading of shares. Answer: A

Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 2) Which of the following statements describes an advantage to the owner of a single proprietorship? A) The owner's liability is limited to the amount he or she actually invests in the firm. B) He or she has limited liability. C) The owner can readily maintain full and complete control over every aspect of the firm's operation. D) The firm has a legal existence separate from its owner. E) Shares of the firm can be traded on any stock exchange. Answer: C Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 3) A firm that has two or more owners who share decision-making power and share the firm's profits is called A) a single proprietorship. B) a partnership. C) a corporation. D) a non-profit organization. E) a joint-stock company. Answer: B Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 4) A limited partnership differs from an ordinary partnership by A) having a limited number of partners. B) having a limited number of partners, each with limited liability. C) including some partners whose liability is restricted to the amount that they invested in the firm. D) having limited liability of all partners. E) having unlimited liability for all partners. Answer: C

Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 5) Which of the following items is part of a firm's financial capital, as distinct from its real capital? A) a new bulldozer B) a $500 000 balance in a bank account C) a network of personal computers D) a fleet of delivery trucks E) inventory of goods valued at $1 000 000 Answer: B Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Applied Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 6) Consider the various forms of organization of firms. Which of the following statements about a corporation are true? 1. It is an entity separate from the individuals who own it. 2. It can incur debt that is an obligation of the corporation but not of its individual owners. 3. It is legally obliged to distribute all profits to shareholders. A) 1 only B) 2 only C) 3 only D) 1 and 2 only E) 2 and 3 only Answer: D Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative

7) A firm can raise financial capital without incurring debt by A) issuing bonds. B) making extra dividend payments. C) issuing new shares. D) increasing its bank loans. E) investing in new capital equipment. Answer: C Diff: 2 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 8) Which of the following statements about the organization of firms is true? A) Partnerships are the most common form of business organization in Canada. B) Owners of a corporation have unlimited liability. C) Corporations have limited access to money markets. D) Owners of a corporation are not personally liable for the firm's actions, though its directors may be. E) Crown corporations are never interested in increasing profits because they have other goals. Answer: D Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 9) Churches, the YMCA, the Salvation Army, and the Nature Conservancy are examples of A) single proprietorship. B) partnership. C) non-profit organizations. D) limited partnership. E) corporations. Answer: C Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Applied Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative

10) An example of "real" capital is A) shares in a corporation. B) corporate bonds. C) a firm's balance in a bank account. D) a firm's computer systems. E) a firm's retained earnings. Answer: D Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Applied Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 11) Which of the following are considered to be "real" capital? A) a firm's physical assets B) corporate bonds C) corporate stock D) a firm's balance in its bank account E) owner's equity Answer: A Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 12) Which of the following best describes the "undistributed profits" of a firm? A) earnings that are used to pay dividends to shareholders B) earnings that are used to cover the costs of production C) earnings that are used to cover interest expenses of the firm D) profits that are paid out to owners of the firm E) profits that are available to be reinvested in the firm's operations Answer: E Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative

13) An example of debt financing for any form of business organization is A) issuing new stock. B) buying back bonds. C) borrowing from a bank. D) using undistributed profits. E) buying back previously issued stock. Answer: C Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 14) It is assumed in standard economic theory that a firm makes decisions in an effort to A) become as large as possible. B) have a highly diversified product. C) be favoured politically. D) maximize its revenue. E) maximize its profits. Answer: E Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 15) "An objective of firms is to maximize profits." This statement A) has been proven by empirical testing to be always true. B) is an assumption used by economists to predict the behaviour of firms. C) is a normative statement and thus cannot be tested. D) applies only to corporations. E) is an unrealistic assumption, and therefore of little use to economists. Answer: B Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative

16) The theory of the firm is based on the following two key assumptions: A) Firms seek to become as large as possible, and they seek to maximize total revenue. B) Each firm has a highly diversified product, and this leads to profit maximization. C) Firms seek to maximize profit, and to distribute the maximum value in dividends. D) Firms seek to maximize profits, and the firm is a single, consistent decision-making unit. E) Firms seek to maximize revenues, and to maximize undistributed profits. Answer: D Diff: 2 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Recall Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 17) Which of the following is the best example of an input to production that is an intermediate product? A) 40 acres of farmland B) the skills and training of a web designer C) computer circuit boards D) a textile factory E) a sewing machine Answer: C Diff: 1 Type: MC Topic: 7.1. organization, financing, and goals of firms Skill: Applied Learning Obj.: 7-1 Identify forms of business organization and methods of financing firms. Category: Qualitative 7.2 Production, Costs, and Profits 1) The relationship between factors of production used in the production process and the resulting output is called a(n) A) consumption possibilities boundary. B) economic function. C) production boundary. D) cost function. E) production function. Answer: E Diff: 1 Type: MC Topic: 7.2a. production functions Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative

2) Economists use the notation Q = f(L,K) to describe A) the flow of labour (L) and capital (K) services that are available when output is (Q). B) the financial relationship between the inputs that a firm uses and the outputs that it produces. C) the arithmetic relationship between the outputs that a firm uses and the inputs that it produces. D) the technological relationship between the inputs that a firm uses and the outputs that it produces. E) the level of output (Q) required to fully employ labour (L) and capital (K). Answer: D Diff: 2 Type: MC Topic: 7.2a. production functions Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 3) The equation Q = 0.5KL - (0.4)L + 2L2 is an example of A) a factor of production equation. B) an economic input function. C) a technological change equation. D) an arithmetic expression of output quantities. E) a production function. Answer: E Diff: 1 Type: MC Topic: 7.2a. production functions Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 4) Suppose a production function for a firm takes the following algebraic form: Q = 2KL - (0.2)L2, where Q is the output of sweaters per day. Now suppose the firm is operating with 8 units of capital (K=8) and 10 units of labour (L=10). What is the output of sweaters? A) 30 sweaters per day B) 60 sweaters per day C) 80 sweaters per day D) 140 sweaters per day E) 155 sweaters per day Answer: D Diff: 2 Type: MC Topic: 7.2a. production functions Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Quantitative

5) Suppose a production function for a firm takes the following algebraic form: Q = (0.5)KL - 40L, where Q is the output of paintbrushes per week. Now suppose the firm is operating with 100 units of capital (K = 100) and 30 000 units of labour (L = 30 000). What is the output of paintbrushes per week? A) 30 000 B) 300 000 C) 1 200 000 D) 1 500 000 E) 3 000 000 Answer: B Diff: 2 Type: MC Topic: 7.2a. production functions Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Quantitative 6) Suppose a production function for a firm takes the following algebraic form: Q = (0.25)K × (1.5)L2, where Q is the output of garage doors produced per month. Now suppose the firm is operating with 10 units of capital (K = 10) and 8 units of labour (L = 8). What is the output of garage doors per month? A) 24 B) 240 C) 300 D) 2400 E) 3000 Answer: B Diff: 2 Type: MC Topic: 7.2a. production functions Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Quantitative 7) The opportunity cost of any factor of production is A) its accounting cost. B) the money actually paid to the factors of production. C) the benefit forgone by not using it in its worst alternative. D) the benefit forgone by not using it in its best alternative. E) its explicit cost. Answer: D Diff: 1 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative

8) The choices listed below involve costs to the firm. For which is the implicit cost potentially different than its explicit cost? A) the use of firm-owned assets B) the services of hired workers C) the use of rented land D) the interest paid on borrowed money E) the purchase of raw materials used in production Answer: A Diff: 2 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 9) The opportunity cost to a firm of using an asset is zero if A) the asset is already owned by the firm. B) no money was spent to acquire the asset. C) the asset has no alternative uses. D) the asset has zero sunk costs associated with it. E) the asset was given to the firm for free. Answer: C Diff: 2 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 10) The opportunity cost of a firm owner's own money that he or she has invested in the firm is an example of A) direct production costs. B) accounting costs. C) sunk costs. D) implicit costs. E) explicit costs. Answer: D Diff: 2 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative

11) If a firm uses factor inputs that are personally owned by the firm's owner, then economists refer to the opportunity cost of these inputs as A) direct production costs. B) accounting costs. C) sunk costs. D) implicit costs. E) inverted costs. Answer: D Diff: 2 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 12) Economic profits are less than accounting profits because the calculation of economic profit A) includes an amount for depreciation. B) includes an explicit charge for risk taking. C) includes the implicit charges for the use of capital owned by the firm and for risk taking. D) includes the implicit charges for the use of capital owned by the firm and for income taxes. E) is stipulated in regulations set forth by the Canada Revenue Agency. Answer: C Diff: 2 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 13) We can predict that resources will move into an industry whenever A) accounting profits for firms in that industry are greater than zero. B) accounting profits for firms in that industry are zero. C) economic profits for firms in that industry are zero. D) economic profits for firms in that industry are greater than zero. E) economic losses for firms in that industry are minimized. Answer: D Diff: 1 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative

14) If Michelle used $1000 from her savings account, which was paying 6% interest annually, to invest in her brother's new sporting-goods store, the opportunity cost of her investment on an annual basis would be A) $60. B) $1000. C) $1060. D) her share of the store's profits. E) the dividend paid to her by her brother. Answer: A Diff: 2 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Quantitative 15) Consider the production costs for a firm, one of which is the cost of depreciation. Depreciation costs are A) payments to outside suppliers. B) the cost of money borrowed to buy a durable asset. C) an estimate of the loss of value of the firm's physical capital. D) a measure of the depreciation of financial assets of the firm. E) irrelevant to an accounting of the firm's total costs. Answer: C Diff: 2 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative

16) The table below provides the annual revenues and costs for a family-owned firm producing catered meals. Total Revenues ($)

500 000

Total Costs ($) - wages and salaries - risk-free return of 6% on owners' capital of 250 000 - rent - depreciation of capital equipment - risk premium of 8% on owners' capital of 250 000 - intermediate inputs - forgone wages of owners in alternative employment - interest on bank loan

200 000 15 000 105 000 25 000 20 000 150 000 80 000 10 000

TABLE 7-1 Refer to Table 7-1. The explicit costs for this family-owned firm are A) $115 000. B) $490 000. C) $500 000. D) $505 000. E) $605 000. Answer: B Diff: 3 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Graphics: Table Category: Quantitative

17) The table below provides the annual revenues and costs for a family-owned firm producing catered meals. Total Revenues ($)

500 000

Total Costs ($) - wages and salaries - risk-free return of 6% on owners' capital of 250 000 - rent - depreciation of capital equipment - risk premium of 8% on owners' capital of 250 000 - intermediate inputs - forgone wages of owners in alternative employment - interest on bank loan

200 000 15 000 105 000 25 000 20 000 150 000 80 000 10 000

TABLE 7-1 Refer to Table 7-1. The implicit costs for this family-owned firm are A) $35 000. B) $80 000. C) $100 000. D) $115 000. E) $490 000. Answer: D Diff: 3 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Graphics: Table Category: Quantitative

18) The table below provides the annual revenues and costs for a family-owned firm producing catered meals. Total Revenues ($)

500 000

Total Costs ($) - wages and salaries - risk-free return of 6% on owners' capital of 250 000 - rent - depreciation of capital equipment - risk premium of 8% on owners' capital of 250 000 - intermediate inputs - forgone wages of owners in alternative employment - interest on bank loan

200 000 15 000 105 000 25 000 20 000 150 000 80 000 10 000

TABLE 7-1 Refer to Table 7-1. The accounting profits for this family-owned firm are A) -$15 000. B) $0. C) $10 000. D) $30 000. E) $500 000. Answer: C Diff: 3 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Graphics: Table Category: Quantitative

19) The table below provides the annual revenues and costs for a family-owned firm producing catered meals. Total Revenues ($)

500 000

Total Costs ($) - wages and salaries - risk-free return of 6% on owners' capital of 250 000 - rent - depreciation of capital equipment - risk premium of 8% on owners' capital of 250 000 - intermediate inputs - forgone wages of owners in alternative employment - interest on bank loan

200 000 15 000 105 000 25 000 20 000 150 000 80 000 10 000

TABLE 7-1 Refer to Table 7-1. The economic profits for this family-owned firm are A) $115 000. B) $10 000. C) $0. D) -$10 000. E) -$105 000. Answer: E Diff: 3 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Graphics: Table Category: Quantitative

20) The table below provides the annual revenues and costs for a family-owned firm producing catered meals. Total Revenues ($)

500 000

Total Costs ($) - wages and salaries - risk-free return of 6% on owners' capital of 250 000 - rent - depreciation of capital equipment - risk premium of 8% on owners' capital of 250 000 - intermediate inputs - forgone wages of owners in alternative employment - interest on bank loan

200 000 15 000 105 000 25 000 20 000 150 000 80 000 10 000

TABLE 7-1 Refer to Table 7-1. To an accountant, this family-owned catering company is earning ________. To an economist, the same firm is earning ________. A) zero profit; economic losses B) zero profit; normal profits C) positive profits; economic losses D) economic profits; economic profits E) economic profits; economic losses Answer: C Diff: 3 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Graphics: Table Category: Quantitative

21) The table below provides the total revenues and costs for a small landscaping company in a recent year. Total Revenues ($) Total Costs ($) - wages and salaries - risk-free return of 2% on owner's capital of $20 000 - interest on bank loan - cost of supplies - depreciation of capital equipment - additional wages the owner could have earned in next best alternative - risk premium of 4% on owner's capital of $20 000

250 000

150 000 400 1500 27 000 8000 30 000 800

TABLE 7-2 Refer to Table 7-2. The explicit costs for this firm are A) $178 500. B) $186 500. C) $186 900. D) $217 300. E) $217 700. Answer: B Diff: 3 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Graphics: Table Category: Quantitative

22) The table below provides the total revenues and costs for a small landscaping company in a recent year. Total Revenues ($) Total Costs ($) - wages and salaries - risk-free return of 2% on owner's capital of $20 000 - interest on bank loan - cost of supplies - depreciation of capital equipment - additional wages the owner could have earned in next best alternative - risk premium of 4% on owner's capital of $20 000

250 000

150 000 400 1500 27 000 8000 30 000 800

TABLE 7-2 Refer to Table 7-2. The implicit costs for this firm are A) $31 200. B) $30 800. C) $30 400. D) $400. E) $800. Answer: A Diff: 3 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Graphics: Table Category: Quantitative

23) The table below provides the total revenues and costs for a small landscaping company in a recent year. Total Revenues ($) Total Costs ($) - wages and salaries - risk-free return of 2% on owner's capital of $20 000 - interest on bank loan - cost of supplies - depreciation of capital equipment - additional wages the owner could have earned in next best alternative - risk premium of 4% on owner's capital of $20 000

250 000

150 000 400 1500 27 000 8000 30 000 800

TABLE 7-2 Refer to Table 7-2. The accounting profits for this firm are A) $32 300. B) $32 700. C) $63 100. D) $63 500. E) $71 500. Answer: D Diff: 3 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Graphics: Table Category: Quantitative

24) The table below provides the total revenues and costs for a small landscaping company in a recent year. Total Revenues ($) Total Costs ($) - wages and salaries - risk-free return of 2% on owner's capital of $20 000 - interest on bank loan - cost of supplies - depreciation of capital equipment - additional wages the owner could have earned in next best alternative - risk premium of 4% on owner's capital of $20 000

250 000

150 000 400 1500 27 000 8000 30 000 800

TABLE 7-2 Refer to Table 7-2. The economic profits for this firm are A) $63 500. B) $32 700. C) $33 500. D) $31 200. E) $32 300. Answer: E Diff: 3 Type: MC Topic: 7.2b. economic vs. accounting profits Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Graphics: Table Category: Quantitative 25) With regard to economic decision making for firms, the short run is A) a definite number of months. B) a period over which the quantities of all factors of production and technology are variable. C) a period over which the quantity of at least one significant factor of production is fixed. D) a period over which the quantities of all factors of production are variable but technology is fixed. E) less than one year. Answer: C Diff: 1 Type: MC Topic: 7.2c. time horizons for firms Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative

26) With regard to economic decision making for firms, the long run is a period in which A) all factors of production are variable but technology is fixed. B) technology is variable. C) only some of the factors of production are variable. D) technology may be variable, but some factors of production are fixed. E) only capital is variable. Answer: A Diff: 1 Type: MC Topic: 7.2c. time horizons for firms Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 27) Which of the following is most likely a long-run decision for a firm? A) the hours a store should stay open B) how many warehouses to build C) the number of workers to hire D) the amount of inventory to stock E) the price at which to sell the product Answer: B Diff: 1 Type: MC Topic: 7.2c. time horizons for firms Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 28) The period of time over which at least one factor of production is fixed is called the A) very-short run. B) short run. C) long run. D) very-long run. E) immediate run. Answer: B Diff: 1 Type: MC Topic: 7.2c. time horizons for firms Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative

29) The period of time over which the firm can vary any of its inputs for a given production technology is called the A) very-short run. B) short run. C) long run. D) very-long run. E) immediate run. Answer: C Diff: 2 Type: MC Topic: 7.2c. time horizons for firms Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 30) Which of the following factors of production is most likely to be variable in the short run? A) capital equipment B) land C) labour D) entrepreneurship E) technology Answer: C Diff: 1 Type: MC Topic: 7.2c. time horizons for firms Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 31) The period of time over which all factors of production and technology are variable is known as the A) very-short run. B) short run. C) immediate run D) long run. E) very-long run. Answer: E Diff: 1 Type: MC Topic: 7.2c. time horizons for firms Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative

32) The period of time over which the firm can vary its technology of production is the A) very-short run. B) short run. C) long run. D) very-long run. E) none of the above; technology cannot be varied. Answer: D Diff: 1 Type: MC Topic: 7.2c. time horizons for firms Skill: Recall Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 33) Consider an Internet-based grocery delivery business. The managers are considering investing in multiple new local distribution centres. This firm is making a(n) ________ decision. A) very short-run B) short-run C) intermediate run D) long-run E) very long-run Answer: D Diff: 3 Type: MC Topic: 7.2c. time horizons for firms Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 34) Consider an Internet-based grocery delivery business. The managers are considering reducing the number of workers filling orders and replacing them with an automated cartfilling process. This firm is making a(n) ________ decision. A) very short-run B) short-run C) intermediate run D) long-run E) very long-run Answer: D Diff: 3 Type: MC Topic: 7.2c. time horizons for firms Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative

35) Consider an Internet-based grocery delivery business. The managers are working with an artificial intelligence firm to develop an on-call, self-driving vehicle delivery system. This firm is making a(n) ________ decision. A) very short-run B) short-run C) intermediate run D) long-run E) very long-run Answer: E Diff: 3 Type: MC Topic: 7.2c. time horizons for firms Skill: Applied Learning Obj.: 7-2 Distinguish between accounting profits and economic profits. Category: Qualitative 7.3 Production in the Short Run 1) What information is provided by average, marginal, and total product curves? A) They demonstrate that each of these measures of output increase as more inputs are applied. B) They demonstrate that, in the short run, all inputs are variable. C) They relate the prices of inputs (factors of production) to the prices of products. D) They relate the price of output to the quantity supplied. E) They express relationships between physical inputs and physical outputs. Answer: E Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Recall Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 2) Consider the total, average, and marginal product curves for a firm in the short run. Average product is at its maximum when A) total product is maximized. B) marginal product is maximized. C) the maximum quantity of the variable input is employed. D) diminishing returns cease to operate. E) average product equals marginal product and marginal product is falling. Answer: E Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Recall Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative

3) Consider the total, average, and marginal product curves for a firm in the short run. If total product is at its maximum, then A) average product must equal marginal product. B) average product must be rising and must lie above marginal product. C) marginal product must be greater than zero and must be falling. D) marginal product must be falling and be equal to zero. E) average product must be falling and be equal to zero. Answer: D Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 4) Consider the total, average, and marginal product curves for a firm in the short run. If the AP curve is rising, then the MP curve A) must lie above the average-product curve over this range and must also be rising. B) must lie above the average-product curve over this range. C) can be either above or below the average-product curve, although it must be rising over the entire range. D) must lie below the average-product curve over this range. E) must be falling. Answer: B Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 5) Consider the total, average, and marginal product curves for a firm in the short run. If AP = MP and both are positive, then total product A) is at a maximum. B) is decreasing as extra units of the variable factor are employed. C) is increasing as extra units of the variable factor are employed. D) may be either increasing or decreasing as extra units of the variable factor are employed. E) is at its minimum. Answer: C Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative

6) Consider the total, average, and marginal product curves for a firm in the short run. When the total-product curve is increasing at an increasing rate, A) average product is zero. B) marginal product is positive but declining. C) the marginal-product curve lies below the average-product curve. D) marginal product is positive and increasing. E) average product is falling. Answer: D Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 7) Consider the total, average, and marginal product curves for a firm in the short run. When a firm's total-product curve is increasing at a decreasing rate, A) average product is zero. B) marginal product is positive but declining. C) the marginal-product curve lies below the average-product curve. D) marginal product is negative and decreasing. E) average product is falling. Answer: B Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Recall Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 8) Which of the following statements about the relationship between marginal product and average product is correct? A) When average product exceeds marginal product, marginal product must be rising. B) When marginal product is falling, average product is falling. C) When marginal product exceeds average product, average product must be rising. D) Average product equals marginal product at marginal product's lowest point. E) Average product equals marginal product when marginal product is at its maximum. Answer: C Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative

9)

FIGURE 7-1 Refer to Figure 7-1. The marginal product of labour curve intersects the average product of labour curve when A) the firm is at its capacity. B) the firm achieves increasing returns. C) average product is at its maximum. D) diminishing returns sets in. E) total product is at its maximum. Answer: C Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Graph

Category: Qualitative 10)

FIGURE 7-1 Refer to Figure 7-1. Total product is increasing at an increasing rate A) from 0 to 32 units of output. B) from 0 to 140 units of output. C) between 140 to 200 units of output. D) between 200 to 250 units of output. E) over the whole production range. Answer: B Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product.

Graphics: Graph Category: Qualitative 11)

FIGURE 7-1 Refer to Figure 7-1. Total product is increasing at a decreasing rate A) from 0 to 20 units of output. B) from 0 to 32 units of output. C) between 140 to 200 units of output. D) between 140 to 250 units of output. E) over the whole production range. Answer: D Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the

relationships among total, average, and marginal product. Graphics: Graph Category: Qualitative 12)

FIGURE 7-1 Refer to Figure 7-1. If the firm hires the 15th unit of labour, A) the extra output will be zero. B) average product will rise. C) marginal product will be unchanged. D) the firm will reach its capacity. E) output will increase by 2 units of output. Answer: A Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied

Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Graph Category: Qualitative 13)

FIGURE 7-1 Refer to Figure 7-1. Suppose each unit of labour represents one worker for one month. What is the maximum number of workers the firm could hire so that the final worker hired still raises the average product of the other workers? A) 7 B) 8 C) 9 D) 11 E) 15 Answer: C Diff: 3 Type: MC

Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Graph Category: Quantitative 14) Consider a firm in the short run. Which of the following statements about the firm's product curves is correct? A) AP is at its minimum when MP = AP. B) TP is at its maximum when MP = O. C) TP begins to decrease when AP begins to decrease. D) When MP > AP, AP is decreasing. E) When the MP curve cuts the AP curve from below, the AP curve begins to fall. Answer: B Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 15) Consider a firm in the short run. Which of the following statements about the firm's product curves is correct? A) AP is at its minimum when MP = AP. B) TP is at its maximum when MP is at its maximum. C) TP begins to decrease when AP begins to decrease. D) When MP < AP, AP is increasing. E) When the MP curve cuts the AP curve from above, the AP curve begins to fall. Answer: E Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 16) Suppose that when a firm hires one additional unit of labour, total product increases from 100 to 110 units of output per month. Marginal product must therefore be A) increasing. B) positive. C) decreasing. D) constant. E) zero. Answer: B Diff: 2 Type: MC

Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative

17) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The marginal product of labour is at its maximum when the firm changes the amount of labour hired from A) 0 to 1 unit. B) 1 to 2 units. C) 2 to 3 units. D) 3 to 4 units. E) 4 to 5 units. Answer: C Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative

18) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The average product of labour is highest when the firm hires A) 1 unit of labour. B) 2 units of labour. C) 3 units of labour. D) 4 units of labour. E) 5 units of labour. Answer: D Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative

19) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. What is the marginal product of the 4th unit of labour hired by the firm? A) 42 B) 60 C) 132 D) 900 E) 1320 Answer: A Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative

20) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. Diminishing marginal product of labour is first observed when the firm changes the amount of labour hired from A) 0 to 1 units. B) 1 to 2 units. C) 2 to 3 units. D) 3 to 4 units. E) 4 to 5 units. Answer: D Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative

21) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The average product of labour when the firm hires 3 units of labour is ________. The average product of labour when the firm hires 4 units of labour is ________. A) 30; 33 B) 90; 132 C) 60; 42 D) 90; 222 E) 30; 90 Answer: A Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative

22) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. The marginal product of labour is at its maximum when the firm changes the amount of labour hired from A) 0 to 1 unit. B) 1 to 2 units. C) 2 to 3 units. D) 3 to 4 units. E) 4 to 5 units. Answer: C Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative

23) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. Diminishing marginal productivity of labour is first observed when the firm changes the amount of labour hired from A) 0 to 1 unit. B) 1 to 2 units. C) 2 to 3 units. D) 3 to 4 units. E) 4 to 5 units. Answer: D Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative

24) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. The average product of labour is highest when the firm hires ________ units of labour. A) 1 B) 2 C) 3 D) 4 E) 5 Answer: D Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative

25) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. The marginal product of labour curve intersects the average product of labour curve from above when the firm changes the amount of labour per unit of time from A) 0 to 1 units. B) 1 to 2 units. C) 2 to 3 units. D) 3 to 4 units. E) 4 to 5 units. Answer: E Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative

26) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. Marginal product of labour begins decreasing with the ________ unit of labour hired. Average product of labour begins decreasing with the ________ unit of labour hired. A) 4th; 3rd B) 3rd; 2nd C) 2nd; 3rd D) 3rd; 4th E) 4th; 5th Answer: E Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Graphics: Table Category: Quantitative 27) Suppose NHL hockey player Connor McDavid is averaging three points per game going into the last game of the season in which he collects four points, thereby changing his average for the season. To use an analogy in economics, it could be said that average product increases A) when total product increases. B) when marginal product exceeds average product. C) when average product exceeds marginal product. D) when marginal product increases. E) whenever marginal product is positive. Answer: B Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product.

Category: Qualitative 28) Consider a basket-producing firm with fixed capital. If the firm can produce 36 baskets per day with 3 workers and then increases productivity to 44 baskets per day with 4 workers, then which of the following statements is true? A) The marginal product of the fourth worker is 11. B) The firm has passed the point of diminishing average productivity. C) The marginal product is above the average product. D) The firm has not yet reached the point of diminishing marginal productivity. E) With 4 workers, the firm's average product of labour is 13. Answer: B Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Quantitative 29) Consider a basket-producing firm with fixed capital. If the firm can produce 36 baskets per day with 3 workers and then increases production to 44 baskets per day with 4 workers, then which of the following statements is true? A) The marginal product of the fourth worker is 11. B) With 4 workers, the marginal product is above the average product. C) The firm has not yet reached the point of diminishing marginal productivity. D) The firm has passed the point of diminishing marginal productivity. E) With 4 workers, the firm's average product of labour is 8. Answer: D Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Quantitative 30) Consider a basket-producing firm with fixed capital. If the firm can produce 24 baskets per day with 3 workers and then increases production to 36 baskets per day with 4 workers, then which of the following statements is definitely true? A) The firm has passed the point of diminishing marginal productivity. B) The marginal productivity of the fourth worker is 9. C) The firm has passed the point of diminishing average productivity. D) With 4 workers, the average product is greater than the marginal product. E) With 4 workers, the marginal product is greater than the average product. Answer: E Diff: 2 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied

Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Quantitative 31) Consider a basket-producing firm with fixed capital. If the firm can produce 24 baskets per day with 3 workers and then increases production to 36 baskets per day with 4 workers, then which of the following statements is definitely true? A) Marginal product for this firm is rising. B) The marginal product of the fourth worker is 9. C) Average product for this firm is rising. D) The firm has passed the point of diminishing marginal productivity. E) With 4 workers, the average product is greater than the marginal product. Answer: C Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Quantitative 32) Consider a house-construction firm with fixed capital. The firm can build 8 houses per year with 16 workers and 8.8 houses per year with 17 workers. If it is currently building 8.8 houses per year, which of the following is true? A) Average product is at a maximum with 16 workers. B) Average product is at a maximum with 17 workers. C) The marginal product is below the average product. D) The firm has already passed the point of diminishing marginal productivity. E) The firm has not yet reached the point of diminishing average productivity. Answer: E Diff: 3 Type: MC Topic: 7.3a. total, average, and marginal product Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Quantitative 33) If increasing quantities of a variable factor are applied to a given quantity of fixed factors, then the law of diminishing returns tells us that A) the marginal product and the average product of the variable factor will eventually decrease. B) the marginal product will eventually decrease with constant average product. C) the average product will eventually decrease with constant marginal product. D) the average product will eventually decrease, but only if total product is held constant. E) total product will eventually begin to fall. Answer: A Diff: 1 Type: MC

Topic: 7.3a. total, average, and marginal product Skill: Recall Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 34) The law of diminishing returns states that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, then A) the MP and the AP of the variable factor will eventually decrease. B) the MP will eventually decrease with constant AP. C) the AP will eventually decrease with constant MP. D) the AP will eventually decrease, but only if TP is held constant. E) TP will eventually begin to fall. Answer: A Diff: 2 Type: MC Topic: 7.3b. law of diminishing returns Skill: Recall Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 35) Diminishing marginal product of labour is said to exist when there is A) an increase in the amount of capital available for each unit of labour. B) a reduction in the level of labour input that causes output to increase. C) an increase in the division and specialization of labour. D) technological advancement. E) a successively smaller increase in output with each successive unit increase in labour input. Answer: E Diff: 2 Type: MC Topic: 7.3b. law of diminishing returns Skill: Recall Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 36) The point of diminishing marginal productivity is the point where A) marginal product has reached its maximum. B) average product has reached its maximum. C) the marginal product begins to fall at an increasing rate. D) the total product begins to fall. E) the marginal product curve lies below the average product curve. Answer: A Diff: 2 Type: MC Topic: 7.3b. law of diminishing returns Skill: Recall

Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative

37) Suppose sport-fishermen on the Campbell River in British Columbia are each catching fewer fish and are having to fish many more hours to catch them. However, the total number of fish caught on the river continues to increase. The river is experiencing A) diminishing total returns. B) constant marginal returns. C) increasing marginal returns. D) diminishing marginal returns. E) increasing average returns. Answer: D Diff: 2 Type: MC Topic: 7.3b. law of diminishing returns Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 38) Suppose a cafe with two espresso machines and one barista is very busy and customers are lined up. The one barista can produce 40 coffee products per hour. The owner hires a second barista and total product increases to 70 units per hour; a third barista is hired and total product increases to 85 units per hour. In terms of labour, this firm is experiencing A) diminishing total returns. B) constant marginal returns. C) diminishing marginal returns. D) increasing average returns. E) increasing marginal returns. Answer: C Diff: 3 Type: MC Topic: 7.3b. law of diminishing returns Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative

39) Suppose a cafe with two espresso machines and one barista is very busy and customers are lined up. The one barista can produce 40 coffee products per hour. The owner hires a second barista and total product increases to 70 units per hour; a third barista is hired and total product increases to 85 units per hour. In terms of labour, this firm is experiencing A) diminishing total returns. B) constant marginal returns. C) increasing average returns. D) increasing marginal returns. E) diminishing average returns. Answer: E Diff: 2 Type: MC Topic: 7.3b. law of diminishing returns Skill: Applied Learning Obj.: 7-3 Understand the law of diminishing marginal returns and the relationships among total, average, and marginal product. Category: Qualitative 7.4 Costs in the Short Run 1) In economics, the term "fixed costs" means A) implicit costs. B) opportunity costs. C) costs that are never accounted for. D) costs incurred in the past that involve no implicit costs. E) costs that do not vary with the level of output produced. Answer: E Diff: 1 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 2) In the short run time horizon for a firm, total fixed costs A) decrease and then increase as output increases. B) decrease as output increases. C) do not vary with output. D) increase and then decrease as output increases. E) are equal to total variable costs. Answer: C Diff: 1 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs.

Category: Qualitative 3) Jodi recently went into business producing widgets. Which of the following would be a fixed cost for her firm? 1. labour costs of $1000 per month 2. raw material costs of $5000 per month 3. a one-year lease on a building of $12 000 A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: C Diff: 1 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 4) Marginal cost is defined as the A) change in total cost resulting from an additional unit of output. B) change in fixed cost resulting from an additional unit of output. C) difference between average total cost and average variable cost. D) cost per unit when the firm is operating at capacity. E) cost of an additional unit of a variable factor of production. Answer: A Diff: 1 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 5) A firm's short-run cost curves, as conventionally drawn, show that A) AFC increases as output increases. B) ATC = TFC + TVC. C) AVC decreases as long as MC > AVC. D) the MC curve intersects the AVC and ATC curves at their maximum points. E) ATC decreases and then increases as output increases. Answer: E Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs.

Category: Qualitative

6) Consider a firm's short-run cost curves. If average total cost is increasing as output rises, then A) total fixed costs must be increasing. B) average fixed costs must be increasing. C) average variable cost must be increasing. D) marginal cost must be below average total cost. E) average total cost is no longer equal to the sum of average variable cost and average fixed cost. Answer: C Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 7) Consider a firm's short-run cost curves. Which one of the following types of cost declines over the whole range of output? A) average fixed cost B) marginal cost C) total fixed cost D) average variable cost E) total variable cost Answer: A Diff: 1 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 8) Consider a firm's short run cost curves. The vertical distance between the total cost curve and the total variable cost curve is A) marginal cost. B) average fixed cost. C) average total cost. D) total fixed cost. E) average variable cost. Answer: D Diff: 1 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative

9) Suppose a firm is producing 100 units of output, incurring a total cost of $10 000 and total variable cost of $6000. It can be concluded that average fixed cost is A) $40. B) $60. C) $100. D) $160. E) $4000. Answer: A Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Quantitative 10) Suppose a firm is producing 500 units of output, incurring a total cost of $700 000 and total fixed cost of $100 000. It can be concluded that average variable cost is A) $200. B) $600. C) $1200. D) $1400. E) $1600. Answer: C Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Quantitative 11) Suppose a firm is producing 250 units of output. At this level of output, average fixed costs are $20 per unit and average variable costs are $80 per unit. It can be concluded that total cost is A) $100. B) $0.40 per unit. C) $40 per unit. D) $2500. E) $25 000. Answer: E Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Quantitative

12) Suppose a firm is producing 10 000 units of output. At this level of output, average total cost is $200 and average fixed cost is $20. It can be concluded that total variable cost is A) $180. B) $1800. C) $18 000. D) $180 000. E) $1 800 000. Answer: E Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Quantitative 13) Suppose a firm with the usual U-shaped cost curves is producing a level of output such that its short-run costs are as follows: ATC = $0.37 per unit AVC = $0.32 per unit AFC = $0.05 per unit MC = $0.43 per unit Given these short-run costs, as the firm increases its output, which of the following statements is true? A) Marginal product of the variable factor must be decreasing. B) Marginal product of the variable factor must be increasing. C) The point of diminishing average product of the variable factor has not yet been reached. D) Average product of the variable factor must be increasing. E) Marginal product of the variable factor is at its minimum point. Answer: A Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Quantitative

14) Suppose a firm with the usual U-shaped cost curves is producing a level of output such that its short run costs are as follows: ATC = $0.37 per unit AVC = $0.32 per unit AFC = $0.05 per unit MC = $0.43 per unit Given these short run costs, which of the following statements is true? A) The firm is operating with excess capacity. B) The firm is operating at capacity. C) The firm is operating above capacity. D) The firm has no capacity constraints. E) The firm is producing a level of output where capacity is increasing. Answer: C Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Quantitative 15) Consider the short-run costs of a firm. Suppose the firm's total fixed costs are $100 and average variable costs are constant regardless of output. Which of the following is then true? A) Marginal cost will equal average total cost. B) Average total cost will decrease when output is increased. C) Marginal cost will be less than average variable cost. D) Average total costs will be constant. E) Marginal cost will be rising as output rises. Answer: B Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative

16) Suppose that a firm's capital is fixed and one more unit of labour is hired, thereby increasing the firm's total output. Which of the following statements can be correct? 1. Marginal cost would remain constant. 2. Marginal cost would increase. 3. Marginal cost would decrease. A) 1 only B) 2 only C) 3 only D) Any of 1, 2, and 3 is possible. E) None are possible. Answer: D Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 17) A firm's capacity is defined as the level of output where A) the upper limit on what can be produced is reached. B) average total cost is at its maximum. C) marginal cost equals average variable cost. D) average fixed costs are at a minimum. E) short-run average total cost is at its minimum. Answer: E Diff: 1 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 18) When a plant is operating at the level of output where its short-run average total cost is at its minimum, A) average fixed cost is at a minimum. B) marginal cost is at a minimum. C) average variable cost is at a minimum. D) the plant is operating at its capacity. E) more of the variable factor of production should be employed. Answer: D Diff: 1 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative

19) Short-run cost curves for a firm are eventually upward-sloping because of the effects of A) the increasing price of variable inputs. B) diminishing marginal product. C) increasing fixed costs. D) increasing marginal productivity of the variable inputs. E) decreasing total product. Answer: B Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 20) Under which of the following circumstances is a firm's short-run marginal costs decreasing? A) average fixed cost is increasing B) total fixed cost is decreasing C) marginal product is decreasing D) marginal product is increasing E) capacity is reached Answer: D Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 21) Consider a firm's short-run cost curves. If the firm's marginal cost is rising, we know that A) average fixed cost must be rising. B) average variable cost must be rising. C) average total cost must be rising. D) marginal product must be zero. E) marginal product must be falling. Answer: E Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative

22) Consider a firm's short-run cost curves. When capital is a fixed factor, a rise in the cost of labour A) shifts the marginal cost curve upwards. B) shifts the AVC curve down. C) shifts the total product curve downwards. D) leaves the MC curve unchanged. E) leaves the ATC curve unchanged. Answer: A Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 23) Suppose Jodi's widget business is using two inputs, labour and capital. If the price of labour increases, which of the following will happen? A) Jodi will shut down her business. B) The firm's average total cost curve will shift upward. C) The firm's marginal cost curve will remain unchanged. D) Jodi will hire more labour. E) The firm's average fixed cost curve will shift upward. Answer: B Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 24) Suppose a firm producing digital cameras is operating such that marginal costs are higher than average costs. If the firm produces one more camera, average costs will A) rise. B) fall. C) reach a point of diminishing returns. D) remain constant. E) reach their maximum. Answer: A Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative

25) A firm that is maximizing its profits by producing a certain level of output must also be A) minimizing its cost of producing that output. B) maximizing its sales. C) minimizing its variable costs. D) maximizing its output. E) maximizing its revenue. Answer: A Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Category: Qualitative 26) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. Average fixed costs for 305 units of output is approximately A) 33 cents. B) 41 cents. C) 45 cents. D) 74 cents. E) $3.05. Answer: A Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

27) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. Average variable costs for 175 units of output is approximately A) 25 cents. B) 32 cents. C) 43 cents. D) 57 cents. E) $1.00. Answer: C Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

28) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. The average total cost for 250 units of output is approximately A) 33 cents. B) 40 cents. C) 63 cents. D) 80 cents. E) $1.00. Answer: D Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

29) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. The total cost of producing 175 units of output is A) $75. B) $100. C) $150. D) $175. E) $350. Answer: D Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

30) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. The average total cost of producing 75 units of output is A) $1. B) $2. C) $0.80. D) $0.67. E) $1.33. Answer: B Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

31) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. The total variable cost of producing 305 units of output is A) $100. B) $125. C) $225. D) $305. E) $325. Answer: B Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

32) The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 Refer to Table 7-4. The total fixed cost of producing 305 units of output is A) $100. B) $125. C) $112.50. D) $225 E) $305. Answer: A Diff: 1 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

33) The diagram below shows some short-run cost curves for a firm.

FIGURE 7-2 Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in part (i) of the figure?

A) Curve 1 is the total cost curve. Curve 2 is the total variable cost curve. Curve 3 is the total fixed cost curve. B) Curve 1 is the total fixed cost curve. Curve 2 is the total variable cost curve. Curve 3 is the total cost curve. C) Curve 1 is the total variable cost curve. Curve 2 is the total cost curve. Curve 3 is the total fixed cost curve. D) Curve 1 is the total marginal cost curve. Curve 2 is the total average cost curve. Curve 3 is the total average fixed cost curve. E) Curve 1 is the total cost curve. Curve 2 is the total variable cost curve. Curve 3 is the average fixed cost curve. Answer: A Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Graph Category: Qualitative

34) The diagram below shows some short-run cost curves for a firm.

FIGURE 7-2 Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in part (ii) of the figure?

A) Curve 4 is the marginal cost curve. Curve 5 is the average fixed cost curve. Curve 6 is the average variable cost curve. Curve 7 is the average total cost curve. B) Curve 4 is the average total cost curve. Curve 5 is the marginal cost curve. Curve 6 is the average variable cost curve. Curve 7 is the average fixed cost curve. C) Curve 4 is the average fixed cost curve. Curve 5 is the average total cost curve. Curve 6 is the marginal cost curve. Curve 7 is the average variable cost curve. D) Curve 4 is the marginal cost curve. Curve 5 is the average total cost curve. Curve 6 is the average variable cost curve. Curve 7 is the average fixed cost curve. E) Curve 4 is the marginal cost curve. Curve 5 is the average variable cost curve. Curve 6 is the average fixed cost curve. Curve 7 is the average total cost curve. Answer: D Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Recall Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Graph Category: Qualitative

35) The table below provides information on output per month and short-run costs for a firm producing outdoor wooden lounge chairs. All costs are in dollars. Q 5 10 15 20 25 30

Total Fixed Cost 200 200 200 200 200 200

Total Variable Cost 200 220 240 260 350 810

Total Cost 400 420 440 460 550 1010

TABLE 7-5 Refer to Table 7-5. What is the average variable cost of producing 10 chairs? A) $22 B) $42 C) $200 D) $220 E) $420 Answer: A Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

36) The table below provides information on output per month and short-run costs for a firm producing outdoor wooden lounge chairs. All costs are in dollars. Q 5 10 15 20 25 30

Total Fixed Cost 200 200 200 200 200 200

Total Variable Cost 200 220 240 260 350 810

Total Cost 400 420 440 460 550 1010

TABLE 7-5 Refer to Table 7-5. What is the average variable cost of producing 20 chairs? A) $22 B) $23 C) $260 D) $460 E) $13 Answer: E Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

37) The table below provides information on output per month and short-run costs for a firm producing outdoor wooden lounge chairs. All costs are in dollars. Q 5 10 15 20 25 30

Total Fixed Cost 200 200 200 200 200 200

Total Variable Cost 200 220 240 260 350 810

Total Cost 400 420 440 460 550 1010

TABLE 7-5 Refer to Table 7-5. What is the average total cost of producing 25 chairs? A) $13 B) $14 C) $22 D) $23 E) $550 Answer: C Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

38) The table below provides information on output per month and short-run costs for a firm producing outdoor wooden lounge chairs. All costs are in dollars. Q 5 10 15 20 25 30

Total Fixed Cost 200 200 200 200 200 200

Total Variable Cost 200 220 240 260 350 810

Total Cost 400 420 440 460 550 1010

TABLE 7-5 Refer to Table 7-5. What is the average total cost of producing 30 chairs? A) $13 B) $14 C) $22 D) $23 E) $33.67 Answer: E Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

39) The table below provides information on output per month and short-run costs for a firm producing outdoor wooden lounge chairs. All costs are in dollars. Q 5 10 15 20 25 30

Total Fixed Cost 200 200 200 200 200 200

Total Variable Cost 200 220 240 260 350 810

Total Cost 400 420 440 460 550 1010

TABLE 7-5 Refer to Table 7-5. Given the information in the table about short-run costs, this firm would minimize the average variable cost of production when producing A) 10 chairs. B) 15 chairs. C) 20 chairs. D) 25 chairs. E) 30 chairs. Answer: C Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

40) The table below provides information on output per month and short-run costs for a firm producing outdoor wooden lounge chairs. All costs are in dollars. Q 5 10 15 20 25 30

Total Fixed Cost 200 200 200 200 200 200

Total Variable Cost 200 220 240 260 350 810

Total Cost 400 420 440 460 550 1010

TABLE 7-5 Refer to Table 7-5. Given the information in the table about short-run costs, this firm would minimize the average total cost of production when producing A) 10 chairs. B) 15 chairs. C) 20 chairs. D) 25 chairs. E) 30 chairs. Answer: D Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

41) The table below provides information on output per month and short-run costs for a firm producing outdoor wooden lounge chairs. All costs are in dollars. Q 5 10 15 20 25 30

Total Fixed Cost 200 200 200 200 200 200

Total Variable Cost 200 220 240 260 350 810

Total Cost 400 420 440 460 550 1010

TABLE 7-5 Refer to Table 7-5. At what level of output is this firm at its capacity? A) 10 chairs B) 15 chairs C) 20 chairs D) 25 chairs E) 30 chairs Answer: D Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

42) The table below shows output, marginal cost, and average variable cost for the production of pairs of shoes. All costs are in dollars.

Output 50 70 90 110 130 150 170 190 210 230

Marginal Cost 60 45 35 30 35 60 105 180 230 290

Average Variable Cost 140 115 95 80 65 60 65 75 90 110

TABLE 7-6 Refer to Table 7-6. The firm's marginal product of its variable factor is maximized when it produces ________ units of output. A) 50 B) 90 C) 100 D) 110 E) 170 Answer: D Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

43) The table below shows output, marginal cost, and average variable cost for the production of pairs of shoes. All costs are in dollars.

Output 50 70 90 110 130 150 170 190 210 230

Marginal Cost 60 45 35 30 35 60 105 180 230 290

Average Variable Cost 140 115 95 80 65 60 65 75 90 110

TABLE 7-6 Refer to Table 7-6. Suppose there are no fixed costs. The firm reaches it's capacity level of output when its output is equal to ________ units. A) 50 B) 110 C) 150 D) 190 E) 210 Answer: C Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

44) The table below shows output, marginal cost, and average variable cost for the production of pairs of shoes. All costs are in dollars.

Output 50 70 90 110 130 150 170 190 210 230

Marginal Cost 60 45 35 30 35 60 105 180 230 290

Average Variable Cost 140 115 95 80 65 60 65 75 90 110

TABLE 7-6 Refer to Table 7-6. If the firm produces 130 pairs of shoes, and the fixed cost is $550, then the firm's total cost is A) $7000. B) $8000. C) $9000. D) $10 000. E) $12 000. Answer: C Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

45) The table below shows output, marginal cost, and average variable cost for the production of pairs of shoes. All costs are in dollars.

Output 50 70 90 110 130 150 170 190 210 230

Marginal Cost 60 45 35 30 35 60 105 180 230 290

Average Variable Cost 140 115 95 80 65 60 65 75 90 110

TABLE 7-6 Refer to Table 7-6. Suppose this firm is producing 210 pairs of shoes per time period and that the variable factor of production is labour. Which of the following statements best describes this firm's production? A) Additional units of labour employed will increase the average variable cost of producing shoes. B) Marginal cost is higher than average variable cost, so average product must be rising. C) Marginal cost is higher than average variable cost, so marginal product must be rising. D) Each additional unit of labour employed reduces the average variable cost of the pairs of shoes. E) The firm is producing below its capacity. Answer: A Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

46) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The average total cost when producing 150 units of output is approximately A) 33 cents. B) 40 cents. C) 67 cents. D) 80 cents. E) $1.50. Answer: C Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

47) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The average total cost when producing 90 units of output is approximately A) 27 cents. B) 30 cents. C) 33 cents. D) 89 cents. E) $26.67. Answer: D Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

48) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The average total cost when this firm is producing zero units of output is A) $50. B) $0. C) undefined. D) $1. E) There is not enough information to determine this. Answer: C Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

49) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The average total cost when this firm is producing 10 units of output is A) 60 cents. B) $1. C) $6. D) $10. E) $60. Answer: C Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

50) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The average variable cost when this firm is producing 10 units of output is A) $0.10. B) $0.50. C) $0.60. D) $1.00. E) $6.00. Answer: D Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

51) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The average variable cost when this firm is producing 90 units of output is A) 17 cents. B) 33 cents. C) 68 cents. D) 89 cents. E) 98 cents. Answer: B Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

52) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. The average variable cost when producing 132 units of output is approximately A) 24 cents. B) 30 cents. C) 45 cents. D) 68 cents. E) 89 cents. Answer: B Diff: 2 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

53) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. If this firm is producing 20 units of output per period its marginal cost is A) $1.00. B) 50 cents. C) $1.67. D) 16.7 cents. E) $10.00. Answer: B Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

54) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. If this firm is producing 111 units of output per period, its marginal cost is A) $1.00. B) 16.7 cents. C) 76 cents. D) 24 cents. E) 38 cents. Answer: D Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

55) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. At what level of output does average variable cost reach a minimum? A) 30 B) 90 C) 132 D) 150 E) AVC declines continuously over the range of output shown. Answer: C Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative

56) The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 Refer to Table 7-3. At what level of output does average total cost reach a minimum? A) 30 B) 90 C) 132 D) 150 E) ATC declines continuously over the range of output shown. Answer: E Diff: 3 Type: MC Topic: 7.4. short-run costs and cost-curves Skill: Applied Learning Obj.: 7-4 Explain the difference between fixed and variable costs and the relationships among total, average, and marginal costs. Graphics: Table Category: Quantitative Economics - Canadian Edition, 16e (Ragan) Chapter 8 Producers in the Long Run 8.1 The Long Run: No Fixed Factors 1) The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month. Technique Labour Capital

A 25 50

B 35 35

C 50 25

D 30 60

TABLE 8-1 Refer to Table 8-1. If the price of labour is $5 and the price of capital is $10, which production technique minimizes the costs of producing 1000 units of output? A) A

B) B C) C D) D E) Any of the techniques have the same cost. Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Graphics: Table Category: Qualitative

2) The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month. Technique Labour Capital

A 25 50

B 35 35

C 50 25

D 30 60

TABLE 8-1 Refer to Table 8-1. If the price of labour is $10 and the price of capital is $5, which production technique minimizes the costs of producing 1000 units of output? A) A B) B C) C D) D E) Any of the techniques have the same cost. Answer: A Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Graphics: Table Category: Qualitative

3) The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month. Technique Labour Capital

A 25 50

B 35 35

C 50 25

D 30 60

TABLE 8-1 Refer to Table 8-1. If the price of both labour and capital is $10, which production technique minimizes the costs of producing 1000 units of output? A) A B) B C) C D) D E) Any of the techniques have the same cost. Answer: B Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Graphics: Table Category: Qualitative

4) The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month. Technique Labour Capital

A 25 50

B 35 35

C 50 25

D 30 60

TABLE 8-1 Refer to Table 8-1. Which production technique is obviously technically inefficient? A) A B) B C) C D) D E) All four techniques are inefficient. Answer: D Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Graphics: Table Category: Qualitative 5) When there is no other way of producing a given level of output with a smaller total value of inputs, the firm is operating at A) minimum cost. B) maximum output. C) maximum profit. D) optimal output. E) maximum cost. Answer: A Diff: 1 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Qualitative

6) Which of the following conditions indicate cost minimization, assuming two inputs, labour (L) and capital (K)? A) PK ∙ MPK = PL ∙ MPL B) MPL = MPK C) MPK/PK = MPL/PL D) MPK/PL = MPL/PK E) PK = PL Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Recall Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Qualitative 7) By expressing the cost-minimizing condition as MPK/MPL = PK/PL, we are able to see A) how the firm determines its profit-maximizing output. B) how the firm can adjust the marginal products of the factors of production to the prices of the factors given by the market. C) that the capital-labour ratio is fixed. D) that the ratio of factor prices is constant over time. E) that the firm is producing at a lower cost if the left-hand side of the equation is greater than the right-hand side. Answer: B Diff: 1 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Recall Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Qualitative 8) For a firm with only two inputs, capital and labour, the condition MP K/MPL = PK/PL guarantees that the firm is A) at its profit-maximizing output but is not necessarily minimizing its costs. B) minimizing its costs but is not necessarily maximizing its profits. C) technically efficient but not economically efficient. D) economically efficient but not technically efficient. E) at its profit-maximizing and cost-minimizing level of output. Answer: B Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors.

Category: Qualitative 9) A profit-maximizing firm will increase its use of capital and decrease its use of labour when the A) marginal product of capital is higher than the marginal product of labour. B) marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour. C) average product of capital is higher than the average product of labour. D) total product of capital is higher than the total product of labour. E) marginal product of capital, per dollar spent on capital, is less than the marginal product of labour, per dollar spent on labour. Answer: B Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Recall Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Qualitative 10) A cost-minimizing firm will increase its use of labour and decrease its use of capital when the A) marginal product of capital is higher than the marginal product of labour. B) marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour. C) average product of capital is higher than the average product of labour. D) total product of capital is higher than the total product of labour. E) marginal product of capital, per dollar spent on capital, is less than the marginal product of labour, per dollar spent on labour. Answer: E Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Recall Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Qualitative 11) When a firm seeks to minimize costs of producing a given level of output, it needs to know A) the price of its competitors' output. B) the level of output that maximizes its profits. C) the cost of the factors of production it uses. D) the cost of the factors of production of its competitors. E) the price of its output. Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization

Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Qualitative 12) The principle of substitution plays a central role in resource allocation because it demonstrates that A) firms will find it profitable to make abundant use of relatively scarce factors. B) methods of producing the same commodity will not differ from one country to another. C) firms can use all factors of production interchangeably with no impact on their costs. D) prices will be relatively low for those factors for which demand is high relative to supply. E) relative factor prices reflect relative scarcities of factors in the economy and so firms will find it profitable to make abundant use of relatively abundant factors. Answer: E Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Recall Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose prices have risen and toward factors whose prices have fallen. Category: Qualitative 13) Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX > MPY/PY. To minimize the cost of production, the firm should hire A) more input Y and less input X. B) more input X and less input Y. C) more input Y only if its price falls. D) more input X only if its price increases. E) more input X only if its price decreases. Answer: B Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Qualitative 14) When a cost-minimizing firm is faced with an increase in the relative price of labour, it adjusts its factor usage so as to A) increase the marginal product of capital relative to the marginal product of labour. B) increase the marginal product of labour relative to the marginal product of capital. C) use more labour per unit of output than before. D) use more of both capital and labour per unit of output. E) maintain the previous usage of labour. Answer: B

Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose prices have risen and toward factors whose prices have fallen. Category: Qualitative 15) Suppose a firm is employing labour (L) and capital (K) such that MPK/MPL = PK/PL. If the price of labour rises, the cost-minimizing firm should then A) employ more labour and less capital because MPK/MPL > PK/PL. B) employ more capital and less labour because MPK/MPL > PK/PL. C) employ more labour and less capital because MPK/MPL < PK/PL. D) employ more capital and less labour because MPK/MPL < PK/PL. E) do nothing. Answer: B Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose prices have risen and toward factors whose prices have fallen. Category: Qualitative 16) Suppose a firm is using 100 units of labour and 50 units of capital to produce 200 completed client tax returns per day. The price of labour is $10 per unit and the price of capital is $5 per unit. The MPL equals 2 and the MPK equals 5. In this situation, A) the firm is minimizing its costs. B) the firm should increase the use of both inputs. C) the firm could lower its production costs by decreasing labour input and increasing capital input. D) the firm could lower its production costs by increasing labour input and decreasing capital input. E) the firm should decrease the use of both inputs. Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative

17) Suppose a firm is using 100 units of labour and 50 units of capital to produce 200 completed client tax returns per day. The price of labour is $5 per unit and the price of capital is $2 per unit. The MPL equals 5 and the MPK equals 2. In this situation, the firm A) is minimizing its costs. B) should increase the use of both inputs. C) could lower its production costs by decreasing labour input and increasing capital input. D) could lower its production costs by increasing labour input and decreasing capital input. E) should decrease the use of both inputs. Answer: A Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 18) Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore. The price of labour is $40 per unit and the price of capital is $1000 per unit. The MPL equals 25 and the MPK equals 750. In this situation, A) the firm is minimizing its costs. B) the firm should increase the use of both inputs. C) the firm could lower its production costs by decreasing labour input and increasing capital input. D) the firm could lower its production costs by increasing labour input and decreasing capital input. E) the firm should decrease the use of both inputs. Answer: C Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative

19) Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore. The price of labour is $20 per unit and the price of capital is $1000 per unit. The MPL equals 25 and the MPK equals 750. In this situation, A) the firm is minimizing its costs. B) the firm should increase the use of both inputs. C) the firm could lower its production costs by decreasing labour input and increasing capital input. D) the firm could lower its production costs by increasing labour input and decreasing capital input. E) the firm should decrease the use of both inputs. Answer: D Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 20) Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore. The price of labour is $40 per unit and the price of capital is $1000 per unit. The MPL equals 24 and the MPK equals 600. In this situation, A) the firm is minimizing its costs. B) the firm should increase the use of both inputs. C) the firm could lower its production costs by decreasing labour input and increasing capital input. D) the firm could lower its production costs by increasing labour input and decreasing capital input. E) the firm should decrease the use of both inputs. Answer: A Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative

21) Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore. The price of labour is $50 per unit and the price of capital is $800 per unit. The MPL equals 60 and the MPK equals 1200. In this situation, A) the firm is minimizing its costs. B) the firm should increase the use of both inputs. C) the firm could lower its production costs by decreasing labour input and increasing capital input. D) the firm could lower its production costs by increasing labour input and decreasing capital input. E) the firm should decrease the use of both inputs. Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 22) Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore. The price of labour is $50 per unit and the price of capital is $800 per unit. The MPL equals 25 and the MPK equals 400. In this situation, A) the firm is minimizing its costs. B) the firm should increase the use of both inputs. C) the firm could lower its production costs by decreasing labour input and increasing capital input. D) the firm could lower its production costs by increasing labour input and decreasing capital input. E) the firm should decrease the use of both inputs. Answer: A Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative

23) Consider a firm that uses only labour and capital as inputs. At the present use of labour and capital, the MP of labour is four times the MP of capital, and the price of labour is twice the price of capital. In order to minimize its costs, the firm should A) substitute capital for labour until their marginal products are equal. B) decrease both capital and labour. C) decrease capital and increase labour. D) increase both labour and capital. E) stay at its present factor mix. Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 24) Consider a firm that uses only labour and capital. At the present use of labour and capital, the MP of labour is two times the MP of capital, and the price of labour is two times the price of capital. In order to minimize its costs, the firm should A) substitute capital for labour until their marginal products are equal. B) decrease both capital and labour. C) decrease capital and increase labour. D) increase both labour and capital. E) not alter its present factor mix. Answer: E Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 25) Consider a firm that uses only labour and capital. At the present use of labour and capital, the MP of labour is twice the MP of capital, and the price of labour is four times the price of capital. In order to minimize its costs, the firm should A) increase capital and decrease labour. B) decrease both capital and labour. C) decrease capital and increase labour. D) increase both labour and capital. E) maintain its present factor mix. Answer: A Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors.

Category: Quantitative 26) Suppose capital costs $10 per unit and labour costs $5 per unit. For a profitmaximizing firm operating at its optimal factor mix, if the marginal product of capital is 50, the marginal product of labour must be A) 10. B) 20. C) 25. D) 50. E) 100. Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 27) Suppose capital costs $6 per unit and labour costs $3 per unit. If the marginal product of capital is 3 and the marginal product of labour is 6, the cost-minimizing firm should A) employ more of both capital and labour. B) employ less of both capital and labour. C) employ more capital and less labour. D) employ less capital and more labour. E) not change its current factor use. Answer: D Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 28) Suppose capital costs $6 per unit and labour costs $3 per unit. If the marginal product of capital is 12 and the marginal product of labour is 6, the cost-minimizing firm should A) employ more of both capital and labour. B) employ less of both capital and labour. C) employ more capital and less labour. D) employ less capital and more labour. E) not change its current factor use. Answer: E Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors.

Category: Quantitative 29) Suppose capital costs $50 per unit and labour costs $20 per unit. If the marginal product of capital is 100 and the marginal product of labour is 30, a cost-minimizing firm should A) employ more of both capital and labour. B) employ less of both capital and labour. C) employ more capital and less labour. D) employ less capital and more labour. E) not change its current factor use. Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 30) Suppose capital costs $100 per unit and labour costs $40 per unit. If the marginal product of capital is 200 and the marginal product of labour is 60, a cost-minimizing firm should A) employ more capital and less labour. B) employ more of both capital and labour. C) employ less of both capital and labour. D) employ less capital and more labour. E) not change its current factor use. Answer: A Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 31) Suppose capital costs $8 per unit and labour costs $4 per unit. For a profitmaximizing firm operating at its optimal factor mix, if the marginal product of capital is 60, the marginal product of labour must be A) 10. B) 20. C) 30. D) 90. E) 120. Answer: C Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied

Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative

32) Suppose capital costs $2000 per unit and labour costs $50 per unit. For a profitmaximizing firm operating at its optimal factor mix, if the marginal product of labour is 10, the marginal product of capital must be A) 40. B) 50. C) 100. D) 400. E) 500. Answer: D Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 33) Suppose capital costs $280 per unit and labour costs $16 per unit. For a profitmaximizing firm operating at its optimal factor mix, if the marginal product of capital is 70, the marginal product of labour must be A) 4. B) 6. C) 8. D) 12. E) 16. Answer: A Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 34) Suppose capital costs $10 per unit and labour costs $4 per unit. If the marginal product of capital is 50 and the marginal product of labour is 50, the firm should ________ in order to minimize its costs of producing its output. A) employ more capital and labour B) employ less capital and labour C) employ more capital and less labour D) employ less capital and more labour E) not change its current factor use Answer: D Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors.

Category: Quantitative 35) Suppose a firm employs two kinds of inputs, capital at $100 per unit, and labour at $25 per unit. If the marginal product of capital is 50, then the firm should ________ in order to minimize its production costs. A) employ more capital and less labour B) employ more labour and less capital C) employ more labour and more capital D) not change its current factor use E) There is insufficient information to make a recommendation. Answer: E Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Category: Quantitative 36) The following table shows the marginal products of capital (K) and labour (L) for various methods for Firm ABC to produce 1000 toys per day. Production Method A B C D E F G

MPK 50 45 40 35 30 25 20

MPL 4 8 12 16 20 24 28

TABLE 8-2 Refer to Table 8-2. As this firm switches from production method A to production method G, production is A) moving farther and farther away from cost minimization. B) becoming more capital intensive and less labour intensive. C) becoming more profitable. D) becoming more labour intensive and less capital intensive. E) remaining at a cost-minimizing level of output. Answer: B Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors.

Graphics: Table Category: Quantitative 37) The following table shows the marginal products of capital (K) and labour (L) for various methods for Firm ABC to produce 1000 toys per day. Production Method A B C D E F G

MPK 50 45 40 35 30 25 20

MPL 4 8 12 16 20 24 28

TABLE 8-2 Refer to Table 8-2. If capital costs $6 per unit and labour costs $4 per unit, which production method minimizes the cost of producing 1000 toys per day? A) method B B) method C C) method D D) method E E) method F Answer: D Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Graphics: Table Category: Quantitative

38) The following table shows the marginal products of capital (K) and labour (L) for various methods for Firm ABC to produce 1000 toys per day. Production Method A B C D E F G

MPK 50 45 40 35 30 25 20

MPL 4 8 12 16 20 24 28

TABLE 8-2 Refer to Table 8-2. Suppose capital costs $6 per unit and labour costs $4 per unit and the firm is employing production method A. How should this firm adjust its use of capital and labour to minimize costs? A) employ more capital and less labour B) employ less capital and more labour C) employ more capital and more labour D) employ less capital and less labour E) There is insufficient information to know. Answer: A Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Graphics: Table Category: Quantitative

39) The following table shows the marginal products of capital (K) and labour (L) for various methods for Firm ABC to produce 1000 toys per day. Production Method A B C D E F G

MPK 50 45 40 35 30 25 20

MPL 4 8 12 16 20 24 28

TABLE 8-2 Refer to Table 8-2. Suppose the firm is employing production method G. How should this firm adjust its use of capital and labour in order to minimize costs? A) employ more capital and less labour B) employ less capital and more labour C) employ more capital and labour D) employ less capital and labour E) There is insufficient information to know. Answer: E Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Graphics: Table Category: Quantitative

40) The following table shows the marginal products of capital (K) and labour (L) for various methods for Firm ABC to produce 1000 toys per day. Production Method A B C D E F G

MPK 50 45 40 35 30 25 20

MPL 4 8 12 16 20 24 28

TABLE 8-2 Refer to Table 8-2. Suppose capital costs $80 per unit and labour costs $24 per unit. Which production method minimizes the cost of producing 1000 toys per day. A) method B B) method C C) method D D) method E E) method F Answer: B Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-1 Explain why profit maximization requires firms to equate marginal product per dollar spent for all factors. Graphics: Table Category: Quantitative

41) Canada has a much lower population density than does Japan. Therefore, the price of land, relative to the price of labour, is lower in Canada than in Japan. Consider a Canadian firm and a Japanese firm, both producing rice, both having access to the same technologies, and both striving to minimize their costs. The Canadian firm will use the two inputs, land and labour, in such a way that its land/labour ratio is A) equal to that of the Japanese firm. B) lower than that of the Japanese firm. C) higher than that of the Japanese firm. D) equal to one. E) indeterminate as there is insufficient information to know. Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose prices have risen and toward factors whose prices have fallen. Category: Qualitative 42) Canada has a much lower population density than does Japan. Therefore, the price of land, relative to the price of labour, is lower in Canada than in Japan. Consider a Canadian firm and a Japanese firm, both producing rice, both having access to the same technologies, and both striving to minimize costs. Now suppose that the relative price of land rises in Canada but remains the same in Japan. The effect on the use of inputs will be to A) increase the land/labour ratio for both the Canadian and the Japanese firms. B) decrease the land/labour ratio for both the Canadian and the Japanese firms. C) increase the land/labour ratio for the Canadian firm. D) decrease the land/labour ratio for the Canadian firm. E) not change the land/labour ratio for either firm. Answer: D Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose prices have risen and toward factors whose prices have fallen. Category: Qualitative

43) One hundred years ago, in North America and Europe it was commonplace for middle class households to employ housemaids. As you know, this is quite rare today. Most such households now have dishwashers, washing machines and dryers. What is an explanation of this change? A) Over long periods of time, labour is always replaced by capital. B) Over long periods of time, capital is always replaced by labour. C) Households substituted away from a factor whose price was falling (labour) and toward a factor whose price was rising (capital). D) Households substituted away from an increasingly expensive factor (labour) and toward an increasingly inexpensive factor (capital). E) The marginal product of labour was falling over time while the marginal product of capital was rising. Answer: D Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose prices have risen and toward factors whose prices have fallen. Category: Qualitative 44) In recent years, garbage collection has changed dramatically. Twenty-five years ago a crew of up to 4 or 5 workers and 1 truck collected residential garbage. Now collection is often done by one driver and 1 more fully automated truck. What is an explanation for this change? A) Over long periods of time, labour is always replaced by capital. B) Over long periods of time, capital is always replaced by labour. C) Firms and municipalities substituted away from an increasingly expensive factor (labour) and toward an increasingly inexpensive factor (capital). D) Firms and municipalities substituted away from a factor whose price was falling (labour) and toward a factor whose price was rising(capital). E) The marginal product of labour was falling over time while the marginal product of capital was rising. Answer: C Diff: 2 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose prices have risen and toward factors whose prices have fallen. Category: Qualitative

45) In the 1890s nearly 50 percent of the Canadian population worked on a farm. Today, that number is less than 2 percent. One important explanation for this change is A) the response to a rising price of labour and a falling relative price of capital. B) the response to a rising price of capital and a falling relative price of labour. C) that over long periods of time, labour is always replaced by capital. D) that over long periods of time, capital is always replaced by labour. E) that the marginal product of labour was falling over time while the marginal product of capital was rising. Answer: A Diff: 3 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose prices have risen and toward factors whose prices have fallen. Category: Qualitative 46) Which of the following are likely to be sources of increasing productivity? 1. substitution toward labour and away from capital (with constant technology) 2. better-trained labour 3. increases in technological know-how A) 1 only B) 2 only C) 3 only D) 1 and 2 only E) 2 and 3 only Answer: E Diff: 1 Type: MC Topic: 8.1a. profit maximization and cost minimization Skill: Applied Learning Obj.: 8-2 Explain why profit‐maximizing firms substitute away from factors whose prices have risen and toward factors whose prices have fallen. Category: Qualitative 47) The long-run average cost (LRAC) curve for a firm shows A) the lowest unit cost at which the firm can produce a given output. B) the highest unit costs of producing a given output. C) the operation of the law of diminishing returns. D) what happens to the fixed costs in the long run. E) the same cost and output levels as the short-run average cost curve. Answer: A Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative

48) Which of the following best describes a firm's long-run average cost curve? The LRAC curve A) shows the minimum cost of producing each possible level of output with a fixed factor. B) shows the relationship between marginal cost and output given that the economically most efficient method of production is employed. C) is the boundary between attainable and unattainable cost levels, with known production technologies and given factor prices. D) is horizontal in most situations. E) is an envelope of short-run average variable cost curves. Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 49) In defining a firm's long-run average cost curve, A) factor prices are held constant and technology is assumed to change. B) factor prices are held constant and the quantity of factors of production used is varied. C) factor prices are varied and the quantity of factors of production is held constant. D) technology, factor prices, and the quantity of factors of production are all varied. E) the time period must be longer than one year. Answer: B Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 50) Suppose a firm is experiencing increasing returns to scale. This is shown graphically by A) a downward-sloping long-run average cost curve. B) an upward-sloping long-run average cost curve. C) a horizontal long-run average cost curve. D) a vertical long-run average cost curve. E) None of the above; returns to scale have nothing to do with the shape of the long-run average cost curve. Answer: A Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves.

Category: Qualitative

51) In the long run, a profit-maximizing firm producing a given level of output chooses the production method that A) produces that output at the lowest possible cost. B) maximizes the marginal product of all factors. C) maximizes the marginal product of labour. D) leads to a flat total cost curve. E) MINIMIZES LABOUR INPUT. Answer: A Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 52) What is meant by the term "increasing returns to scale"? A) output rises proportionately less than inputs, increasing per unit cost of production in the short run B) output rises proportionately more than inputs, resulting in increasing per unit costs C) output rises proportionately more than inputs, resulting in lower per unit costs in the long run D) it has the same meaning as increasing costs of production E) it implies that the long-run average cost curve is shifting downward Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 53) In the long run, the law of diminishing marginal returns A) is not relevant because there are no fixed factors of production. B) sometimes holds, depending on the production process. C) does hold, regardless of production process. D) is exactly the same as in the short run. E) does not hold because technology is a variable. Answer: A Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative

54) Assume a firm is using 10 units of capital and 10 units of labour to produce 10 widgets per hour. By doubling both inputs the result is a doubling of output. This firm is experiencing A) constant returns to scale. B) economies of scale. C) diseconomies of scale. D) increasing costs. E) decreasing returns. Answer: A Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Quantitative 55) Assume a firm is using 10 units of capital and 10 units of labour and is producing 10 widgets per hour. Now it doubles both inputs, resulting in output of 30 widgets per hour. This firm is experiencing A) decreasing returns to scale. B) increasing returns to scale. C) constant returns to scale. D) diseconomies of scale. E) increasing costs. Answer: B Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Quantitative 56) Assume a firm is using 10 units of labour and 10 units of capital and is producing 10 units of output per hour. Now both inputs are doubled, resulting in output rising to 18 units per hour. The firm is experiencing A) constant returns to scale. B) increasing returns to scale. C) decreasing returns to scale. D) economies of scale. E) decreasing costs. Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves.

Category: Quantitative

57) Assume a firm is using 6 units of capital and 6 units of labour to produce 6 baskets. Now it doubles both inputs resulting in a new total of 16 baskets being produced. This firm is experiencing A) decreasing returns to scale. B) increasing returns to scale. C) constant returns to scale. D) diseconomies of scale. E) increasing costs. Answer: B Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Quantitative 58) Suppose a firm experiences decreasing returns to scale. This is shown graphically by A) a downward-sloping long-run average cost curve. B) an upward-sloping long-run average cost curve. C) a downward-sloping long-run marginal-cost curve. D) a horizontal long-run average cost curve. E) an increasing marginal product curve. Answer: B Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 59) "The bigger the volume, the lower the cost, and we pass these savings on to you" is a familiar advertising slogan. It implies essentially that the A) total cost of the firm will remain constant as output expands. B) firm expects to experience increasing returns over the relevant range of output. C) average fixed cost will decline or remain constant over the long run. D) consumer is able to pay less today because the total cost of the firm is expected to decline tomorrow. E) firm is altruistic. Answer: B Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative

60)

FIGURE 8-1 Refer to Figure 8-1. Which of the four firms in the figure is displaying decreasing returns to scale at all output levels? A) Firm A B) Firm B C) Firm C D) Firm D E) All firms are displaying increasing returns to scale. Answer: C Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

61)

FIGURE 8-1 Refer to Figure 8-1. Which of the four firms in the figure is displaying constant returns to scale at all output levels? A) Firm A B) Firm B C) Firm C D) Firm D E) None of the four firms is displaying constant returns to scale. Answer: B Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

62)

FIGURE 8-1 Refer to Figure 8-1. For which of the four firms in the figure is output increasing more than in proportion to inputs for all output levels? A) Firm A B) Firm B C) Firm C D) Firm D E) none of the four firms Answer: A Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

63)

FIGURE 8-1 Refer to Figure 8-1. For which of the four firms is output increasing less than in proportion to inputs for all output levels? A) Firm A B) Firm B C) Firm C D) Firm D E) none of the four firms Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

64)

FIGURE 8-1 Refer to Figure 8-1. For which of the four firms would the family of short-run average total cost curves lie below the LRAC? A) Firm A B) Firm B C) Firm C D) Firm D E) none of the four firms Answer: E Diff: 3 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

65) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. Increasing returns to scale occur over the output range A) 0 to Q1 only. B) Q1 to Q2 only. C) Q2 to Q3 only. D) 0 to Q3 only. E) beyond Q3 only. Answer: D Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

66) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. Decreasing returns to scale occur over the output range A) 0 to Q1 only. B) Q1 to Q2 only. C) Q3 to Q5 only. D) 0 to Q3 only. E) beyond Q3 only. Answer: E Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

67) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. In the long run, the lowest-cost level of output achievable by this firm is A) Q2. B) Q3. C) Q4. D) Q5. E) not shown in the diagram Answer: B Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

68) Consider the long-run average cost curve for a firm. Any point representing a cost and output combination that is below the LRAC curve A) may represent actual cost and production levels in the short run. B) represents less efficient cost levels than points on the long-run average cost curve. C) is attainable only when all factors are variable. D) represents unattainable cost levels, given current technologies. E) is attainable if the firm minimizes its costs according to the "principle of substitution." Answer: D Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 69) Which of the following paired concepts are equivalent to each other? A) constant costs; economies of scale B) increasing returns; decreasing costs C) increasing returns; increasing costs D) increasing costs; economies of scale E) increasing returns; diseconomies of scale Answer: B Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 70) Which of the following paired concepts are equivalent to each other? A) constant costs; economies of scale B) decreasing returns; decreasing costs C) increasing returns; increasing costs D) decreasing costs; economies of scale E) increasing returns; diseconomies of scale Answer: D Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative

71) Of the following, which is the least likely to represent a firm's long-run decision? A) What should be the size and design of a firm's new plant? B) Should the firm choose a method of production that uses relatively more capital than labour? C) By how much should output be expanded from existing plants? D) Should the firm invest resources in the development of better technologies? E) What technique (technology) is the best to use under current factor pricing? Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 72) The long-run average cost curve is an envelope curve, with each point associated with a short-run average cost curve A) tangent at that point. B) crossing that point from above. C) lying below it. D) intersecting that point. E) at its minimum point. Answer: A Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 73) The point of tangency between the short-run average total cost (SRATC) curve and the long-run average cost (LRAC) curve occurs A) at the point of minimum SRATC. B) at a point where average total cost is falling but the marginal cost is rising. C) at a point where both the average total cost and the marginal cost are rising. D) at an output level for which the quantity of the fixed factor is optimal. E) only when the LRAC curve is at its minimum. Answer: D Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative

74) In the long run, decreasing returns to scale are likely to be caused by A) diseconomies of scale associated with management problems. B) a decrease in factor prices. C) increasing specialization of labour. D) diminishing returns to the variable factor. E) decreasing costs. Answer: A Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 75) Which of the following statements concerning long-run and short-run cost curves is correct? A) A short-run average cost curve can fall below the long-run average cost curve. B) The short-run average cost curve for the optimal plant size is tangent to the long-run average cost curve at all levels of output of the fixed factor. C) The long-run average cost curve envelops a whole family of short-run marginal cost curves. D) The minimum point of the long-run average cost curve will correspond to the minimum point on a single short-run average cost curve. E) Both the long-run and short-run average cost curves show the lowest cost of producing any output when all factors are variable. Answer: D Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 76) A short-run average total cost curve will touch the long-run average cost curve at a level of output only A) where the short-run cost curve is downward sloping. B) where the short-run cost curve is upward sloping. C) when the quantity of the fixed factor being employed is at the optimal level for that level of output. D) where the short-run cost curve is downward-sloping and the quantity of the fixed factor is optimal. E) by coincidence. Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall

Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative

77) Consider the short-run and long-run cost curves for a firm. If factor prices decrease, A) the firm will move down along both its long-run and short-run average cost curves. B) the firm will move down along its long-run average cost curve only. C) both the long-run and short-run average cost curves will shift downward. D) there will be a downward shift in the long-run average cost curve but not in the shortrun average cost curve. E) there will be no change in the cost curves in the long run. Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 78) Which of the following cost curves demonstrates increasing returns to scale? A) a downward-sloping long-run average cost curve B) an upward-sloping long-run average cost curve C) a horizontal long-run average cost curve D) a vertical long-run average cost curve E) Returns to scale have nothing to do with the shape of the long-run average cost curve. Answer: A Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 79) For many firms, the LRAC curve is U-shaped. The downward-sloping portion of the LRAC curve can be explained by A) economies of scale. B) diminishing returns to the variable factor. C) diminishing returns to the fixed factor. D) rising prices of the fixed factor. E) decreasing short-run marginal cost. Answer: A Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative

80) Suppose Farmer Smith hires 4 workers and leases 2 tractors and 15 hectares of farmland for one growing season, and produces 120 000 bushels of crop. The next year he hires 8 workers and leases 4 tractors and 30 hectares of farmland, and produces 210 000 bushels of crop. This firm (the farmer) is exhibiting ________ returns to scale. A) decreasing B) increasing C) constant D) marginal E) variable Answer: A Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Quantitative 81) Suppose Farmer Smith hires 4 workers and leases 2 tractors and 15 hectares of farmland for one growing season, and produces 120 000 bushels of crop. The next year he hires 8 workers and leases 4 tractors and 30 hectares of farmland, and produces 260 000 bushels of crop. This firm (the farmer) is exhibiting ________ returns to scale. A) decreasing B) increasing C) constant D) marginal E) variable Answer: B Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Quantitative 82) Suppose Farmer Smith hires 4 workers and leases 2 tractors and 15 hectares of farmland for one growing season, and produces 120 000 bushels of crop. The next year he hires 8 workers and leases 4 tractors and 30 hectares of farmland, and produces 240 000 bushels of crop. This firm (the farmer) is exhibiting ________ returns to scale. A) decreasing B) increasing C) constant D) marginal E) variable Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve

Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Quantitative 83) Suppose a shipping company employs 2000 workers, operates 400 delivery trucks and makes 1.5 million domestic shipments in one year. The next year they increase their workforce to 3000 workers, operate 600 trucks and make 2.8 million domestic shipments in one year. This firm is exhibiting ________ returns to scale. A) decreasing B) increasing C) constant D) marginal E) variable Answer: B Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Quantitative 84) A short-run average total cost curve and a long-run average cost curve are tangent A) where the short-run cost curve is downward sloping. B) where the short-run cost curve is upward sloping. C) when the plant size is at the optimal level for that level of output. D) where the short-run cost curve is downward sloping and the plant size is optimal. E) by coincidence. Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative 85) In the long run, a profit-maximizing firm produces any given level of output by choosing the production method that A) maximizes the marginal product of all factors. B) equates the marginal product of all factors. C) equates the average cost per unit of all factors. D) is associated with a flat total cost curve. E) produces that output at the lowest possible cost. Answer: E Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve

Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative

86) Why do we refer to the long-run average cost curve as a "boundary"? A) The points on the curve represent a boundary between fixed factor prices and variable factor prices. B) The points below the curve represent cost levels that are unattainable given current technology and factor prices. C) The points below the curve represent cost levels attainable to the firm only with adjustment of all factor prices. D) The points above the curve represent costs that are unattainable given current technology and factor prices. E) The points above the curve represent cost levels attainable to the firm only with adjustment of all factor prices. Answer: B Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Category: Qualitative

87) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. What is the difference between the SRATC curves and the LRAC curve? A) The SRATC curves show the optimal plant size when all factors of production are variable, whereas the LRAC shows the lowest cost attainable associated with each LRAC curve. B) The SRATC curves show the lowest attainable cost of production at each level of output when all factors are variable in the short run, whereas the LRAC curve shows the same in the long run. C) The LRAC is an envelope curve, joining the minimum points on all SRATC curves. D) For the SRATC curves, one or more of the factors of production is fixed, whereas for the LRAC curve, all factors of production are variable. E) The SRATC curves show diseconomies of scales, whereas the LRAC curve shows economies of scale. Answer: D Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Recall Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

88) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. The points of tangency between each of the three SRATC curves and the LRAC curve show A) technically inefficient methods of production, given that they lie above the LRAC. B) the lowest cost attainable, given that the plant size is the largest it can possibly be. C) the output that is possible when all factors of production are fixed. D) the lowest cost attainable for any given plant size. E) optimal plant sizes in the long run. Answer: D Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

89) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. The minimum efficient scale is achieved by this firm at output level A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: C Diff: 1 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

90) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. If this firm is producing at point B, then A) this firm is producing a level of output that is technically inefficient in the long run. B) this firm is experiencing decreasing returns to scale. C) this firm could produce the same level of output at a lower cost with plant size 2. D) it should employ more of its variable factors of production. E) plant size 1 is optimal. Answer: C Diff: 3 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

91) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. Suppose this firm is producing at point B. Why might this firm continue to produce at point B, rather than immediately move to point C and produce the same level of output (Q2), at a lower cost? A) If this firm continues to produce at point B for any period of time, it must be because it is not profit-maximizing. B) If this firm continues to produce at point B for any period of time, it must be because it is not cost-minimizing. C) There can be a significant time delay while the firm readjusts its plant size, during which time it remains at point B. D) The firm may choose to remain at point B until the price of its output increases enough to justify building a new plant. E) The firm cannot produce at point C because there is no SRATC curve through this point. Answer: C Diff: 2 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

92) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. Should this profit-maximizing firm ever consider moving from point E (output level Q3 on SRATC2) to point F (output level Q5 on SRATC3)? A) No, because they are already producing at their lowest possible cost at point E. B) Yes, because the firm can take advantage of economies of scale. C) Yes, because SRATC3 is the optimal plant size for this firm. D) No, because producing at point F implies a higher cost per unit of output. E) Yes, if the product price rises enough to lead the firm to expand to plant size 3. Answer: E Diff: 3 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

93) The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-2 Refer to Figure 8-2. Suppose this firm is producing output level Q3 with plant size 2. Now suppose this firm changes to plant size 3 and is producing output level Q 5. We can say that A) the firm is then operating with the optimal plant size. B) this firm has experienced economies of scale. C) output has increased more than in proportion to the increase in inputs. D) output has increased exactly in proportion to the increase in inputs. E) output has increased less than in proportion to the increase in inputs. Answer: E Diff: 3 Type: MC Topic: 8.1b. long-run costs and the LRAC curve Skill: Applied Learning Obj.: 8-3 Understand the relationship between short-run and long-run cost curves. Graphics: Graph Category: Qualitative

8.2 The Very Long Run: Changes in Technology 1) Consider the short-run and long-run cost curves for a firm. If there is an improvement in the firm's technology, A) the firm will move to a lower point on both its long-run and short-run average cost curves. B) the firm will move to a lower point on its long-run average cost curve only. C) both the long-run and short-run average cost curves will shift downward. D) there will be a downward shift in the long-run average cost curve but not in the shortrun average cost curve. E) there will be no change in the cost curves in the long run. Answer: C Diff: 2 Type: MC Topic: 8.2. technological change Skill: Recall Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative 2) Economists collect and analyze data on output per worker and output per hour of work. What are they trying to measure by doing so? A) the ratio of marginal products of factors B) the principle of substitution C) diminishing marginal returns D) returns to scale E) productivity Answer: E Diff: 1 Type: MC Topic: 8.2. technological change Skill: Recall Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative 3) A change in the technique for producing an existing product is known as A) product innovation. B) investment. C) invention. D) an increase in productivity. E) process innovation. Answer: E Diff: 1 Type: MC Topic: 8.2. technological change Skill: Recall Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate.

Category: Qualitative 4) With respect to innovation, which of the following statements is true? A) Government policy cannot influence the rate of innovation. B) Innovation is exogenous to the economic system. C) The utilization rate of existing plant and equipment and its durability are independent of the pace of innovation. D) The principal incentive for innovation does not appear to be related to profits. E) Innovation is often endogenous to the economic system. Answer: E Diff: 1 Type: MC Topic: 8.2. technological change Skill: Recall Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative 5) What is the definition of productivity? A) output produced per unit of input B) output produced by a combination of two or more inputs C) the cost of a unit of output D) a measure of input used E) the efficient use of technology Answer: A Diff: 2 Type: MC Topic: 8.2. technological change Skill: Recall Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative 6) Which of the following factors is most important as a source of sustained growth in material living standards? A) population increase B) changing relative factor prices C) decrease in cost of capital D) technological improvement E) capital-labour substitution Answer: D Diff: 2 Type: MC Topic: 8.2. technological change Skill: Recall Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative

7) A very-long-run consideration that could change a firm's production function is A) rising cost of the factors of production. B) increasing returns to scale of operation. C) an improvement in education that increases the quality of the economy's labour force. D) diminishing returns. E) size of the plant. Answer: C Diff: 1 Type: MC Topic: 8.2. technological change Skill: Applied Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative 8) Although capital is a variable factor in the long run, once chosen, it often becomes a fixed factor for a long time. A profit-maximizing firm must therefore select a method of production that is A) economically efficient at current factor prices. B) technologically advanced beyond methods currently used. C) labour intensive, as labour is always a variable factor. D) economically efficient at current factor prices and sufficiently flexible to adapt to changing factor prices over time. E) adaptable to wide ranges of output over time. Answer: D Diff: 2 Type: MC Topic: 8.2. technological change Skill: Recall Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative 9) The fact that new methods to extract oil are developed as oil prices increase suggests A) that methods of production do not change in response to factor-price changes. B) that invention is exogenous. C) that invention does respond to economic signals and is endogenous. D) that oil has many close substitutes. E) nothing; changes in technology occur regardless of market prices. Answer: C Diff: 1 Type: MC Topic: 8.2. technological change Skill: Applied Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative

10) The creation of a new product is called A) process innovation. B) a rise in productivity. C) creative destruction. D) investment. E) product innovation. Answer: E Diff: 1 Type: MC Topic: 8.2. technological change Skill: Recall Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative 11) Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in Northern Quebec, the operation of which requires a great deal of electricity. Suppose also that the price of electricity is predicted to rise significantly in the near future. As a result, the firm decides to build a plant using existing technology that is more expensive but uses less electricity per tonne of aluminum produced. This behaviour is an example of A) short-run profit maximization. B) short-run cost minimization. C) the long-run principle of substitution. D) innovation away from changes in factor prices. E) long-run economies of scale. Answer: C Diff: 3 Type: MC Topic: 8.2. technological change Skill: Applied Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative

12) Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in Northern Quebec, the operation of which requires a great deal of electricity. Suppose also that the price of electricity is predicted to rise significantly in the near future. As a result, the firm decides to embark on new research and development which leads to the development of a new production technique that uses less electricity per tonne of aluminum produced. This is an example of A) the marginal rate of substitution between factors. B) innovation away from increases in factor prices. C) short-run cost minimization. D) short-run profit maximization. E) long-run economies of scale. Answer: B Diff: 3 Type: MC Topic: 8.2. technological change Skill: Applied Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative 13) Suppose Commercial Footwear Inc. is making a cost-minimizing decision about the level of output to produce with a given technology. Which of the following is a long-run decision? A) Should we build a larger shoe manufacturing facility? B) Should we hire additional labour to work in the existing facility? C) Should we change to a lower-cost leather supplier? D) Should we invest in research in the hope of developing a new technology for shoe production? E) Should we hire more accountants to investigate ways to reduce our corporate tax payments? Answer: A Diff: 3 Type: MC Topic: 8.2. technological change Skill: Applied Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative

14) Which of the following statements most accurately makes the distinction between the long run and the very-long run with respect to the long-run average cost (LRAC) curve? A) In the long run, the LRAC curve is shifting down, whereas in the very-long run the firm is moving along the existing LRAC curve. B) In the long run, the LRAC curve is shifting up, whereas in the very-long run the firm is moving along the existing LRAC curve. C) In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long run, the LRAC curve is shifting up. D) In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long run, the LRAC curve is shifting down. E) There is no distinction between the long run and the very-long run with respect to the LRAC curve. Answer: D Diff: 3 Type: MC Topic: 8.2. technological change Skill: Recall Learning Obj.: 8-4 Discuss the importance of technological change and why firms are motivated to innovate. Category: Qualitative 8A-1 Isoquants 1) What information is displayed by an isoquant? A) the whole set of technically efficient factor combinations that can produce varying levels of output B) various levels of output that can be produced with different factor combinations C) various levels of output that can be produced with a fixed factor combination D) the whole set of technically efficient factor combinations that can produce a single level of output E) the alternative factor combinations that require the same expenditure Answer: D Diff: 2 Type: MC Topic: 8-appendix.1. isoquant analysis Skill: Recall Learning Obj.: 8-8A-1 Isoquants Category: Qualitative

2) What does the slope of an isoquant measure? A) the marginal rate of (technical) substitution between factors B) the average capital/labour ratio C) the marginal cost of a given level of output D) the ratio of prices of inputs E) the ratio of prices of goods Answer: A Diff: 1 Type: MC Topic: 8-appendix.1. isoquant analysis Skill: Recall Learning Obj.: 8-8A-1 Isoquants Category: Qualitative 3) Movement from one point to another along an isoquant implies a change in A) output levels, holding factor combinations constant. B) factor combinations, holding output constant. C) product prices. D) the level of output, independent of what happens to factor combinations. E) money income. Answer: B Diff: 1 Type: MC Topic: 8-appendix.1. isoquant analysis Skill: Recall Learning Obj.: 8-8A-1 Isoquants Category: Qualitative 4) Which of the following is indicated by the downward slope of an isoquant? A) the diminishing marginal productivity of a variable factor B) the diminishing marginal productivity of a fixed factor C) that each factor input has a negative marginal productivity D) a change in relative factor prices, with output held constant E) that a reduction in the use of one factor requires an increase in the use of the other factor in order to keep output constant Answer: E Diff: 1 Type: MC Topic: 8-appendix.1. isoquant analysis Skill: Recall Learning Obj.: 8-8A-1 Isoquants Category: Qualitative

5) Isoquants are usually drawn convex to the origin. This convex shape reflects the assumption that A) both factors are subject to the law of diminishing returns. B) the variable factor is subject to the law of diminishing returns. C) the marginal productivity of all factors is positive. D) the marginal productivity of all factors is negative. E) both factors are subject to increasing returns. Answer: A Diff: 2 Type: MC Topic: 8-appendix.1. isoquant analysis Skill: Recall Learning Obj.: 8-8A-1 Isoquants Category: Qualitative 6) Suppose a firm moves from one isoquant to an isoquant further from the origin on an isoquant map. This movement indicates that A) factor prices for all inputs have increased. B) the price of capital has decreased. C) the firm has increased its plant size. D) the firm has hired more labour. E) the firm has increased its level of output. Answer: E Diff: 2 Type: MC Topic: 8-appendix.1. isoquant analysis Skill: Applied Learning Obj.: 8-8A-1 Isoquants Category: Qualitative 8A-2 Cost Minimization 1) The slope of a firm's isocost line is equal to the ratio of A) the marginal products of its factors. B) the marginal rate of substitution between factors. C) the factor prices. D) total variable cost to total cost. E) product prices. Answer: C Diff: 1 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Recall Learning Obj.: 8-8A-2 Cost minimization Category: Qualitative

2) A firm's least-cost position for producing a given output level occurs at that point where A) the isocost line intersects the highest isoquant. B) the isocost and isoquant intersect the horizontal axis. C) the isoquant is closest to the origin. D) the isocost line and the isoquant are tangent to each other. E) the isocost and isoquant intersect the vertical axis. Answer: D Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Recall Learning Obj.: 8-8A-2 Cost minimization Category: Qualitative 3) Movement from one point to another along an isocost line implies a change in A) output levels, holding factor combinations constant. B) factor combinations, holding expenditure constant. C) factor prices. D) the level of output, independent of what happens to factor combinations. E) expenditure. Answer: B Diff: 1 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Category: Qualitative 4) An individual isocost line is a downward sloping straight line. The constant slope reflects A) decreasing factor prices. B) increasing factor prices. C) that each factor price has a negative value. D) a change in relative factor prices. E) constant factor prices. Answer: E Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Category: Qualitative

5) A firm operates at its least-cost position for a given level of output by equating A) the marginal product of each factor. B) the marginal product per dollar spent for each factor. C) the price of each input. D) the total expenditure on each input. E) the average product for each factor. Answer: B Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Recall Learning Obj.: 8-8A-2 Cost minimization Category: Qualitative

6)

FIGURE 8-3 Refer to Figure 8-3. A firm that is producing an output of 1000 units will minimize its costs at point A) A. B) B. C) C. D) D. E) halfway between B and D. Answer: B Diff: 1 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

7)

FIGURE 8-3 Refer to Figure 8-3. A firm that is producing an output of 2000 units will minimize its costs at point A) A. B) B. C) C. D) D. E) There is not enough information provided to be sure. Answer: E Diff: 3 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

8)

FIGURE 8-3 Refer to Figure 8-3. The firm is initially minimizing the cost of producing 1000 units of output. Suppose the factor prices then change such that the price of capital (K) rises and the price of labour (L) falls. If the firm decides to keep its output unchanged, it will move toward the point A) A. B) B. C) C. D) D. E) There is not enough information to know. Answer: C Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

9)

FIGURE 8-3 Refer to Figure 8-3. The firm is initially minimizing the cost of producing 1000 units of output. Suppose the factor prices then change such that the price of capital (K) falls and the price of labour (L) rises. If the firm decides to leave its output unchanged, it will now move toward the point A) A. B) B. C) C. D) D. E) There is not enough information to know. Answer: A Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

10)

FIGURE 8-3 Refer to Figure 8-3, with the isoquants and isocost line as shown. A firm that is producing at point A can reduce its costs for producing 1000 units by employing A) less capital and less labour. B) more capital and less labour. C) less capital and more labour. D) more capital and more labour. E) less capital and the same labour. Answer: C Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

11)

FIGURE 8-3 Refer to Figure 8-3, with the isoquants and isocost line as shown. A firm that is producing at point C can reduce its costs for producing 1000 units by employing A) less capital and less labour. B) more capital and less labour. C) less capital and more labour. D) more capital and more labour. E) less labour and the same capital. Answer: B Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

12)

FIGURE 8-3 Refer to Figure 8-3. The firm is initially producing 1000 units and minimizing its production cost at point B. Suppose the prices of capital and labour each fall by 20%. If the firm wishes to continue producing the same level of output it will A) move toward point A. B) remain at point B. C) move toward point C. D) move toward point D. E) move to the left of point B. Answer: B Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

13)

FIGURE 8-3 Refer to Figure 8-3. The firm is initially producing 2000 units and minimizing its production cost at point D. Suppose the prices of capital and labour each rise by 10%. If the firm wishes to continue producing the same level of output it will A) move toward point A. B) move toward point B. C) move toward point C. D) remain at point D. E) move to the right of point D. Answer: D Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

14)

FIGURE 8-3 Refer to Figure 8-3. The firm is initially operating at point B. If prices of both factors fell by 25% and the firm wished to continue expending the same amount on each resource (while continuing to maintain efficiency) the firm would A) move towards point D. B) move toward point A. C) shift towards the origin. D) move toward point C. E) stay at point B. Answer: A Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

15)

FIGURE 8-3 Refer to Figure 8-3. The firm is initially operating at point B. An improvement in technology would be represented by A) a shift to the curve indicated by Q = 2000. B) a movement toward point D. C) a movement toward the origin. D) a new isoquant map. E) a new isocost curve. Answer: D Diff: 3 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

16) The figure below shows the isocost lines facing a firm producing golf tees.

FIGURE 8-4 Refer to Figure 8-4. This firm can be a "cost minimizer" by producing on isocost line A) 1 only. B) 2 only. C) 3 only. D) 4 only. E) Not able to determine from the information provided. Answer: E Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

17) The figure below shows the isocost lines facing a firm producing golf tees.

FIGURE 8-4 Refer to Figure 8-4. Given the information provided about the isocost lines, we know that the per unit price of capital is ________ and the per unit price of labour is ________. A) $20; $50 B) $50; $20 C) $2; $5 D) $5; $2 E) not determinable; not determinable Answer: D Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Quantitative

18) The figure below shows the isocost lines facing a firm producing golf tees.

FIGURE 8-4 Refer to Figure 8-4. If the cost-minimizing firm is initially producing at a point on isocost line 1 and then moves to a point on isocost line 3, we can say that A) the per unit prices of capital and labour have each doubled. B) the output of golf tees has doubled. C) the per unit prices of capital and labour have fallen by 50%. D) the firm's level of output has increased. E) the firm is producing more efficiently. Answer: D Diff: 3 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

19) The figure below shows the isocost lines facing a firm producing golf tees.

FIGURE 8-4 Refer to Figure 8-4. The firm that is facing the isocost lines as shown will minimize its cost of production of any given output level if it employs capital and labour such that the ratio of the marginal product of labour to the marginal product of capital (MPL/MPK) is equal to A) 5/2. B) 5. C) 2. D) 2/5. E) Not able to determine from the information provided. Answer: D Diff: 3 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Quantitative

20) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-5 Refer to Figure 8-5. This firm will minimize its costs of producing 2000 golf tees at point A) A. B) B. C) C. D) D. E) E. Answer: C Diff: 1 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Quantitative

21) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-5 Refer to Figure 8-5. Suppose this firm is producing 4000 golf tees with 10 units of capital and 25 units of labour (point G). The marginal rate of substitution between capital and labour is A) 2.5. B) 0.4. C) 100. D) 40. E) 0.025. Answer: B Diff: 3 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Quantitative

22) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-5 Refer to Figure 8-5. At each of points A, C, E and G on the isoquant map we know that A) the firm is at its cost-minimizing position for an output level of 4000 golf tees. B) the firm can adjust its employment of factors to reduce its total cost, with output unchanged. C) the firm has adjusted the factor prices to equate the ratio of marginal products of the factors. D) the ratio of the marginal utilities of capital and labour is equal to the ratio of the prices of capital and labour. E) the ratio of the marginal products of capital and labour is equal to the ratio of the prices of capital and labour. Answer: E Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

23) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-5 Refer to Figure 8-5. The cost-minimizing factor combination for producing 2000 golf tees is A) 10 units of capital and 25 units of labour. B) 12 units of capital and 30 units of labour. C) 6 units of capital and 15 units of labour. D) 8 units of capital and 20 units of labour. E) 4 units of capital and 10 units of labour. Answer: C Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Quantitative

24) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-5 Refer to Figure 8-5. Suppose this firm is producing 3000 golf tees and is at point F on the isoquant map. Which of the following is true? A) MPK/MPL is equal to PK/PL. B) MPK/MPL is greater than 5/2. C) MPL/MPK is greater than 5/2. D) MPK/MPL is equal to 2/5. E) MPK/MPL is equal to 5/2. Answer: B Diff: 3 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Quantitative

25) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-5 Refer to Figure 8-5. Suppose this firm is producing 3000 golf tees and is at point F on the isoquant map. In order to maintain its output and minimize costs this firm should A) not change its use of factors. B) move to an isoquant closer to the origin. C) move to an isocost line further from the origin. D) employ more labour and less capital. E) employ more capital and less labour. Answer: E Diff: 2 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Qualitative

26) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-5 Refer to Figure 8-5. Suppose there is a change in relative factor prices and the costminimizing method of producing 2000 golf tees is now at point D. If the total cost of producing 2000 golf tees is still $60, it must be the case that A) the price of labour fell and the price of capital remained constant. B) the price of labour and capital both fell. C) the price of labour rose and the price of capital fell. D) the price of labour fell and the price of capital rose. E) the price of labour and capital both rose. Answer: D Diff: 3 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Quantitative

27) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-5 Refer to Figure 8-5. Suppose the firm is currently producing at point E and the prices of capital and labour each increase by 30%. If the firm wants to minimize the cost of producing the same level of output, the firm's chosen factor combination would be at point A) A. B) C. C) E. D) G. E) not determinable from the information provided. Answer: C Diff: 3 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Quantitative

28) The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-5 Refer to Figure 8-5. As this firm is increasing its production of golf tees, it is experiencing ________ returns to scale. A) constant B) decreasing C) increasing D) diminishing E) Not determinable from the information provided. Answer: C Diff: 3 Type: MC Topic: 8-appendix.2. isoquant analysis and cost minimization Skill: Applied Learning Obj.: 8-8A-2 Cost minimization Graphics: Graph Category: Quantitative Economics - Canadian Edition, 16e (Ragan) Chapter 9 Competitive Markets 9.1 Market Structure and Firm Behaviour 1) The term "perfect competition" refers to A) rivalrous behaviour.

B) ideal economic behaviour. C) a type of market structure. D) the most prevalent market structure in a capitalist economy. E) the most realistic market structure. Answer: C Diff: 1 Type: MC Topic: 9.1. competitive market structure Skill: Recall Learning Obj.: 9-1 Distinguish between competitive behaviour and a competitive market. Category: Qualitative 2) In economics, perfect competition refers to a market structure where A) firms behave strategically. B) all firms are earning profits. C) firms co-operate with each other. D) each firm has zero market power. E) firms can set the price of their product. Answer: D Diff: 1 Type: MC Topic: 9.1. competitive market structure Skill: Recall Learning Obj.: 9-1 Distinguish between competitive behaviour and a competitive market. Category: Qualitative 3) A firm is said to have "market power" only when A) it has the ability to influence the price of its product. B) it has the ability to choose its own profit-maximizing level of output. C) its demand curve is the market demand curve. D) it is one of 10 or fewer firms in the industry. E) it is one of 25 or fewer firms in the industry. Answer: A Diff: 1 Type: MC Topic: 9.1. competitive market structure Skill: Recall Learning Obj.: 9-1 Distinguish between competitive behaviour and a competitive market. Category: Qualitative

9.2 The Theory of Perfect Competition 1) The theory of perfect competition is built on several assumptions, including that A) the individual firm can affect the price of the product it sells. B) the individual firm can influence demand by advertising. C) each firm must earn economic profits to remain in the industry. D) any firm can easily enter or leave the industry. E) there are few producers of an identical product. Answer: D Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 2) An example of a product that could most closely satisfy the homogeneous product assumption of perfect competition is A) barley. B) cars. C) shampoo. D) personal computers. E) pizza. Answer: A Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 3) Which of the following statements apply to a perfectly competitive market? 1. There is freedom of entry and exit of firms in the industry. 2. Consumers prefer certain brands over others. 3. All firms in the industry are price takers. A) 1 only B) 2 only C) 3 only D) 1 and 2 only E) 1 and 3 only Answer: E Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

4) Consider a firm in a perfectly competitive market. If this firm were to raise its price, its A) revenue would decrease only if market demand were elastic. B) revenue would increase only if market demand were inelastic. C) total costs would increase. D) revenue would fall dramatically. E) profits would increase as long as costs remained constant. Answer: D Diff: 2 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 5) Consider a firm in a perfectly competitive market. Which of the following is true of a firm in this market? A) The firm can set the price it charges. B) The firm can sell as much of its product as it wishes at the market price. C) The firm can affect the market conditions in a significant way. D) The firm is aware of its competitors' costs. E) The firm competes actively with other sellers in the industry. Answer: B Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 6) Consider a firm in a perfectly competitive market. Which of the following is true of a firm in this market? A) The firm has no power to influence the market price. B) The firm is limited in the amount of product it can sell without affecting the price. C) The firm is dependant upon the behaviour of its competitors. D) The firm is aware of its competitors' costs. E) The firm competes actively with other sellers in the industry. Answer: A Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

7) The conditions for a perfectly competitive market include which one of the following? A) Firms behave as price takers. B) Profits are zero in the short run. C) New entrants cannot threaten the position of existing firms. D) Firms can control prices. E) Firms must employ the newest technologies as soon as they are developed. Answer: A Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 8) In order to decide the appropriate output to produce, the manager of a perfectly competitive firm needs to know which of the following? A) the industry or market demand B) the industry or market supply C) what other firms in the industry are producing D) the prevailing market price for the firm's output E) its competitors' market strategies Answer: D Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 9) When economists say that a firm is a "price taker" they mean that A) the firm initially takes price as given and tries to influence it through advertising. B) the firm can alter its rate of production and sales without affecting the market price of the product. C) at the price prevailing in the market, the firm will be willing to sell an infinite quantity. D) the demand curve that the firm faces is perfectly inelastic. E) the firm can alter the market price as it changes its rate of production. Answer: B Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

10) Which of the following producers operate in a market structure most closely approximated by perfect competition? A) a restaurant in your neighbourhood B) Air Canada C) a Safeway grocery store D) a British Columbia peach grower. E) the Bank of Montreal Answer: D Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 11) Which of the following statements is one of the assumptions of the theory of perfect competition? A) Firms compete with each other by varying their price. B) Firms are price setters. C) Consumers know the prices charged by each firm. D) Firms produce a wide variety of versions of the product. E) A firm's entry to the market is regulated by the federal Competition Bureau. Answer: C Diff: 1 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 12) Suppose XYZ Corp. is a profit-maximizing firm that is producing and selling 1 billion disposable wooden chopsticks per month at a price of $0.04 per unit. Further, suppose market demand for this product is 1.5 billion units per month. What can we conclude about market structure in this case? A) This is not a perfectly competitive market because XYZ Corp. is small relative to the size of the industry. B) This is not a perfectly competitive market because XYZ Corp. is selling its product at a price that is not equal to marginal cost. C) This is a perfectly competitive market because there is freedom of entry and exit in the industry. D) This is a perfectly competitive market because the product is homogeneous. E) This is not a perfectly competitive market because XYZ Corp. is large relative to the size of the industry. Answer: E Diff: 2 Type: MC Topic: 9.2a. assumptions of perfect competition Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition.

Category: Quantitative 13) Why will a perfectly competitive firm not sell its product below the prevailing market price? A) It faces inelastic demand. B) It can sell all it wishes at the market price. C) The sellers in the market have agreed to not sell below a specified price. D) Its costs would increase dramatically. E) This would lead to a price war among sellers. Answer: B Diff: 1 Type: MC Topic: 9.2b. demand curve for perfectly competitive firm Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 14) The price elasticity of demand faced by an individual wheat farmer would come closest to which following value? A) 0.00007 B) 0.7 C) 1.0 D) 71.0 E) 71 000 Answer: E Diff: 2 Type: MC Topic: 9.2b. demand curve for perfectly competitive firm Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 15) Which of the following terms would best describe the price elasticity of demand facing a perfectly competitive firm? A) perfectly inelastic B) inelastic C) unit D) elastic E) perfectly elastic Answer: E Diff: 1 Type: MC Topic: 9.2b. demand curve for perfectly competitive firm Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

16) The demand curve facing a perfectly competitive firm A) is the same as the industry or market demand curve. B) is almost perfectly elastic at the market price. C) depends on the firm's technology. D) depends on the firm's costs of production. E) depends on the firm's output. Answer: B Diff: 1 Type: MC Topic: 9.2b. demand curve for perfectly competitive firm Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 17) If the demand curve faced by a firm is downward sloping, we can reasonably believe that the A) firm can influence the price of the product it sells. B) firm will have no effect on the price of the product it sells. C) firm must lower prices if it hopes to increase its profits. D) firm's contributions to total output of the product is insignificant. E) firm has no control over the price of the product it sells but can vary the output. Answer: A Diff: 2 Type: MC Topic: 9.2b. demand curve for perfectly competitive firm Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 18) The market demand curve for a perfectly competitive industry is typically A) identical to the competitive firm's demand curve. B) downward sloping. C) upward sloping. D) infinitely elastic. E) a rectangular hyperbola. Answer: B Diff: 2 Type: MC Topic: 9.2b. demand curve for perfectly competitive firm Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

19) Under perfect competition, the demand curve facing an individual firm is A) the same as the industry's demand curve. B) downward sloping. C) upward sloping. D) infinitely price elastic. E) a rectangular hyperbola. Answer: D Diff: 1 Type: MC Topic: 9.2b. demand curve for perfectly competitive firm Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 20) The perfectly elastic demand curve faced by a competitive firm indicates that A) it could actually sell an infinite amount of output at the going price. B) the firm could increase total revenue by increasing the price. C) as the firm expands output, its marginal revenue will fall. D) total revenue is constant regardless of quantity produced. E) the product's price will be unaffected by any realistic change in the firm's level of output. Answer: E Diff: 1 Type: MC Topic: 9.2b. demand curve for perfectly competitive firm Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 21) When economists say that a perfectly competitive firm is a "quantity adjuster," they mean that A) it adjusts its output in response to changes in prices. B) it can vary its output by an infinite amount. C) it is not concerned with cost factors. D) its marginal-cost curve coincides with its own demand curve. E) changing the output level does not affect the costs of production. Answer: A Diff: 1 Type: MC Topic: 9.2b. demand curve for perfectly competitive firm Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

22) Total revenue (TR) for an individual firm in a perfectly competitive market equals A) p × q. B) (p × q)/q. C) △p × △q. D) △q/△p. E) △(p × q)/△q. Answer: A Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 23) Average revenue (AR) for an individual firm in a perfectly competitive market equals A) p × q. B) (p × q)/q. C) △p × △q. D) △q/△p. E) (p × q)/△q. Answer: B Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 24) Average revenue (AR) for an individual firm in a perfectly competitive market equals A) p × q. B) p. C) △p × △q. D) △q/△p. E) (p × q)/△q. Answer: B Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

25) Average revenue (AR) for an individual firm in a perfectly competitive market equals A) MR/TR. B) MR/q. C) MR × q. D) MR. E) TR/MR. Answer: D Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 26) For any firm operating in any market structure, marginal revenue is defined as A) total revenue divided by the number of units sold. B) the change in total revenue resulting from the sale of an additional unit of the product. C) the total amount received by the seller from the sale of a product. D) the change in price resulting from the sale of an additional unit of the product. E) price times quantity of the product sold. Answer: B Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 27) Any firm's average revenue is defined as A) total revenue divided by the number of units sold. B) the change in total revenue resulting from the sale of an additional unit of the product. C) the total amount received by the seller from the sale of a product. D) the change in price resulting from the sale of an additional unit of the product. E) price times quantity of the product sold. Answer: A Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

28) A perfectly competitive firm's total revenue is equal to which of the following? A) average revenue multiplied by price B) price times quantity of the product sold, divided by quantity of the product sold C) the revenue received on the last unit sold D) marginal revenue times quantity of the product sold E) price multiplied by marginal revenue Answer: D Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 29) A perfectly competitive firm's demand curve coincides with A) its average-revenue curve and total-revenue curve. B) its total-revenue curve. C) both its marginal and average-revenue curves. D) both its marginal and total-revenue curves. E) the market demand curve. Answer: C Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 30) A perfectly competitive firm's demand curve A) has unit elasticity. B) is identical to the market demand curve. C) yields constant total revenues. D) is a horizontal line where P = AR = MR. E) is downward sloping. Answer: D Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

31) For any firm operating in any market structure, marginal revenue (MR) equals A) p × q. B) (p × q)/q. C) △p × △q. D) △q/△p. E) △(p × q)/△q. Answer: E Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 32) Firms have several different concepts of revenue: total revenue, average revenue, marginal revenue, and price. For a profit-maximizing perfectly competitive firm, which statement below is true? A) Total revenue, average revenue, marginal revenue, and price are all equal. B) Average revenue, marginal revenue, and price are equal. C) Only marginal revenue and price are equal. D) Only average revenue and price are equal. E) None of these revenues are equal. Answer: B Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 33) In the short run, the profit-maximizing behaviour for a price-taking firm requires it to operate where A) P = MC, given that P is greater than or equal to ATC. B) P = TR = TC. C) P > MR > MC. D) AVC = AR. E) P = MC, given that P is greater than or equal to AVC. Answer: E Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

34) For a given market price, a perfectly competitive firm's total-revenue curve A) is a positively sloped straight line, starting from the origin. B) increases to the right and then declines when MC = MR. C) is a straight line that coincides with the market demand curve. D) is the same as the firm's demand curve. E) is the same as the firm's MR curve. Answer: A Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 35) For a given market price, a perfectly competitive firm's average-revenue curve A) is a positively sloped straight line, starting from the origin. B) increases to the right and then declines when MC = MR. C) is a straight line that coincides with the market demand curve. D) is the same as the firm's demand curve. E) is the same as the firm's TR curve. Answer: D Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative 36) For a given market price, a perfectly competitive firm's marginal-revenue curve A) is a positively sloped straight line, starting from the origin. B) increases to the right and then declines when MC = MR. C) is a straight line that coincides with the market demand curve. D) is the same as the firm's demand curve. E) is the same as the firm's TR curve. Answer: D Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Recall Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Qualitative

37) Farmer Anna is producing tomatoes in a perfectly competitive market. In Year 1 she sells 4000 bushels of tomatoes at a price of $12.00 each. In Year 2 she sells 4800 bushels at $13.00 each. In Year 2, her average revenue is ________ and her marginal revenue is ________. A) $13.00; $1.00 B) $12.50; $12.50 C) $13.00; $13.00 D) $12.00; $12.00 E) $12.00; $1.00 Answer: C Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Quantitative 38) Suppose XYZ Corp. is producing and selling disposable wooden chopsticks in a perfectly competitive market. The market price is $0.04 per unit and the firm is currently producing 1 million units per month. The firm's total revenue is ________ per month. The firm's marginal revenue is ________. A) $25 000; $0.04 B) $40 000; $0.04 C) $15 000; $0.015 D) $40 000; $0.015 E) $40 000; $0.025 Answer: B Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Quantitative 39) Suppose XYZ Corp. is producing and selling disposable wooden chopsticks in a perfectly competitive market. The market price is $0.05 per unit and the firm is currently producing 600 000 units per month. The firm's total revenue is ________ per month. The firm's marginal revenue is ________. A) $30 000; $0.05 B) $12 million; $0.05 C) $1.2 million; $0.01 D) $3000; $0.50 E) $3000; $0.05 Answer: A Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition.

Category: Quantitative 40) Suppose XYZ Corp. is producing and selling disposable wooden chopsticks in a perfectly competitive market. The market price is $0.05 per unit and the firm is currently producing 600 000 units per month. What is the firm's average revenue? A) $3000 B) $30 000 C) $0.01 D) $0.05 E) $0.10 Answer: D Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Quantitative 41) Suppose XYZ Corp. is producing and selling disposable wooden chopsticks in a perfectly competitive market. The market price is $0.04 per unit and the firm is selling 1 million units per month. Now suppose the firm increases its stated price to $0.05 per unit. According to the theory of perfect competition, the result will be A) total revenue for this firm will increase, but by less than $10 000 per month. B) total revenue will increase from $40 000 to $50 000 per month. C) total revenue will decrease from $50 000 to $40 000 per month. D) total revenue for this firm will fall dramatically, perhaps to zero. E) no change in the firm's total revenue. Answer: D Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Quantitative 42) Consider a perfectly competitive firm producing and selling mousetraps at a market price of $5.00. If this firm is producing 1250 mousetraps, its total revenue is ________, its average revenue is ________ and its marginal revenue is ________. A) $5; $5; $5 B) $6250; $250; $5 C) $1750; $250; $5 D) $5000; $5; $250 E) $6250; $5; $5 Answer: E Diff: 2 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition.

Category: Quantitative

43) Consider a perfectly competitive firm producing and selling mousetraps at a market price of $5.00. Suppose this firm is currently selling 1750 mousetraps at the market price of $5. If the firm raises its price to $6, its total revenue will be A) $0. B) greater than or equal to $1750. C) greater than or equal to $6250. D) $10 500. E) greater than $10 500. Answer: A Diff: 1 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Quantitative 44) Consider a perfectly competitive firm producing and selling mousetraps at a market price of $5.00. Suppose this firm is currently selling 1750 mousetraps at the market price of $5. If the firm raises its price to $6, it's average revenue will be A) $0. B) $5. C) $6. D) between $5 and $6. E) greater than $6. Answer: A Diff: 3 Type: MC Topic: 9.2c. total, average, and marginal revenue Skill: Applied Learning Obj.: 9-2 List the four key assumptions of the theory of perfect competition. Category: Quantitative 9.3 Short-Run Decisions 1) A firm in a perfectly competitive industry will maximize profits by adjusting A) price until marginal revenue equals marginal cost. B) output until marginal cost equals marginal revenue. C) price until average revenue equals average total cost. D) output until average revenue equals short-run average total cost. E) average total cost until it equals price. Answer: B Diff: 1 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Recall Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative

2) Consider a perfectly competitive industry in the short-run. When a firm in this industry is at its profit-maximizing level of output, it A) is doing as well as it can and is making a profit. B) may be making a profit or incurring a loss. C) is producing where P = AVC. D) is producing where MC = AC. E) is producing where price exceeds marginal cost. Answer: B Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative 3) In the short run, a profit-maximizing firm will expand output A) as long as marginal revenue is greater than marginal cost. B) until marginal cost begins to rise. C) until marginal revenue equals average variable cost. D) until total revenue equals total cost. E) as long as marginal cost is greater than marginal revenue. Answer: A Diff: 1 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Recall Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative

4) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. In order to maximize its profits, the firm should continue to produce in the short run even if the market price is less than its ATC as long as the price is greater than or equal to A) AVC. B) MC. C) AFC. D) TVC. E) TC. Answer: A Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Qualitative

5) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. The total cost of producing 6 units of output is A) $71.67. B) $100. C) $230. D) $330. E) $430. Answer: E Diff: 1 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

6) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. If the firm is producing at an output level of 2 units, the ATC is ________ and the AVC is ________. A) $100; $70 B) $70; $35 C) $50; $50 D) $140; $40 E) $85; $35 Answer: E Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

7) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. If the firm is producing at an output level of 4 units, the ATC is ________ and the AVC is ________. A) $280; $180 B) $25; $45 C) $70; $45 D) $70; $35 E) $180; $100 Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

8) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. If the firm is producing at an output level of 6 units, the ATC is ________ and the AVC is ________. A) $55; $16.67 B) $38.33; $16.67 C) $80; $55 D) $55; $80 E) $71.67; $55 Answer: E Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

9) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. This profit-maximizing firm would produce no output in the short run if the market price of its output dropped below A) $35. B) $40. C) $70. D) $90. E) $100. Answer: A Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

10) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. At what price would a profit-maximizing firm earn zero economic profits? A) $40 B) $70 C) $145 D) $220 E) $430 Answer: B Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

11) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. If the market price were $75, this perfectly competitive firm wishing to maximize its profits would A) produce 2 units of output. B) produce 6 units of output. C) produce 5 units of output. D) not produce because P < minimum of ATC. E) not produce because P < TFC. Answer: C Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

12) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. What is the marginal cost of producing the 2nd unit of output? A) $10 B) $15 C) $5 D) $30 E) $35 Answer: D Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

13) Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-1 Refer to Table 9-1. What is the marginal cost of producing the 5th unit of output? A) $30 B) $35 C) $50 D) $70 E) $80 Answer: D Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

14) Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-2 Refer to Table 9-2. If this firm were producing at an output level of 30 units, the AFC would be ________ and the AVC would be ________. A) $5; $6 B) $6; $5 C) $0.17; $0.20 D) $0.20; $0.17 E) $0.10; $0.30 Answer: C Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

15) Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-2 Refer to Table 9-2. This firm would produce no output in the short run if the market price of its output A) dropped below $0.15. B) dropped below $0.20. C) dropped below $0.30. D) dropped below $2.00. E) dropped below $3.00. Answer: A Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

16) Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-2 Refer to Table 9-2. As this firm increases output from 40 units to 50 units per period, its marginal cost rises to A) $0.10. B) $0.17. C) $0.375. D) $0.40. E) $0.50. Answer: E Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

17) Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-2 Refer to Table 9-2. What is the marginal cost of producing the 35th unit of output? A) $0.10 B) $0.17 C) $0.375 D) $0.40 E) $0.50 Answer: D Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

18) Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-2 Refer to Table 9-2. What is the marginal cost of producing the 15th unit of output? A) $0.10 B) $0.17 C) $0.375 D) $0.40 E) $0.50 Answer: A Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

19) Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-2 Refer to Table 9-2. Suppose the prevailing market price for this firm's product is $0.40. The profit-maximizing level of output for this firm is between A) 0 and 10 units. B) 10 and 20 units. C) 20 and 30 units. D) 30 and 40 units. E) 40 and 50 units. Answer: D Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

20) Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-2 Refer to Table 9-2. Suppose the prevailing market price for this firm's product is $0.42 and the firm produces its profit-maximizing level of output. At this price, A) the firm is earning zero economic profits. B) the firm is earning positive economic profits. C) the firm is suffering economic losses and this firm will exit the industry. D) the firm should increase output. E) the firm should decrease output. Answer: B Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

21) Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-2 Refer to Table 9-2. Suppose the prevailing market price for this firm's product is $0.45. If the firm is producing 20 units of output per period, then its profit per unit is ________ and its total profit per period is ________. A) $9; $180 B) $0.05; $1.00 C) $6; $120 D) $0.01; $2 E) $0.40; $8 Answer: B Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative

22) Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-2 Refer to Table 9-2. Suppose the prevailing market price for this firm's product is $0.14 and the firm is currently producing 20 units of output. This competitive firm wishing to maximize profits would A) increase output because marginal revenue is greater than marginal cost. B) decrease output because marginal revenue is less than marginal cost. C) increase output because marginal revenue is less than marginal cost. D) decrease output because marginal revenue is greater than marginal cost. E) produce zero output because price is less than the minimum average variable cost. Answer: E Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Table Category: Quantitative 23) Suppose ABC Corp. is a firm producing newsprint in a perfectly competitive industry. Its output is 1500 tonnes per month, the marginal cost of the last tonne produced is $710, and the average revenue per tonne is $620. In the short run, this firm should A) reduce output. B) increase output until average revenue is equal to marginal cost. C) increase output until marginal revenue is equal to marginal cost. D) definitely shut down. E) The price of the product is not known, so it is not possible to determine. Answer: A Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative

24) Suppose ABC Corp. is a firm producing newsprint in a perfectly competitive industry. We have the following information about the firm's production: - output (Q) = 1500 tonnes per month - average total cost (ATC) = $627 per tonne - average variable cost (AVC) = $614 per tonne - marginal revenue (MR) = $620 per tonne - marginal cost (MC) = $620 per tonne In the short run, this firm should A) reduce output because the price per tonne is less than ATC. B) shut down because the firm is incurring economic losses. C) maintain production at the current level. D) increase output because MR is greater than AVC. E) Not possible to determine because the price of the product is not known. Answer: C Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative 25) Suppose ABC Corp. is a firm producing newsprint in a perfectly competitive industry. We have the following information about the firm's production: - output (Q) = 1500 tonnes per month - average total cost (ATC) = $627 per tonne - average variable cost (AVC) = $614 per tonne - marginal revenue (MR) = $620 per tonne - marginal cost (MC) = $620 per tonne At the current level of output, this firm is ________ profit and is earning economic profit of ________ per month. A) maximizing; $10 500 B) maximizing; -$10 500 C) not maximizing; -$10 500 D) not maximizing; -$9000 E) maximizing; $9000 Answer: B Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative

26) Suppose ABC Corp. is producing newsprint in a perfectly competitive industry. We have the following information about the firm's production: - output (Q) = 1500 tonnes per month - average total cost (ATC) = $627 per tonne - average variable cost (AVC) = $614 per tonne - marginal revenue (MR) = $620 per tonne - marginal cost (MC) = $620 per tonne Suppose ABC Corp. chooses to temporarily halt production in its current period. Is this a profit-maximizing choice for this firm? A) Yes. The firm is not covering its AVC and is incurring losses in each period. B) Yes. The firm is not covering its ATC and is incurring losses in each period. C) No. The firm is covering its ATC and should continue to produce so it can cover some of its fixed costs, which it will incur whether it produces or not. D) No. The firm is covering its AVC and should continue to produce so it can cover some of its fixed costs, which it will incur whether it produces or not. E) There is not enough information to determine this. Answer: D Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative

27)

FIGURE 9-1 Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P1, the profit-maximizing firm in the short run should A) produce output A. B) produce output B. C) produce output C. D) produce output D or shut down as it doesn't really matter which. E) definitely shut down. Answer: D Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

28)

FIGURE 9-1 Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P2, the profit-maximizing firm in the short run should A) produce output B. B) produce output C. C) produce output D. D) produce output E. E) shut down, as it is incurring losses. Answer: D Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

29)

FIGURE 9-1 Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P3, the profit-maximizing firm in the short run should A) produce output A. B) produce output F or shut down, as it doesn't matter which. C) produce output D. D) shut down because more profits could be earned in another industry. E) produce output F. Answer: E Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

30)

FIGURE 9-1 Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P4, the profit-maximizing firm in the short run should produce output A) C. B) F. C) G. D) H. E) I. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

31)

FIGURE 9-1 Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The firm's short-run supply curve starts at output ________ and rises along the marginal cost (MC) curve. A) D B) E C) F D) G E) H Answer: A Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

32)

FIGURE 9-1 Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The short-run shut down price for the firm is A) P1. B) P2. C) P3. D) P4. E) P5. Answer: A Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

33)

FIGURE 9-1 Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The price at which the firm earns zero economic profits is A) P1. B) P2. C) P3. D) P4. E) P5. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

34)

FIGURE 9-1 Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The firm would incur economic profit at all market prices above A) P1. B) P2. C) P3. D) P4. E) P5. Answer: C Diff: 1 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

35)

FIGURE 9-1 Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P4 and the firm is producing output level F, this firm should A) expand output to quantity G. B) expand output to quantity I. C) maintain output at quantity F. D) reduce output to quantity C. E) reduce output to quantity D. Answer: A Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

36) If a perfectly competitive firm in the short run is producing where P = ATC = MC, this firm is A) at its profit-maximizing output level. B) obliged to shut down. C) on the downward-sloping portion of its demand curve. D) earning economic profits. E) incurring losses. Answer: A Diff: 1 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Recall Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative 37) A perfectly competitive firm maximizes its profits by A) maximizing total revenue. B) maximizing total sales. C) choosing the optimal level of output. D) choosing the optimal price. E) pricing slightly under its competitors. Answer: C Diff: 1 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Recall Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative 38) If a perfectly competitive firm produces at an output level where marginal cost equals marginal revenue, then A) the last unit produced adds the same amount to costs as it does to revenue. B) the firm is maximizing its revenue. C) there is no reason to reduce or expand output, as long as AVC is greater than or equal to price. D) the difference between TR and TC is zero. E) the firm should shut down. Answer: A Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Recall Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative

39) In the short run, if a perfectly competitive firm is faced with average revenue below average variable cost it will produce zero output so as to reduce its A) costs to below its revenue. B) costs to zero. C) losses to the amount of its fixed costs. D) losses to the amount of its variable costs. E) losses to the amount of its marginal costs. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Recall Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative 40) On a graph showing a firm's TC and TR curves, the profit-maximizing level of output is found where A) TC intersects the vertical axis. B) TR becomes vertical. C) TR lies above TC by the greatest amount. D) TR and TC intersect. E) TR is at a maximum. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative 41) A price-taking firm in the short run should not produce any level of output unless A) marginal revenue exceeds marginal cost. B) marginal revenue equals average total cost. C) average revenue equals or exceeds average variable cost. D) average revenue equals or exceeds average total cost. E) it is earning positive profits. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative

42) Suppose a perfectly competitive firm is producing a level of output for which price equals average total cost, and average total cost is less than marginal cost. In order to maximize its profits, the firm should A) reduce its output. B) expand its output. C) produce zero output. D) increase the market price. E) not change its output. Answer: A Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative 43) Which of the following statements about a firm in a perfectly competitive industry is correct? A) The firm can improve its competitive position and sell more output by advertising its product. B) The firm maximizes its profit by producing where P = ATC. C) The firm maximizes its profit by producing where P = AVC. D) The firm will not produce at all if P < ATC. E) The firm will not produce at all if P < the minimum of AVC. Answer: E Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative 44) Consider a perfectly competitive firm that is producing a level of output such that price equals average total cost and average total cost is less than marginal cost. In order to maximize its profits, the firm should A) reduce output. B) expand output. C) shut down. D) increase the market price. E) not change output. Answer: A Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run.

Category: Qualitative

45) Suppose a perfectly competitive firm is producing a level of output such that its average revenue is less than its lowest average variable cost. The firm should A) reduce its output. B) expand its output. C) produce zero output. D) increase the market price. E) not change its output. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative 46) Suppose your trucking firm in a perfectly competitive industry is making zero economic profits in the short run. The federal government imposes a new safety regulation that affects all firms, thus shifting the marginal cost curve upward. As a result your firm's profit maximizing, short-run output will A) remain the same because you will pass on the extra costs to the consumers. B) remain the same since the new regulation does not affect ATC. C) increase as firms will leave the industry at the higher costs, thus driving up the market price. D) increase as price rises in the long run. E) decrease because the new MC curve will intersect the horizontal demand curve at a lower rate of output. Answer: E Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Qualitative

47) Suppose that in a perfectly competitive industry, the market price of the product is $6. A firm is producing the output level at which average total cost equals marginal cost, both of which are $8. Average variable cost is $4. To maximize its profits in the short run, the firm should A) reduce its output. B) expand its output. C) leave its output unchanged. D) shut down. E) There is insufficient information to know. Answer: A Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative 48) Suppose that in a perfectly competitive industry, the market price of the product is $27. A firm is producing the output level at which average total cost equals marginal cost, both of which are $25. Average variable cost is $23. To maximize profits in the short run, the firm should A) reduce its output. B) increase its output. C) leave its output unchanged. D) shut down. E) change the price of the product. Answer: B Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative 49) Suppose that in a perfectly competitive industry, the market price for the product is $130. A firm is producing the output level at which average total cost equals marginal cost, both of which are $138. Average variable cost is $132. To maximize profits in the short run, the firm should A) reduce its output. B) expand its output. C) leave its output unchanged. D) produce zero output. E) change the price of the product. Answer: D Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm

Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative 50) Suppose that in a perfectly competitive industry, the market price of the product is $12. Firm A is producing the output level at which average total cost equals marginal cost, both of which are $10. To maximize its profits, Firm A should A) reduce its output. B) expand its output. C) leave its output unchanged. D) increase its advertising. E) change the price of the product. Answer: B Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative 51) Consider a perfectly competitive firm in the following position: output = 4000 units, market price = $1, total fixed costs = $2000, total variable costs = $2000, and marginal cost = $1. To maximize profits, the firm should A) reduce its output. B) expand its output. C) produce zero output. D) increase the market price. E) not change its output. Answer: E Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative

52) Consider a perfectly competitive firm in the following position: output = 4000, market price = $1, total fixed costs = $2000, total variable costs = $4500, and marginal cost = $1. To maximize profits, the firm should A) reduce its output. B) expand its output. C) produce zero output. D) increase the market price. E) not change its output. Answer: C Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative 53) Consider a perfectly competitive firm in the following position: output = 4000 units, market price = $1, total fixed costs = $2000, total variable costs = $1000, and marginal cost = $1.10. To maximize profits, the firm should A) reduce its output. B) expand its output. C) produce zero output. D) increase the market price. E) not change its output. Answer: A Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative 54) A perfectly competitive firm is currently producing an output level where price is $10.00, average variable cost is $6.00, average total cost is $10.00, and marginal cost is $8.00. In order to maximize profits, this firm should A) produce zero output. B) decrease its output. C) increase its output. D) increase the market price. E) not change its output — this firm is at its profit-maximizing position. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run.

Category: Quantitative 55) A perfectly competitive firm facing a price of $4.00 is currently producing an output level where average variable cost is $2.00, average total cost is $4.00, and marginal cost is $3.00. In order to maximize profits, this firm should A) shut down. B) decrease output. C) increase output. D) increase the market price. E) not change output. This firm is at its profit-maximizing position. Answer: C Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative

56) Consider the following short-run cost curves for a profit-maximizing firm in a perfectly competitive industry.

FIGURE 9-2 Refer to Figure 9-2. If the current market price is $6, the profit-maximizing output for this firm is A) 100 units. B) 200 units. C) 300 units. D) 400 units. E) 500 units. Answer: D Diff: 1 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Quantitative

57) Consider the following short-run cost curves for a profit-maximizing firm in a perfectly competitive industry.

FIGURE 9-2 Refer to Figure 9-2. If the price is $6 and the firm is producing at its profit-maximizing output, then total costs for the firm are A) $100. B) $300. C) $1600. D) $2400. E) $3500. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Quantitative

58) Consider the following short-run cost curves for a profit-maximizing firm in a perfectly competitive industry.

FIGURE 9-2 Refer to Figure 9-2. If the market price is $1, the firm will produce ________ units of output in the short run. A) 0 B) 100 C) 200 D) 300 E) 400 Answer: A Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Quantitative

59) Consider the following short-run cost curves for a profit-maximizing firm in a perfectly competitive industry.

FIGURE 9-2 Refer to Figure 9-2. If the market price is $2, the firm will A) produce zero output. and make zero profit. B) produce zero output. and suffer a loss equal to its fixed cost. C) continue operating in the short run and suffer a loss that is less than its fixed cost. D) produce 300 units and make a loss equal to total variable cost. E) produce 200 units and make a loss equal to its total fixed cost. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

60) Consider the following cost curves for two perfectly competitive firms, Firm A and Firm B.

FIGURE 9-3 Refer to Figure 9-3. Firms A and B are in the same industry. Choose the statement that best describes the situation facing the two firms. A) Firm A is suffering losses and will be shut down immediately; Firm B will be shut down if the price falls any further. B) Firm A is making losses but remains producing as long as price falls no further; Firm B is producing at lower cost and is earning economic profits. C) Firm A and Firm B are both earning positive economic profits; new firms will likely enter the industry. D) Firm A and Firm B are both suffering economic losses and will soon exit the industry. E) Firm A and Firm B have different cost structures and should therefore each charge a different profit-maximizing price. Answer: B Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

61) Consider the following cost curves for two perfectly competitive firms, Firm A and Firm B.

FIGURE 9-3 Refer to Figure 9-3. If Firm B is producing at output level q2, and selling its output at p0, then Firm B should A) remain at this output level because profits are maximized when SRAVC is at its minimum. B) expand output to q1 because profits are maximized when SRATC is at its minimum. C) shut down because at this price and output level the firm is suffering losses. D) expand output to q0 so that profits will be maximized. E) raise the price above p0 to increase profits. Answer: D Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

62) Consider a perfectly competitive firm producing and selling mousetraps at a market price of $5.00. Suppose this firm is producing 1250 mousetraps and its average total cost is $4 per unit. The firm will be A) suffering losses of $5000. B) earning profits of $5000. C) breaking even. D) earning profits of $1250. E) suffering losses of $1250. Answer: D Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative 63) Consider a perfectly competitive firm producing and selling mousetraps at a market price of $5.00. Suppose this firm is producing 1500 mousetraps and its average total cost is $5.10 per unit. The firm will be A) suffering losses of $7650. B) earning profits of $7650. C) breaking even. D) earning profits of $150. E) suffering losses of $150. Answer: E Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Category: Quantitative 64) Consider a perfectly competitive firm producing and selling mousetraps at a market price of $5.00. Suppose this firm is producing 2000 mousetraps and average variable cost is $5.50. What level of economic profit is this firm earning? A) $1000 B) -$1000 C) $0 D) $0.50 E) There is insufficient information to answer to know. Answer: E Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run.

Category: Quantitative 65) Consider the total cost and revenue curves shown below, for two perfectly competitive firms, Firm A and Firm B.

FIGURE 9-4 Refer to Figure 9-4. Given its total cost and revenue curves, Firm A should A) build another plant to reap scale economies. B) produce zero output. C) continue production, as it is earning positive profits. D) maximize its profits by producing that level of output such that the slope of the TC curve is equal to the slope of the TR curve. E) maximize its profits by producing that level of output such that the slope of the TVC curve is equal to the slope of the TR curve. Answer: B Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

66) Consider the total cost and revenue curves shown below, for two perfectly competitive firms, Firm A and Firm B.

FIGURE 9-4 Refer to Figure 9-4. Given its total cost and revenue curves, Firm B should A) exit the industry. B) shut down temporarily. C) maximize its profits by producing that level of output such that the slope of the TC curve is equal to the slope of the TR curve. D) maximize its profits by producing that level of output such that the slope of the TVC curve is equal to the slope of the TR curve. E) produce the level of output where the TC curve intersects the TR curve. Answer: C Diff: 2 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Applied Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

67) Consider the total cost and revenue curves shown below, for two perfectly competitive firms, Firm A and Firm B.

FIGURE 9-4 Refer to Figure 9-4. If both Firms A and B are producing a level of output such that the slope of the TC curve is equal to the slope of the TR curve, A) then MC = MR and both firms are maximizing profit (or minimizing losses). B) then the ATC is at a minimum and both firms are maximizing profits. C) then both firms are suffering losses because the distance between TR and TC is the smallest. D) then both firms are earning positive economic profits because the distance between TR and TC is the greatest. E) then MC = MR, but both firms may not be maximizing their profits. Answer: E Diff: 3 Type: MC Topic: 9.3a. profit maximization for perfectly competitive firm Skill: Recall Learning Obj.: 9-4 Determine whether competitive firms are making profits or losses in the short run. Graphics: Graph Category: Qualitative

68) The short-run supply curve for a perfectly competitive firm is A) its entire marginal-cost curve. B) its rising portion of the average-variable-cost curve. C) its average-revenue curve. D) its marginal-cost curve above the average-variable-cost curve. E) the industry supply curve. Answer: D Diff: 1 Type: MC Topic: 9.3b. supply curves perfectly comp. firm and industry Skill: Recall Learning Obj.: 9-3 Derive a competitive firm's supply curve. Category: Qualitative 69) Consider a firm in a perfectly competitive industry. The shut-down point is the price at which the firm can just cover its A) marginal costs. B) non-economic costs. C) fixed costs. D) unstated costs. E) variable costs. Answer: E Diff: 1 Type: MC Topic: 9.3b. supply curves perfectly comp. firm and industry Skill: Recall Learning Obj.: 9-3 Derive a competitive firm's supply curve. Category: Qualitative 70) The supply curve for a perfectly competitive industry is the horizontal summation of the individual firms' A) MC curves above ATC. B) MC curves above AVC. C) AVC curves above MC. D) MC curves above AFC. E) short-run average cost curves. Answer: B Diff: 1 Type: MC Topic: 9.3b. supply curves perfectly comp. firm and industry Skill: Recall Learning Obj.: 9-3 Derive a competitive firm's supply curve. Category: Qualitative

71) Consider the following short-run cost curves for a profit-maximizing firm in a perfectly competitive industry.

FIGURE 9-2 Refer to Figure 9-2. The short-run supply curve for this perfectly competitive firm is its A) ATC curve at and above $3. B) AVC curve at and above $1.50. C) entire marginal cost curve. D) marginal cost curve at and above $3. E) marginal cost curve at and above $1.50. Answer: E Diff: 1 Type: MC Topic: 9.3b. supply curves perfectly comp. firm and industry Skill: Applied Learning Obj.: 9-3 Derive a competitive firm's supply curve. Graphics: Graph Category: Qualitative

72) Consider the following short-run cost curves for a profit-maximizing firm in a perfectly competitive industry.

FIGURE 9-2 Refer to Figure 9-2. The short-run supply curve for the industry in which this firm operates is A) the MC curve at or above a price of $1.50. B) the AVC curve at or above a price of $1.50. C) the entire MC curve. D) the MC curve at or above a price of $3. E) not able to determine from the information provided. Answer: E Diff: 2 Type: MC Topic: 9.3b. supply curves perfectly comp. firm and industry Skill: Applied Learning Obj.: 9-3 Derive a competitive firm's supply curve. Graphics: Graph Category: Qualitative

9.4 Long-Run Decisions 1) If a perfectly competitive market is in a short-run equilibrium and each firm has P > SRATC, then A) individual firms in the industry will increase their output. B) new firms will enter the market because existing firms are earning economic profits. C) the market supply curve will become less elastic. D) existing firms will continue to earn economic profits in the long run. E) price will fall in the short run as it is too high and firms are making economic profits. Answer: B Diff: 1 Type: MC Topic: 9.4a. entry and exit Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 2) If firms in a competitive industry are earning positive economic profits, in the long run we expect A) the demand curve for the product will shift to the left, so that the price of the product will fall. B) the supply curve for the product will shift to the right as new firms enter the industry, causing industry output to increase and price to fall. C) there would be no change in the industry as long as P = MC for the individual firms. D) the individual firms will lower their price to discourage new firms from entering the industry. E) the government would intervene and force the firms to lower prices. Answer: B Diff: 2 Type: MC Topic: 9.4a. entry and exit Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative

3) If firms in a competitive industry are suffering economic losses, then one would expect that in the long run, A) the demand curve for the product will shift to the left, causing equilibrium output and price to decline. B) there would be no change in the number of firms in the industry as long as firms are covering their average variable costs. C) the supply curve for the product will shift to the left as firms leave the industry, causing industry output to fall and price to rise. D) the supply curve for the product will shift to the right as individual firms lower their prices to increase their sales. E) each firm would raise its price until it was breaking even. Answer: C Diff: 2 Type: MC Topic: 9.4a. entry and exit Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 4) Consider a perfectly competitive firm when its industry is in long-run equilibrium. Which of the following statements about the firm is correct? A) The firm has successfully differentiated its product. B) The firm has successfully established barriers to entry. C) The firm has a strong profit incentive to expand capacity. D) The firm has no ability to affect its product's price. E) The firm is earning positive economic profits. Answer: D Diff: 1 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative

5) Consider the following statement of equalities: P = MC = minimum SRATC = minimum LRAC. This statement of equalities best applies to which of the following? A) a perfectly competitive firm that is maximizing profits, which will lead other firms to enter this industry B) a perfectly competitive firm when the industry is in long-run equilibrium C) a perfectly competitive firm that is producing the optimal quantity, such that other firms will exit the industry D) a perfectly competitive industry that is in long-run equilibrium E) a perfectly competitive industry that is in short-run equilibrium Answer: B Diff: 3 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 6) Which of the following statements about a perfectly competitive industry in long-run equilibrium is correct? A) In order to stay in the industry, each firm is making an economic profit. B) Losses are tolerable because of high fixed costs. C) Individual firms will have no incentive for technological improvement. D) Firms must exhibit economies of scale. E) Each firm is producing at the minimum point on its LRAC curve. Answer: E Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 7) If a perfectly competitive firm is producing to the left of the minimum point of its long-run average cost curve, then A) it cannot be producing its present output efficiently. B) it can reduce its unit costs by building a larger plant. C) it can still be in long-run equilibrium as long as P = SRATC. D) its profits will decrease if it builds a larger plant. E) it should shut down. Answer: B Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative

8) Consider a perfectly competitive firm. Which of the following equalities could hold true in a short-run equilibrium but not in a long-run equilibrium? A) TC = TFC + TVC B) P = MC C) P = AR D) P = AVC E) P = MR Answer: D Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative

9) Consider the following cost curves for Firm X, a perfectly competitive firm.

FIGURE 9-5 Refer to Figure 9-5. Firm X is producing output level Q2 where price = P2. Which of the following statements about this firm are correct? 1. P = MC = SRATC = LRAC. 2. There are economic profits to attract new entrants. 3. Firm X is producing at its minimum efficient scale. A) Statement 1 B) Statement 2 C) Statement 3 D) Statements 1 and 3 E) Statements 2 and 3 Answer: D Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Graphics: Graph Category: Qualitative

10) Consider the following cost curves for Firm X, a perfectly competitive firm.

FIGURE 9-5 Refer to Figure 9-5. If Firm X has a capital stock that generates SRATC1, then in the long run Firm X will have to A) maintain its output level at Q1, because it is maximizing its short-run profits. B) set its output at Q1 with the existing plant size. C) expand its output to Q2 with the existing plant size. D) set its output at Q1 with an expanded plant size. E) either expand its plant size or exit from the industry. Answer: E Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Graphics: Graph Category: Qualitative

11) Consider the following cost curves for Firm X, a perfectly competitive firm.

FIGURE 9-5 Refer to Figure 9-5. If Firm X is producing output Q1 and the market price is P1, A) there are profits to induce increases in output by Firm X, using its existing plant. B) there is no lower-cost scale of plant which could be built by Firm X. C) Firm X is producing at its minimum efficient scale. D) Firm X is at its long-run profit-maximizing position. E) new firms have a profit incentive to enter the industry, building larger plants. Answer: E Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Graphics: Graph Category: Qualitative

12) Consider the following cost curves for Firm X, a perfectly competitive firm.

FIGURE 9-5 Refer to Figure 9-5. Suppose Firm X is producing output Q2 and the market price is P2. Now suppose demand conditions change and price rises above P2. We could expect that A) Firm X will now earn long-run economic profits. B) the profit now being earned by existing firms will induce new firms to enter the industry. C) Firm X will no longer be a price taker. D) Firm X can gain market share as the market expands. E) the higher costs facing firms will cause some firms to leave the industry, allowing Firm X to earn profits in the short run. Answer: B Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Graphics: Graph Category: Qualitative

13) Suppose a typical firm in a competitive industry has the following data in the short run: price = $10; output = 100 units; ATC = $8; AVC = $7. What will likely happen in the long run? A) In the long run, the industry will expand because firms are earning economic profits. B) In the long run, the industry will contract because firms are suffering losses. C) The size of the industry will remain the same in the long run. D) The typical firm would shut down, until the remaining firms have a higher price. E) There is not enough information to formulate an answer. Answer: A Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Quantitative 14) Suppose a typical firm in a competitive industry has the following data in the short run: price = $6; output = 100 units; ATC = $8; AVC = $7. What will likely happen in the long run? A) In the long, run the industry will expand because firms are earning economic profits. B) In the long, run the industry will contract because firms are suffering losses. C) The size of the industry will remain the same in the long run. D) The typical firm would shut down, until the remaining firms have a higher price. E) There is not enough information to formulate an answer. Answer: B Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Quantitative 15) Suppose a typical firm in a competitive industry has the following data in the short run: price = $5000; output = 1 million units; ATC = $5300; AVC = $4750. What will likely happen in the long run? A) In the long, run the industry will expand because firms are earning economic profits. B) In the long, run the industry will contract because firms are suffering losses. C) The size of the industry will remain the same in the long run. D) Consumers will avoid this industry because firms are suffering losses. E) There is not enough information to formulate an answer. Answer: B Diff: 3 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition

Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Quantitative

16) Suppose a typical firm in a competitive industry has the following data in the short run: price = $4000; output = 1 million units; ATC = $4000; AVC = $3500. What will likely happen in the long run? A) In the long run, the industry will expand because firms are earning economic profits. B) In the long run, the industry will contract because firms are suffering losses. C) The size of the industry will remain the same in the long run. D) The typical firm would shut down, until the remaining firms have a higher price. E) There is not enough information to formulate an answer. Answer: C Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Quantitative 17) Suppose a typical firm in a competitive industry has the following data in the short run: price = $5000; output = 100 000 units; ATC = $4600; AVC =$ 4300. What will likely happen in the long run? A) In the long run, the industry will expand because firms are earning economic profits. B) In the long run, the industry will contract because firms are suffering losses. C) The size of the industry will remain the same in the long run. D) The typical firm would shut down, until the remaining firms have a higher price. E) There is not enough information to formulate an answer. Answer: A Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Quantitative 18) In the long run, it is not possible for a perfectly competitive firm to A) alter its plant size. B) adopt new technology. C) replace its antiquated equipment. D) adjust its output. E) set the product price. Answer: E Diff: 1 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative

19) In a perfectly competitive market, smaller-than-efficient sized firms can exist in A) the short run. B) the long run. C) both the short and long run. D) the long run, and they will make positive economic profits. E) both the short run and the long run, but they must reduce plant size to remain competitive. Answer: A Diff: 1 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 20) Comparing the short-run and long-run profit-maximizing positions of a perfectly competitive firm, which statement is true? A) Price will equal marginal cost in the short run, but not necessarily in the long run. B) Economic profit may exist in the short run and in the long run. C) The firm will produce at minimum average cost in both the short and long run. D) Price should equal average cost in the long run, but not necessarily in the short run. E) The firm may have unexploited economies of scale in both the short run and the long run. Answer: D Diff: 3 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 21) Consider a perfectly competitive firm when its industry is in long-run equilibrium. In this case, A) price is greater than marginal cost. B) marginal revenue is greater than marginal cost. C) price equals minimum short-run and long-run average total cost. D) economic profits are greater than zero. E) average fixed costs are at the maximum. Answer: C Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative

22) Consider a competitive industry in which firms are facing a continual decrease in demand for their product. In the long run, A) new firms will enter the industry and earn normal profits. B) existing firms will modernize plant and equipment in order to increase efficiency. C) existing firms will expand output as a means of recovering losses. D) firms will begin advertising in order to increase demand for their product. E) capacity in the industry will gradually shrink as plant and equipment is not replaced. Answer: E Diff: 3 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 23) Long-run equilibrium in a perfectly competitive industry is characterized by A) internal economies of scale. B) an output level at which firms' SRATC curves are tangent to the downward sloping portion of their LRAC curves. C) falling costs. D) rising costs. E) each firm producing at the minimum point on its LRAC curve. Answer: E Diff: 1 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 24) If a perfectly competitive firm is producing where its MR=MC, but is operating to the left of the minimum point of its LRAC curve, A) it cannot be optimizing its short-run behaviour. B) it can reduce its average costs by building a larger plant. C) it can still be in long-run equilibrium as long as P = SRATC. D) its profits will decrease if it builds a larger plant. E) it is in a long-run profit maximizing position. Answer: B Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative

25) Which of the following conditions is true of a perfectly competitive industry when it is in long-run equilibrium? A) Firms are entering the industry. B) Firms are exiting the industry. C) Price equals minimum short-run average total cost for all firms. D) Accounting profits for all firms are zero. E) Firms are experiencing increasing returns to scale. Answer: C Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 26) The diagram below shows the short-run cost curves for 3 perfectly competitive firms in the same industry.

FIGURE 9-6 Refer to Figure 9-6. Given that Firms A, B and C are in the same industry, is this industry in long-run equilibrium? A) No, because Firm A is not producing at a profit-maximizing level of output. B) No, because if the industry were in equilibrium, all 3 firms would be earning zero economic profits. C) Yes, because all 3 firms are producing at their minimum average total cost. D) Yes, because P = MC = MR for each of the 3 firms. E) Yes, because each of the 3 firms is operating at its minimum efficient scale. Answer: B Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Graphics: Graph

Category: Qualitative 27) The diagram below shows the short-run cost curves for 3 perfectly competitive firms in the same industry.

FIGURE 9-6 Refer to Figure 9-6. Which firm or firms is likely to exit this industry? A) Firm A B) Firm B C) Firm C D) all of Firms A, B, and C E) none of Firms A, B, and C Answer: C Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Graphics: Graph Category: Qualitative

28) The diagram below shows the short-run cost curves for 3 perfectly competitive firms in the same industry.

FIGURE 9-6 Refer to Figure 9-6. Which of the following statements about Firms A, B and C is true? A) Firm A is suffering losses, Firm B is breaking even, and Firm C is earning profits. B) Firm A is breaking even, Firm B is suffering losses, and Firm C is earning profits. C) Firm A is earning profits, Firm B is breaking even, and Firm C is suffering losses. D) Firms A, B and C are breaking even. E) Firms A, B and C are earning profits. Answer: C Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Graphics: Graph Category: Qualitative 29) Suppose a paper mill in Quebec is shut down by its owner, even though the plant and equipment are in excellent shape and the paper is of top quality. What could explain this? A) The price the firm is receiving for the paper is less than its average variable cost. B) The paper mill must not have been operating at its profit-maximizing level of output. C) The price the firm is receiving is less than the average total cost. D) The price the firm is receiving for the paper is greater than its marginal cost. E) The owner was not minimizing its production costs. Answer: A Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative

30) Suppose a perfectly competitive industry is in long-run equilibrium. A new one-time cost-saving technology (which is freely available) is then developed and new plants are built. Eventually, a new long-run equilibrium will be established where A) new plants employ the new technology, but existing plants continue to produce as long as they cover their fixed costs. B) high-cost and low-cost firms exist side by side and market output will be higher. C) the industry supply curve has shifted to the left and price and output are both higher. D) all plants continue to operate until they are physically worn out as long as price is greater than the firm's average variable cost. E) all plants use the new technology, and market output will be higher and price will be lower. Answer: E Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 31) Consider the textile industry, which we assume to be a competitive industry, and which experiences continuous cost-reducing technological change. Which of the following statements best describes this industry? A) High-cost textile mills will co-exist with low-cost mills as long as the revenue for the high-cost mills is covering their variable costs. B) The price of the product is determined by the minimum ATC of the lowest-cost plants. C) All textile mills in the industry will be earning zero economic profits or losses. D) Both A and B E) Both B and C Answer: D Diff: 3 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Applied Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative

32) Which of the following assumptions about perfectly competitive markets is primarily responsible for the horizontal demand curve facing the individual firm? A) differentiated product B) consumers are aware of all firms' prices C) each firm is small relative to the size of the industry D) freedom of entry and exit in the industry E) strategic behaviour Answer: C Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative 33) Which of the following assumptions about perfectly competitive markets is primarily responsible for firms having zero economic profit in long run equilibrium? A) homogeneous product B) consumers are aware of all firms' prices C) each firm is small relative to the size of the industry D) freedom of entry and exit in the industry E) strategic behaviour Answer: D Diff: 2 Type: MC Topic: 9.4b. long-run equilibrium in perfect competition Skill: Recall Learning Obj.: 9-5 Explain the role played by profits, entry, and exit in determining a competitive industry's long‐run equilibrium. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 10 Monopoly, Cartels, and Price Discrimination 10.1 A Single-Price Monopolist 1) The marginal revenue curve facing a single-price monopolist A) is the same as the average revenue curve facing the monopolist. B) is the same as the demand curve facing the monopolist. C) shows the change in the profit for the firm. D) lies below the average revenue curve. E) at first falls to a minimum and then rises as output is increased. Answer: D Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist.

Category: Qualitative 2) The demand curve facing a single-price monopolist slopes downward because A) its average revenue equals its marginal revenue. B) its demand curve is the market demand curve, which is generally downward sloping. C) demand is perfectly inelastic. D) it sells typically to only one consumer. E) its supply curve is upward sloping. Answer: B Diff: 1 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 3) A monopoly is distinguished from a firm operating under any other market structure in the following way: The monopoly A) charges a price higher than its average revenue. B) can choose its output level. C) can choose its level of cost. D) does not produce at a profit-maximizing level of output. E) faces a demand curve which is identical to the market demand curve. Answer: E Diff: 1 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 4) A monopolistic firm faces a downward-sloping demand curve because A) there are a large number of firms in the industry, all selling the same product. B) the demand for its product is always inelastic. C) the market price is affected by the amount sold by a monopolistic firm. D) marginal revenue is negative throughout the feasible range of output. E) the monopolistic firm can exploit economies of scale. Answer: C Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 5) The average revenue curve for a single-price monopolist

A) is a horizontal line, equal to the price of its product. B) lies below its demand curve. C) coincides with its demand curve. D) slopes upward to the right. E) does not exist. Answer: C Diff: 1 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 6) For a single-price monopolist, marginal revenue falls faster than price (as output rises) because A) in order to sell additional units, the price must be lowered on all units. B) profits are maximized when marginal cost equals marginal revenue. C) the firm has no supply curve. D) the cost of producing extra units of output increases as production is increased. E) none of the above — marginal revenue does not fall faster than price. Answer: A Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative

7) Marginal revenue is less than price for a single-price monopolist because the A) firm's output decisions do not affect the selling price. B) firm must lower its price for all units if it wants to sell more of the product. C) monopolist charges a price higher than the unit production cost. D) monopolist must worry about how its price setting will lead to entry by other firms. E) monopolist has achieved economies of scale. Answer: B Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 8) The table below shows the demand schedule for a product produced by a single-price monopolist.

Price $8 $7 $6 $5 $4 $3 $2

Quantity Demanded 5 6 7 8 9 10 11

TABLE 10-1 Refer to Table 10-1. For a single-price monopolist, the marginal revenue associated with increasing sales from 5 to 6 units is A) -4. B) -2. C) 0. D) 2. E) 4. Answer: D Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

9) The table below shows the demand schedule for a product produced by a single-price monopolist.

Price $8 $7 $6 $5 $4 $3 $2

Quantity Demanded 5 6 7 8 9 10 11

TABLE 10-1 Refer to Table 10-1. For a single-price monopolist, the marginal revenue associated with increasing sales from 6 to 7 units is A) -4. B) -2. C) 0. D) 2. E) 4. Answer: C Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

10) The table below shows the demand schedule for a product produced by a single-price monopolist.

Price $8 $7 $6 $5 $4 $3 $2

Quantity Demanded 5 6 7 8 9 10 11

TABLE 10-1 Refer to Table 10-1. For a single-price monopolist producing and selling 9 units, the marginal revenue earned by selling the 9th unit is A) -4. B) -2. C) 0. D) 2. E) 4. Answer: A Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

11) The table below shows the demand schedule for a product produced by a single-price monopolist.

Price $8 $7 $6 $5 $4 $3 $2

Quantity Demanded 5 6 7 8 9 10 11

TABLE 10-1 Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. At what level of output is marginal revenue equal to 0? A) between 6 and 7 units B) between 7 and 8 units C) between 8 and 9 units D) between 9 and 10 units E) between 10 and 11 units Answer: A Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

12) The table below shows the demand schedule for a product produced by a single-price monopolist.

Price $8 $7 $6 $5 $4 $3 $2

Quantity Demanded 5 6 7 8 9 10 11

TABLE 10-1 Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. At what level of output is total revenue maximized for this firm? A) between 6 and 7 units B) between 7 and 8 units C) between 8 and 9 units D) between 9 and 10 units E) between 10 and 11 units Answer: A Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

13) The table below shows the demand schedule for a product produced by a single-price monopolist.

Price $8 $7 $6 $5 $4 $3 $2

Quantity Demanded 5 6 7 8 9 10 11

TABLE 10-1 Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. Which of the following statements about price elasticity of demand is true? A) demand is unit-elastic at a price of $4 B) demand is elastic at a price of $8 C) demand is elastic at a price of $5 D) demand is inelastic at a price of $8 E) demand is elastic at a price of $3 Answer: B Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

14) The table below shows the demand schedule for a product produced by a single-price monopolist.

Price $8 $7 $6 $5 $4 $3 $2

Quantity Demanded 5 6 7 8 9 10 11

TABLE 10-1 Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. At what level of demand is the price elasticity of demand equal to 1? A) between 6 and 7 units B) between 7 and 8 units C) between 8 and 9 units D) between 9 and 10 units E) between 10 and 11 units Answer: A Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

15) The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.

FIGURE 10-1 Refer to Figure 10-1. Suppose this single-price monopolist is initially selling 5 units at $8 each and then reduces the price of the product to $6. By making this change, the revenue the firm gives up on the units it was already selling is ________ and the revenue it gains on the additional units sold is ________. Its marginal revenue is therefore ________. (All figures are dollars.) A) 38; 40; 2 B) 8; 6; 2 C) 10; 12; 2 D) 14; 14; 0 E) 5; 7; -2 Answer: C Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Quantitative

16) The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.

FIGURE 10-1 Refer to Figure 10-1. Suppose this single-price monopolist is initially selling 9 units at $4 each and then reduces the price of the product to $3. By making this change, the revenue the firm gives up on the units it was already selling is ________ and the revenue it gains on the additional units sold is ________. Its marginal revenue is therefore ________. (All figures are dollars) A) 40; 27; -13 B) 30; 36; 6 C) 34; 28; -6 D) 9; 3; -6 E) 3; 9; 6 Answer: D Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Quantitative

17) The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.

FIGURE 10-1 Refer to Figure 10-1. What is the level of output at which marginal revenue first becomes negative? A) 5th unit B) 6th unit C) 7th unit D) 8th unit E) 9th unit Answer: D Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Quantitative

18) The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.

FIGURE 10-1 Refer to Figure 10-1. What is represented by the two shaded areas on the diagram as the monopoly firm reduces the price of its product from $8 to $7? (We will refer to the area associated with the price change from $8 to $7 as the horizontal bar and the area associated with the quantity change from 5 units to 6 units as the vertical bar.) A) The horizontal bar represents a loss in total revenue; the vertical bar represents a gain in total revenue. B) The horizontal bar represents a gain in total revenue; the vertical bar represents a loss in total revenue. C) The horizontal bar represents a loss in marginal revenue; the vertical bar represents a gain in marginal revenue. D) The horizontal bar represents a gain in marginal revenue; the vertical bar represents a loss in marginal revenue. E) The horizontal bar represents a gain in average revenue; the vertical bar represents a loss in average revenue. Answer: A Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph

Category: Quantitative 19) The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.

FIGURE 10-1 Refer to Figure 10-1. What is the change in total revenue for this firm as it increases output from 5 units to 6 units? A) -$2 B) $0 C) $2 D) $10 E) $12 Answer: C Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Quantitative

20) The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.

FIGURE 10-1 Refer to Figure 10-1. What is the change in total revenue for this firm as it increases output from 9 units to 10 units? A) -$6 B) -$2 C) $0 D) $2 E) $6 Answer: A Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Quantitative

21) If a single-price monopolist sets price where the price elasticity of demand exactly equals 1, its A) total profits are at a maximum. B) marginal revenue is always positive. C) total revenue is rising, although marginal revenue is falling. D) total revenue is falling. E) total revenue is at its maximum. Answer: E Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 22) Consider a profit-maximizing single-price monopolist that faces a linear demand curve. The firm sets price where the price elasticity of demand is A) zero. B) less than one. C) one. D) greater than one. E) infinite. Answer: D Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 23) A monopolist faces a straight-line demand curve and is currently producing an output level of 2000 units receiving $10 000 in total revenue. At an output of 1000 units the marginal revenue for this firm would be A) 0. B) $2.50. C) $5.00. D) $10.00. E) Impossible to tell with the given information. Answer: E Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Quantitative

24) Consider a single-price monopolist that is operating in the inelastic range of its linear demand curve. This firm A) would be operating where its AR is negative. B) would be operating where marginal revenue is negative. C) would be operating where marginal revenue is negative but its total revenues would be at a maximum. D) could raise its total revenue by lowering its price. E) would be operating at its profit-maximizing position. Answer: B Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 25) Consider a profit-maximizing single-price monopolist that faces a linear demand curve. The firm would not set a price at which demand is inelastic because A) marginal revenue is zero in that range of output. B) average revenue is zero in that range of output. C) the marginal revenue would be negative in that range of output. D) the average revenue would be negative in that range of output. E) the marginal revenue and average revenue would be equal in that range of output. Answer: C Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Quantitative

26) Consider the following AR and MR curves for a single-price monopolist.

FIGURE 10-2 Refer to Figure 10-2. The price elasticity of demand at Q2 is A) zero. B) greater than 1. C) less than 1. D) equal to 1. E) not determinable from the diagram. Answer: D Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

27) Consider the following AR and MR curves for a single-price monopolist.

FIGURE 10-2 Refer to Figure 10-2. The price elasticity of demand at Q1 is A) zero. B) less than 1. C) equal to 1. D) greater than 1. E) not determinable from the diagram. Answer: D Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

28) The diagram below shows total revenue for a single-price monopolist.

FIGURE 10-3 Refer to Figure 10-3. The firm's marginal revenue at Q1 is A) zero. B) positive and rising. C) positive but falling. D) negative and falling. E) not determinable from the diagram. Answer: C Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

29) The diagram below shows total revenue for a single-price monopolist.

FIGURE 10-3 Refer to Figure 10-3. The price elasticity of demand at Q3 is A) zero. B) less than 1. C) equal to 1. D) greater than 1. E) not determinable from the diagram. Answer: B Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

30) he diagram below shows the demand curve facing a single-price monopolist.

FIGURE 10-4 Refer to Figure 10-4. Suppose the firm is currently producing at point A on the demand curve, selling 100 units of output at a price of $60 per unit. If the firm moves to point B, the revenue the firm gives up on the units it was already selling is ________, and the revenue it gains on the additional units sold is ________. A) $1000; $5000 B) $2000; $5000 C) $5000; $2000 D) $100; $200 E) $100; $500 Answer: A Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

31) he diagram below shows the demand curve facing a single-price monopolist.

FIGURE 10-4 Refer to Figure 10-4. What is the firm's marginal revenue per unit as it moves from point A to point B on the demand curve? A) $0 B) $40 C) $50 D) $1000 E) $2000 Answer: B Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Quantitative

32) he diagram below shows the demand curve facing a single-price monopolist.

FIGURE 10-4 Refer to Figure 10-4. Suppose the firm is currently at point C on the demand curve, selling 300 units at $40 per unit. If the firm moves to point D, the revenue the firm gives up on the units it was already selling is ________ and the revenue it gains on the additional units sold is ________. A) $9000; $9000 B) $12 000; $12 000 C) $3000; 4000 D) $4000; $3000 E) $3000; $3000 Answer: E Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Quantitative

33) he diagram below shows the demand curve facing a single-price monopolist.

FIGURE 10-4 Refer to Figure 10-4. What is the firm's marginal revenue per unit as it moves from point C to point D on the demand curve? A) $0 B) $10 C) $50 D) $100 E) $3000 Answer: A Diff: 3 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Quantitative

34) he diagram below shows the demand curve facing a single-price monopolist.

FIGURE 10-4 Refer to Figure 10-4. At what level of quantity does the marginal revenue curve for this firm intersect the horizontal axis? A) 0 B) 250 C) 350 D) 500 E) 700 Answer: C Diff: 2 Type: MC Topic: 10.1a. demand, price and revenue for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Quantitative

35) Consider the following AR and MR curves for a single-price monopolist.

FIGURE 10-2 Refer to Figure 10-2. If marginal costs were zero, the profit-maximizing output for this single-price monopolist would be A) 0. B) Q1. C) Q2. D) Q3. E) Q4. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

36) Consider the following AR and MR curves for a single-price monopolist.

FIGURE 10-2 Refer to Figure 10-2. If marginal costs were positive and constant but less than A, the profit-maximizing output for this single-price monopolist would be A) 0. B) greater than zero, but less than Q1. C) greater than zero, but less than Q2. D) equal to Q2. E) between Q2 and Q4. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

37) Consider the following AR and MR curves for a single-price monopolist.

FIGURE 10-2 Refer to Figure 10-2. For this single-price monopolist, the profit-maximizing level of output is A) Q1. B) Q2. C) Q3. D) Q4. E) not determinable from the diagram. Answer: E Diff: 1 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative 38) If a single-price monopoly is presently producing an output at which marginal revenue is less than marginal cost, it can increase its profits by A) reducing output and raising prices. B) reducing output and holding prices unchanged. C) expanding output and lowering price. D) expanding output and raising price. E) reducing barriers to entry. Answer: A Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a

profit‐maximizing monopolist. Category: Qualitative 39) If a single-price monopoly is presently producing an output at which marginal cost is less than marginal revenue, it can increase its profits by A) reducing output and raising prices. B) reducing output and holding prices unchanged. C) expanding output and lowering price. D) expanding output and raising price. E) reducing barriers to entry. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 40) For a monopolist, the profit-maximizing level of output occurs where A) MR = MC. B) MR = AC. C) MC = 0. D) MC = AR. E) MC = price. Answer: A Diff: 1 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 41) A monopolist will be earning positive economic profits A) at all times, since it controls the market. B) when price equals marginal cost. C) whenever marginal revenue equals marginal cost. D) when price exceeds average total cost. E) whenever marginal revenue is positive. Answer: D Diff: 1 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative

42) At the profit-maximizing level of output for a single-price monopolist, price A) always exceeds average total cost. B) equals marginal cost. C) exceeds marginal cost. D) equals marginal revenue. E) is below marginal revenue. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 43) Which of the following statements about single-price monopolists is correct? A) The profit-maximizing level of output is the same as the total revenue-maximizing level of output. B) The average revenue curve lies above the demand curve. C) AR is greater than MR. D) Price elasticity of demand will be equal to one if the firm is profit-maximizing. E) Price equals marginal cost at the profit-maximizing level of output. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 44) Monopolistic firms do not have supply curves because A) they are not constrained by the marginal costs of production. B) their output is a fixed quantity. C) monopolists get to choose their price-quantity combination along the demand curve. D) monopolists face a given market price. E) their marginal costs cannot be calculated. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative

45) A single-price monopolist is currently producing an output level where price equals marginal cost, and profits are positive. In order to maximize profits, this monopolist should A) produce zero output. B) increase production and reduce price. C) decrease production and increase price. D) not change his output level, because he is currently earning profits. E) reduce price and let production adjust to the new price. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 46) If a single-price monopolist's price equals marginal cost, the firm A) could increase its profits by lowering output and raising price. B) should maintain its current price because it is a price taker. C) will find it more profitable to produce a greater output. D) is producing where MR = MC and thus is maximizing profits. E) should definitely shut down. Answer: A Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 47) Suppose a single-price monopolist calculates that at its present output, marginal revenue is $2 and marginal cost is $1. If the price of the product is $3, the monopolist could maximize its profits by A) lowering price and raising output. B) lowering price and leaving output unchanged. C) raising price and leaving output unchanged. D) doing nothing. E) shutting down. Answer: A Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative

48) The diagram below shows total revenue for a single-price monopolist.

FIGURE 10-3 Refer to Figure 10-3. The profit-maximizing output for this single-price monopolist is A) Q1. B) Q2. C) Q3. D) Q4. E) not determinable from the diagram. Answer: E Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

49) A single-price monopolist is currently producing an output level where P = $20, MR = $13, ATC = $15, and MC = $14. In order to maximize profits, this monopolist should A) produce zero output. B) increase production and reduce price. C) decrease production and increase price. D) not change the output level, because the firm is currently at the profit-maximizing output level. E) There is insufficient information to make a recommendation. Answer: C Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Quantitative 50) A single-price monopolist is currently producing an output level where P = $320, MR = $260, ATC = $280, and MC = $200. In order to maximize profits, this monopolist should A) produce zero output. B) increase production and reduce price. C) decrease production and increase price. D) not change the output level because the firm is currently at the profit-maximizing output level. E) There is insufficient information to make a recommendation. Answer: B Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Quantitative 51) A single-price monopolist is currently producing an output level where P = $320, MR = $200, AVC = $327, and MC = $200. In order to maximize profits, this firm should A) increase production and reduce prices. B) decrease production and increase prices. C) not change its output level, because the firm is currently at its profit maximizing level. D) produce zero output. E) There is insufficient information to make a recommendation. Answer: D Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist.

Category: Quantitative 52) Economic profit for a monopolistic firm will equal zero when A) average total cost is minimized. B) marginal revenue equals marginal cost. C) marginal revenue equals price. D) price equals marginal cost. E) average total cost equals price. Answer: E Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 53) Suppose a monopolist's marginal revenue is MR = 12 - 2Q and its marginal cost is MC = 3. What is the profit-maximizing output for this firm? A) 0 B) 4 C) 4.5 D) 6 E) 12 Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Quantitative 54) Suppose a monopolist's marginal revenue is MR = 15 - 2Q and its marginal cost is MC = 5. What is the profit-maximizing output for this firm? A) 0 B) 5 C) 7.5 D) 10 E) 15 Answer: B Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Quantitative

55) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. A profit-maximizing single-price monopolist would produce the quantity A) Q0. B) Q1. C) Q2. D) Q3. E) Q4. Answer: A Diff: 1 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

56) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. A profit-maximizing single-price monopolist would charge the price A) P0. B) P1. C) P2. D) P3. E) P4. Answer: E Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

57) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. The average per unit profit earned by this profit-maximizing singleprice monopolist is A) P4 - P0. B) P4 - P1. C) P4 - P2. D) P4 - P3. E) P3 - P2. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

58) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. If the single-price monopolist is producing at the profit-maximizing level of output, its total cost is represented by the area A) 0P4aQ0. B) 0P3cQ3. C) 0P1dQ1. D) 0P2bQ0. E) 0P0gQ5. Answer: D Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

59) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. If this single-price monopolist is producing at the profit-maximizing level of output, its total revenue is represented by the area A) 0P4aQ0. B) 0P3cQ2. C) 0P1dQ1. D) 0P2bQ0. E) 0P0gQ5. Answer: A Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

60) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. If this single-price monopolist is producing at the profit-maximizing level of output, its total profit is represented by the area A) 0P4aQ0. B) P4abP2. C) P3ceP2. D) 0P2bQ0. E) 0P0fQ0. Answer: B Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

61) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. If this single-price monopolist is producing at the profit-maximizing level of output, consumer surplus is represented by the area A) P5P2b. B) P5P4a. C) P5P0g. D) P5P1e. E) P5Q30. Answer: B Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

62) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. This single-price monopolist would maximize total revenue by producing the quantity A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

63) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. Suppose this firm experiences an increase in the demand for its product. In the short run, this profit-maximizing monopolist will A) increase its price and output. B) increase price and produce the same output. C) increase price and reduce output. D) neither raise price nor change output. E) lower both price and output. Answer: A Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Graph Category: Qualitative

64) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. What is the marginal cost of an additional meal when output is between 400 and 500 meals per day? A) $0 B) $0.50 C) $1.50 D) $4.00 E) $5.00 Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

65) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. What is the marginal cost of an additional meal when output is between 100 and 200 meals per day? A) $0 B) $1.50 C) $1.25 D) $1.00 E) $0.50 Answer: E Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

66) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. Assuming this firm is a single-price monopolist, what is the marginal revenue of an additional meal sold when output is between 100 and 200 meals per day? A) $0.50 B) $5.50 C) $4.00 D) $4.50 E) -$0.50 Answer: D Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

67) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. Assuming this firm is a single-price monopolist, what is the marginal revenue of an additional meal sold when output is between 400 and 500 meals per day? A) -$0.50 B) $0.50 C) $1.00 D) $1.50 E) $4.50 Answer: D Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

68) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. Assuming this firm is a single-price monopolist, which of the following best approximates the firm's profit-maximizing output and price? A) 150 meals at $5.50 per meal B) 250 meals at $0.75 per meal C) 350 meals at $2.50 per meal D) 450 meals at $3.75 per meal E) 550 meals at $3.25 per meal Answer: D Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

69) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. Assume this firm is a single-price monopolist. At the profitmaximizing level of output, the elasticity of demand is A) less than one. B) one. C) greater than one. D) infinite. E) impossible to know with the available information. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

70) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. Assume this firm is a single-price monopolist. If this firm provided 400 meals per day, its profits per day would be ________; if the firm provided 700 meals per day its profits would be ________. A) $1600; $1750 B) $400; $150 C) $400; -$400 D) $1750; $1600 E) $800; $150 Answer: E Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

71) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. For this monopolist, at what level of output is its marginal revenue equal to its marginal cost? A) between 200 and 300 B) between 300 and 400 C) between 400 and 500 D) between 600 and 700 E) at no level of output. Answer: C Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

72) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. If this firm is providing 500 meals per day, what is its profit per meal served? A) -$0.50 B) $1.60 C) $1.90 D) $2.00 E) $3.50 Answer: B Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

73) Your food-services company has been named as the monopoly provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $ 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50

Total Cost $ 500 550 600 675 800 950 1200 1600

Total Revenue $ 0 550 1000 1350 1600 1750 1800 1750

TABLE 10-2 Refer to Table 10-2. If this firm is providing 300 meals per day, what is its profit per meal served? A) -$0.50 B) $4.50 C) $2.75 D) $2.25 E) $1.90 Answer: D Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

74) Suppose a single-price monopolist knows the following information: Price Quantity $10.00

TR

1500

MR $7.00

Fixed Cost $6000

TC

ATC

MC

$5.00 $5.00

The monopolist could maximize profits by A) staying at the current price and output. B) lowering price and increasing output. C) lowering price and leaving output unchanged. D) raising price and leaving output unchanged. E) producing zero output. Answer: B Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative 75) Suppose a single-price monopolist knows the following information: Price Quantity $10.00

1500

TR

MR $7.00

Fixed Cost $6000

TC

ATC

MC

$5.00 $5.00

The total profit being earned by this firm at the current level of output is ________ which ________ the maximum profit possible. A) $3000; is not B) $7500; is not C) $15 000; is D) $97 500; is not E) $105 000; is Answer: B Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

76) Suppose a single-price monopolist knows the following information: Price Quantity $9.00

TR

1500

MR $4.00

Fixed Cost $7000

TC

ATC

MC

$7.00 $5.00

The monopolist could maximize its profits by A) staying at the current price and output. B) lowering price and increasing output. C) lowering price and leaving output unchanged. D) raising price and lowering output. E) producing zero output. Answer: D Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative 77) Suppose a single-price monopolist knows the following information: Price Quantity $9.00

1500

TR

MR $4.00

Fixed Cost $7000

TC

ATC

MC

$7.00 $5.00

The total profit being earned by this firm at the current level of output is A) $1500. B) $3000. C) $6500. D) $10 500. E) $13 500. Answer: B Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

78) Suppose a single-price monopolist knows the following information: Price Quantity $5.00

TR

2000

MR $4.00

Fixed Cost $2000

TC

ATC

MC

$5.00 $3.00

The monopolist could maximize profits in the short run by A) staying at the current price and output. B) lowering price and increasing output. C) lowering price and leaving output unchanged. D) raising price and lowering output. E) shutting down. Answer: B Diff: 3 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative 79) Suppose a single-price monopolist knows the following information: Price Quantity $5.00

2000

TR

MR $4.00

Fixed Cost $2000

TC

ATC

MC

$5.00 $3.00

The total profit being earned by this firm at the current level of output is A) -$2000. B) -$1000. C) 0. D) $1000. E) $2000. Answer: C Diff: 2 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Applied Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Graphics: Table Category: Quantitative

80) Which of the following statements describes a major difference between monopoly and perfect competition? A) Monopolistic firms emphasize cost minimization whereas perfectly competitive firms emphasize profit maximization. B) Perfectly competitive firms can never earn economic profits; monopolistic firms always earn economic profits. C) Perfectly competitive firms cannot maintain positive economic profits in the long run, whereas monopolists can. D) Monopolists do not consider consumer demand when choosing price and output levels. E) Monopolistic firms tend to maximize revenue while perfectly competitive firms maximize profit. Answer: C Diff: 1 Type: MC Topic: 10.1b. profit maximization for a monopolist Skill: Recall Learning Obj.: 10-1 Explain why marginal revenue is less than price for a profit‐maximizing monopolist. Category: Qualitative 81) Which one of the following is a natural barrier to firms entering an industry? A) decreasing returns to scale B) a positively sloped LRAC curve over the whole range of output C) a negatively sloped LRAC curve over the whole range of output D) threats of punitive price-cutting by existing producers E) licensing and patent restrictions Answer: C Diff: 1 Type: MC Topic: 10.1c. entry barriers Skill: Recall Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run. Category: Qualitative 82) Natural barriers to firms to entering an industry include A) control or ownership of the entire supply of an essential raw material. B) large economies of scale in the industry. C) a government-awarded franchise. D) a patent which allows production by only the patent holder. E) increasing-cost production. Answer: B Diff: 2 Type: MC Topic: 10.1c. entry barriers Skill: Recall Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run.

Category: Qualitative 83) A likely cause of a natural monopoly occurring in some industry is A) scale economies. B) patents. C) licenses. D) charters. E) sabotage. Answer: A Diff: 1 Type: MC Topic: 10.1c. entry barriers Skill: Recall Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run. Category: Qualitative 84) If an industry's demand conditions allow, at most, one firm to cover its costs while producing at its minimum efficient scale (MES), this situation is known as A) a discriminating monopoly. B) a natural monopoly. C) declining marginal revenue. D) limited competition. E) natural economic limits. Answer: B Diff: 1 Type: MC Topic: 10.1c. entry barriers Skill: Recall Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run. Category: Qualitative 85) Suppose the technology of an industry is such that the typical firm's minimum efficient scale is 8000 units per month at an average long-run cost of $5 per unit. If the total quantity demanded at a price of $5 per unit is 8500 units per month, the likely result would be A) a cartel. B) a concentrated oligopoly. C) a natural monopoly. D) price discrimination. E) perfectly competitive firms. Answer: C Diff: 2 Type: MC Topic: 10.1c. entry barriers Skill: Applied Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run.

Category: Qualitative

86) Suppose the technology of an industry is such that the typical firm's minimum efficient scale is 18 units per day at an average long-run cost of $1600 per unit. If the total quantity demanded at a price of $1750 per unit is 16 units per month, the likely result would be A) a competitive industry. B) a cartel. C) price discrimination. D) a natural monopoly. E) a concentrated oligopoly. Answer: D Diff: 3 Type: MC Topic: 10.1c. entry barriers Skill: Applied Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run. Category: Quantitative 87) Suppose the technology of production in an industry is such that the typical firm's minimum efficient scale is 1400 units per week at an average long-run cost of $9 per unit. If the total quantity demanded in this market at a price of $9 per unit is 22 million units per week, the likely result will be A) a cartel. B) price discrimination. C) a natural monopoly. D) a concentrated oligopoly. E) a competitive industry. Answer: E Diff: 2 Type: MC Topic: 10.1c. entry barriers Skill: Applied Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run. Category: Qualitative 88) If a competing firm is able to overcome an entry barrier of a monopolized industry, the demand curve of the single firm already in the industry will A) shift to the right. B) remain the same in spite of the entry of the other firm. C) shift to the right and become more elastic. D) become less elastic. E) shift to the left and become more elastic. Answer: E Diff: 2 Type: MC Topic: 10.1c. entry barriers Skill: Applied Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain

positive profits in the long run. Category: Qualitative 89) A firm is best described as a natural monopoly if A) there are no competing firms. B) it holds an exclusive charter from the government. C) its ATC curve is upward sloping. D) its MC curve is downward sloping. E) it can supply the entire market while minimizing its average costs. Answer: E Diff: 1 Type: MC Topic: 10.1c. entry barriers Skill: Recall Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run. Category: Qualitative 90) One of the main arguments of Joseph Schumpeter's idea of "creative destruction" is that A) the existence of monopolies leads to destruction of the environment. B) short-run profits created by the existence of monopolies will lead to antitrust legislation, which will force the fragmentation of monopolies into competitive industries. C) perfectly competitive industries are characterized by more productive innovation and productivity growth than monopolistic industries, which Schumpeter regarded as destructive. D) monopoly profits lead to innovation in an effort to sustain those profits. E) monopolies create profits for themselves at the expense of the destruction of consumer surplus. Answer: D Diff: 2 Type: MC Topic: 10.1d. innovation and creative destruction Skill: Recall Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run. Category: Qualitative 91) In the first half of the twentieth century, Joseph Schumpeter described a process of "creative destruction." A broadly similar phenomenon is occurring in the economy today, and we refer to it as A) de-industrialization. B) globalization. C) hollowing out. D) artificial intelligence. E) disruptive technology. Answer: E Diff: 3 Type: MC

Topic: 10.1d. innovation and creative destruction Skill: Recall Learning Obj.: 10-2 Understand how entry barriers can allow monopolists to maintain positive profits in the long run. Category: Qualitative 10.2 Cartels and Monopoly Power 1) A number of firms agreeing together to restrict output and thereby raise prices is known as A) a monopoly. B) a natural monopoly. C) a cartel. D) a barrier to entry. E) an oligopoly. Answer: C Diff: 1 Type: MC Topic: 10.2. cartels Skill: Recall Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Category: Qualitative 2) The cartelization of an industry with a homogeneous product usually means that A) member firms have agreed to cooperate in reducing costs. B) member firms have agreed to reduce their joint output. C) the demand curve facing the industry must be linear. D) the demand curve facing the industry must be elastic. E) member firms have agreed to reduce investment. Answer: B Diff: 1 Type: MC Topic: 10.2. cartels Skill: Recall Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Category: Qualitative 3) One of the reasons cartels are considered unstable is that A) member firms reduce their investment, thereby becoming uncompetitive over time. B) it is inefficient to manage individual firms collectively. C) there are wide fluctuations in price as cartel members vary their output. D) consumers seek out substitutes to the cartel product. E) individual members of the cartel have an incentive to violate the cartel agreement. Answer: E Diff: 1 Type: MC Topic: 10.2. cartels Skill: Recall

Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Category: Qualitative

4) The two characteristic problems for cartels are A) agreeing on the price to be set and preventing new entrants. B) policing members' output restrictions and preventing new entrants. C) coordinating marketing policies and policing members' quotas. D) agreeing on the price to be set and coordinating marketing policies. E) policing members' prices and restricting output. Answer: B Diff: 2 Type: MC Topic: 10.2. cartels Skill: Recall Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Category: Qualitative 5) It is common for a cartel to collapse when one or more firms in the cartel A) exceed its output quota. B) produce more efficiently than other member firms. C) are much larger than other cartel members. D) increase its price above the monopoly price. E) exit the industry. Answer: A Diff: 2 Type: MC Topic: 10.2. cartels Skill: Applied Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Category: Qualitative 6) Under what circumstances can a cartel succeed in the long run? A) The cartel has authorization from the government. B) There is free entry of new firms. C) All firms are experiencing decreasing returns to scale. D) The long-run market supply curve is elastic. E) Member firms cooperate and resist their individual incentives. Answer: E Diff: 2 Type: MC Topic: 10.2. cartels Skill: Recall Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Category: Qualitative

7) Suppose all of the firms in a perfectly competitive industry form a cartel and agree to restrict output, thereby raising the price of the product. Individual Firm A will gain the most from the existence of the cartel if A) all firms, including A, cooperate and restrict output. B) Firm A restricts output, while the other firms do not. C) all firms, except Firm A, cooperate and restrict output. D) no firms restrict output. E) all firms revert back to their competitive outputs. Answer: C Diff: 2 Type: MC Topic: 10.2. cartels Skill: Applied Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Category: Qualitative 8) In November 2012, there was some discussion of several south-Asian countries joining together to restrict the supply of rice to the world market. Between them, these countries' exports of rice account for 40% of the total global trade. What would they be trying to accomplish? A) They are attempting to form a cartel, increase their joint output, and control a larger percentage of the total global trade. B) They are attempting to price discriminate between consumers of their exported rice, thereby increasing their share of the global trade and increasing their joint profits. C) They are attempting to form a cartel, jointly restrict output, and increase the world price of rice. D) They are attempting to act as a bloc to restrict entry of new producers to the world market, and thereby protect their joint profits. E) They are attempting to form a cartel, drive other producers out of the world market and then increase their output of rice. Answer: C Diff: 3 Type: MC Topic: 10.2. cartels Skill: Applied Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Category: Qualitative

9) The figure below shows an individual firm in a perfectly competitive industry in which all firms have joined together to form a cartel. This firm has agreed to restrict its output to 600 units per day and raise its price to $5 per unit.

FIGURE 10-6 Refer to Figure 10-6. Prior to joining the cartel, this firm was operating in a long-run equilibrium. Its output as a perfectly competitive firm was ________ units per day; its price was ________ per unit; and its economic profits were ________ per day. A) 1000; $3.00; $0 B) 1000; $5.00; $2000 C) 1200; $5.00; $2400 D) 600; $4.00; $600 E) 600; $5.00; $600 Answer: A Diff: 2 Type: MC Topic: 10.2. cartels Skill: Applied Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Graphics: Graph Category: Quantitative

10) The figure below shows an individual firm in a perfectly competitive industry in which all firms have joined together to form a cartel. This firm has agreed to restrict its output to 600 units per day and raise its price to $5 per unit.

FIGURE 10-6 Refer to Figure 10-6. As a participating member of the cartel in this industry, what are the additional profits this firm is earning, in comparison to the profits it was earning prior to joining the cartel? A) $600 per day B) $1050 per day C) $1200 per day D) $3000 per day E) $1800 per day Answer: A Diff: 3 Type: MC Topic: 10.2. cartels Skill: Applied Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Graphics: Graph Category: Quantitative

11) The figure below shows an individual firm in a perfectly competitive industry in which all firms have joined together to form a cartel. This firm has agreed to restrict its output to 600 units per day and raise its price to $5 per unit.

FIGURE 10-6 Refer to Figure 10-6. As a participating member of the cartel in this industry, this firm has an incentive to cheat on its cartel agreement as long as A) MR < MC. B) MR > ATC. C) P = MC. D) P > MC. E) P > ATC. Answer: D Diff: 1 Type: MC Topic: 10.2. cartels Skill: Applied Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Graphics: Graph Category: Quantitative

12) The figure below shows an individual firm in a perfectly competitive industry in which all firms have joined together to form a cartel. This firm has agreed to restrict its output to 600 units per day and raise its price to $5 per unit.

FIGURE 10-6 Refer to Figure 10-6. Suppose this firm, and this firm only, decided to cheat on its agreement with the cartel and produce an output level that satisfies its own profitmaximizing condition. What profits would this firm earn under this circumstance? A) $2100 per day B) $2400 per day C) $3600 per day D) $3000 per day E) $6000 per day Answer: A Diff: 3 Type: MC Topic: 10.2. cartels Skill: Applied Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Graphics: Graph Category: Quantitative

13) The figure below shows an individual firm in a perfectly competitive industry in which all firms have joined together to form a cartel. This firm has agreed to restrict its output to 600 units per day and raise its price to $5 per unit.

FIGURE 10-6 Refer to Figure 10-6. Suppose this firm, and this firm only, decided to cheat on its agreement with the cartel and produce an output level that satisfies its own profitmaximizing condition. What are the additional profits this firm will earn, compared to the profits it would earn as a cooperative member of the cartel? A) $350 B) $600 C) $1500 D) $2100 E) $2400 Answer: C Diff: 3 Type: MC Topic: 10.2. cartels Skill: Applied Learning Obj.: 10-3 Describe why firms would form a cartel to restrict industry output and how this would increase their profits. Graphics: Graph Category: Quantitative

10.3 Price Discrimination 1) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. In order to maximize its profits, a perfect-price-discriminating monopolist produces the quantity A) Q0. B) Q1. C) Q2. D) Q3. E) Q4. Answer: C Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Recall Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

2) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. If the monopolist is practicing perfect price discrimination and is maximizing its profits, the total revenue is represented by the area A) 0P4aQ0. B) 0P5cQ2. C) 0P1dQ1. D) 0P2bQ0. E) 0P3cQ2. Answer: B Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

3) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. If the monopolist is practicing perfect price discrimination and is maximizing its profits, the consumer surplus is represented by the area A) P5P3c. B) P5P4a. C) P5P0c. D) P5P2e. E) There is no consumer surplus in this case. Answer: E Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

4) Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. Suppose this monopolist is practicing perfect price discrimination. How does this differ from the situation where this firm is charging a single price for its product? A) The firm is producing the same quantity, has successfully identified different segments of the market, and is able to capture some of the consumer surplus. B) The firm is restricting output to a level below that of the single-price monopolist, and thereby raises the price of its product and earns higher profits. C) The firm is producing a smaller quantity, is charging a different price for each unit sold and is earning higher profits. D) The firm is producing the same quantity, but charging a different price for each unit sold and is earning higher profits. E) The firm is producing a higher quantity, is charging a different price for each unit sold and is earning higher profits. Answer: E Diff: 3 Type: MC Topic: 10.3. price discrimination Skill: Recall Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

5) Consider a firm with some market power in its industry. Relative to a firm that must charge a single price for all of its output, the ability of this firm to charge multiple prices gives it the ability to capture some or all of the A) producer surplus. B) consumer surplus. C) fixed costs. D) variable costs. E) marginal costs. Answer: B Diff: 1 Type: MC Topic: 10.3. price discrimination Skill: Recall Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 6) Consider a price-setting firm that is able to practice price discrimination. By doing so the firm is able to increase its profits. How? A) by shifting its cost curves downward B) by raising the price above the competitive price C) by charging different prices according to the willingness to pay of each consumer D) by reducing costs through a reduction in output E) by charging different prices according to the different marginal cost on each unit Answer: C Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Recall Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 7) Suppose the market for some product can be divided into two segments, each with a linear demand curve. A monopolist can set a different (single) price in each segment. The profit-maximizing price discrimination across these two market segments will lead to A) higher output with average revenue higher than the best single price. B) lower output with total revenue higher than the single best price. C) lower output with a higher average revenue than the best single price. D) higher output with average revenue lower than the best single price. E) the same output but higher average revenue than the best single price. Answer: E Diff: 3 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative

8) One reason movie theatres charge a lower admission price to senior citizens is that A) movie-theatre owners are able to practice perfect price discrimination. B) government sets the price policies. C) senior citizens have a more elastic demand than other movie-goers. D) senior citizens have a less elastic demand than other movie-goers. E) senior citizens have a higher willingness-to-pay than other people. Answer: C Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 9) Which of the following cases are examples of price discrimination? 1. Airlines charge different fares for business people than tourist travelers. 2. Young males are charged higher premiums for car insurance than older males or women. 3. A local phone company charges different telephone rates to residential and business users. A) 1 only B) 2 only C) 3 only D) 1 and 3 only E) 1, 2, and 3 Answer: D Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 10) Which of the following cases are examples of price discrimination? 1. A supermarket charging more for strawberries in December than in June. 2. A doctor charging for her services according to the income of her patients. 3. A fixed mortgage rate is higher than a variable mortgage rate. A) 1 only B) 2 only C) 3 only D) 1 and 3 only E) 1, 2, and 3 Answer: B Diff: 2 Type: MC Topic: 10.3. price discrimination

Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 11) Which of the following statements about a monopoly practicing perfect price discrimination is correct? A) The profit-maximizing criterion is MR = P, the same as for perfect competition. B) The demand curve is also the marginal-revenue curve. C) It will charge higher prices in those market segments with more elastic demand. D) The output will always be less than that produced by a single-price monopolist. E) Total costs will be lower than that of a single-price monopolist. Answer: B Diff: 3 Type: MC Topic: 10.3. price discrimination Skill: Recall Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 12) If a monopolist is practicing perfect price discrimination, then the following equation is true: A) MR = P for all units. B) MR = 1/2 P for any unit. C) AR = ATC at the profit-maximizing level of output. D) MC = 1/2 MR at the profit-maximizing level of output. E) P = AVC at the profit-maximizing level of output. Answer: A Diff: 3 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 13) If a monopolist is practicing perfect price discrimination, then A) the producer surplus is zero. B) consumer surplus is zero. C) costs are lower than for the non-price-discriminating monopolist. D) demand must be inelastic. E) the monopolist is not profit maximizing. Answer: B Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging

different prices to different consumers. Category: Qualitative

14) Which of the following products would most easily lend itself to successful price discrimination by a monopolist? A) mobile phones B) electricity C) pianos D) restaurant meals E) transport trucks Answer: B Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 15) If a monopolist is practising perfect price discrimination, we know that A) the firm is facing a perfectly elastic demand curve. B) the firm is facing a perfectly inelastic demand curve. C) marginal cost is rising as output rises. D) the firm is producing a lower output than it would if it were a single-price monopolist. E) the firm is selling each unit at a different price and capturing all consumer surplus. Answer: E Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Recall Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative

16) The diagram below shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the pharmaceutical firm holds a 20-year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent.

FIGURE 10-7 Refer to Figure 10-7. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output it will produce A) Q0 units and charge the perfectly competitive price. B) Q0 units and charge a price of p0. C) Q1 units and charge a price of p1. D) Q0 units and charge a price of p2. E) Q1 units and charge a price greater than its average total variable cost. Answer: B Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

17) The diagram below shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the pharmaceutical firm holds a 20-year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent.

FIGURE 10-7 Refer to Figure 10-7. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output, consumer surplus is represented by A) areas H + I. B) areas C + D + E + F. C) areas D + E. D) There is no consumer surplus generated. E) It is not possible to determine with the information provided. Answer: C Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

18) The diagram below shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the pharmaceutical firm holds a 20-year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent.

FIGURE 10-7 Refer to Figure 10-7. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output, it will generate a total profit represented by A) the sum of areas A through K. B) areas A + B + C + F + G. C) areas B + C + F + G + H + I. D) areas D + E. E) It is not possible to determine with the information provided. Answer: E Diff: 3 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

19) The diagram below shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the pharmaceutical firm holds a 20-year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent.

FIGURE 10-7 Refer to Figure 10-7. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output it will produce A) Q1 units and charge a price of p1 on the last unit sold. B) Q1 units and charge a price of p1 on all units. C) Q0 units and charge a price of p0 on the last unit sold. D) Q0 units and charge a price of p0 on all units. E) It is not possible to determine with the information provided. Answer: A Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

20) The diagram below shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the pharmaceutical firm holds a 20-year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent.

FIGURE 10-7 Refer to Figure 10-7. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output, consumer surplus is represented by A) areas C + D + E + F + H. B) areas D + E. C) areas C + F + H. D) There is no consumer surplus. E) It is not possible to determine with the information provided. Answer: D Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

21) The diagram below shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the pharmaceutical firm holds a 20-year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent.

FIGURE 10-7 Refer to Figure 10-7. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output, it will generate a deadweight loss to society represented by A) areas H + I. B) areas H + I + J + K. C) areas I + J + K. D) There is no deadweight loss generated. E) It is not possible to determine with the information provided. Answer: A Diff: 3 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

22) The diagram below shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the pharmaceutical firm holds a 20-year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent.

FIGURE 10-7 Refer to Figure 10-7. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output, it will generate a deadweight loss to society represented by A) areas H + I. B) areas H + I + J + K. C) areas I + J + K. D) There is no deadweight loss generated. E) It is not possible to determine with the information provided. Answer: D Diff: 3 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

23) The diagram below shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the pharmaceutical firm holds a 20-year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent.

FIGURE 10-7 Refer to Figure 10-7. Assume this pharmaceutical firm has no fixed costs and is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output, it will generate a total profit represented by A) areas B + C + F + G + H + I. B) areas C + F + H. C) areas G + I. D) the area below the demand curve minus the area below the MC curve, up to Q1. E) It is not possible to determine with the information provided. Answer: D Diff: 3 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

24) The diagram below shows the demand curve and marginal cost and marginal revenue curves for a new heart medication for which the pharmaceutical firm holds a 20-year patent on its production and sales. This protection gives the firm monopoly power for the 20 years of the patent.

FIGURE 10-7 Refer to Figure 10-7. Suppose this pharmaceutical firm is charging a single price for its drug and is maximizing its profits. If it then begins to perfectly price discriminate among its buyers and maximizes its profits by doing so, it will A) cause a loss of economic surplus to society as a whole. B) generate an increase in producer surplus equal to areas D + E + H + I. C) no longer be equating MR and MC. D) reduce its producer surplus by areas C + F + H. E) decrease its total output. Answer: B Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Graphics: Graph Category: Qualitative

25) Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $18 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $25 and marginal revenue in segment B is $15. Is this firm maximizing its profit? A) Yes, because it has set a price such that MC is between the MRs of the two market segments. B) No, because it is only possible to equate MR and MC when there is a single MR curve. C) Yes, because since marginal cost is constant, the firm must set a single price. D) No, this firm can increase its profits by price discriminating across the two market segments. Answer: D Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Quantitative 26) Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $18 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $25 and marginal revenue in segment B is $15. How can this firm maximize its profit? A) increase the output in segment A and decrease the output in segment B B) increase the output in segments A and B C) decrease the output in segment A and increase the output in segment B D) decrease the output in segments A and B E) maintain the current output and its allocation across segments Answer: A Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Quantitative

27) Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $100 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $85 and marginal revenue in segment B is $105. Is this firm maximizing its profit? A) Yes, because it has set a price such that MC is between the MRs of the two market segments. B) No, because it is only possible to equate MR and MC when there is a single MR curve. C) Yes, because since marginal cost is constant, the firm must set a single price. D) No, this firm can increase its profits by price discriminating across the two market segments. Answer: D Diff: 1 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Quantitative 28) Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $100 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $85 and marginal revenue in segment B is $105. How can this firm maximize its profit? A) increase the output in segment A and decrease the output in segment B B) increase the output in segments A and B C) decrease the output in segment A and increase the output in segment B D) decrease the output in segments A and B E) maintain the current output and its allocation across segments Answer: C Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Quantitative

29) With regard to price discrimination, we can generally say that a monopolist practicing perfect price discrimination ________ a single-price monopolist in the same market. A) produces a lower level of output compared to B) generates more consumer surplus than C) generates a more efficient outcome for society as a whole compared to D) produces the same output level and charges the same price as E) has the same effects on consumer welfare as Answer: C Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 30) Many clothing retailers allow you to go to their website and print a coupon that you then present for a discounted price on your next purchase in the store. In economics we refer to this as A) a created entry barrier, a form of price discrimination. B) hurdle pricing, a form of price discrimination. C) sales maximization, a form of market segmentation. D) a loss-leader, a form of advertising. E) arbitrage, a form of price discrimination. Answer: B Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative 31) Suppose you go to a retailer's website and print a coupon that gives you a discount on your next purchase at their store. But your friend, who also plans to purchase there, can't be bothered. You are revealing to the store that A) you have a lower income than your friend. B) you understand price discrimination and your friend does not. C) you have a lower elasticity of demand than your friend. D) you have a higher elasticity of demand than your friend. E) elasticity of demand changes according to the size of the discount offered. Answer: D Diff: 2 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative

32) Consider the following statement: "Price discrimination is harmful to society and should not be tolerated under any circumstance." Why is this statement false? A) Price discrimination always leads to lower prices and higher quantities. B) Price discrimination can allow for some consumers to be made better off because they are able to buy a product or service that was otherwise unaffordable. C) Price discrimination leads to higher prices for all consumers and a reduction in consumer surplus. D) Price discrimination reduces total quantity exchanged and therefore reduces the sum of producer and consumer surplus. E) Price discrimination violates the Canadian Charter of Rights and Freedoms. Answer: B Diff: 3 Type: MC Topic: 10.3. price discrimination Skill: Applied Learning Obj.: 10-4 Explain how some firms can increase their profits by charging different prices to different consumers. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 11 Imperfect Competition and Strategic Behaviour 11.1 Imperfect Competition 1) An example of a Canadian industry composed of a few large firms is A) the accounting profession. B) clothing retailing. C) gasoline retailing. D) restaurants. E) hair dressers. Answer: C Diff: 1 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-1 Recognize that Canadian industries typically have either a large number of small firms or a small number of large firms. Category: Qualitative 2) A Canadian industry composed of many small firms is A) steel manufacturing. B) automobile production. C) gasoline retailing. D) restaurants. E) natural gas transmission. Answer: D Diff: 1 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall

Learning Obj.: 11-1 Recognize that Canadian industries typically have either a large number of small firms or a small number of large firms. Category: Qualitative 3) By calculating a concentration ratio, economists measure the A) degree to which a monopolist's output is lower than in perfect competition. B) control of a monopolist over its input prices. C) fraction of total industry sales accounted for by the largest firms. D) degree to which firms in the industry use similar technologies. E) concentration of firms in one geographic location. Answer: C Diff: 1 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-1 Recognize that Canadian industries typically have either a large number of small firms or a small number of large firms. Category: Qualitative 4) In Canada, concentration ratios are highest in which of the following industries? A) tobacco products B) petroleum and coal products C) mining D) machinery E) clothing Answer: B Diff: 1 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-1 Recognize that Canadian industries typically have either a large number of small firms or a small number of large firms. Category: Qualitative 5) The table below shows the market shares for the only firms in a domestic cement market.

Firm A Firm B Firm C Firm D Firm E Firm F Firm G Firm H

Market Share 45% 22% 10% 8% 7% 5% 2% 1%

TABLE 11-1 Refer to Table 11-1. The four-firm concentration ratio in this industry is ________%. A) 100 B) 92 C) 85 D) 67 E) 45 Answer: C Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied Learning Obj.: 11-1 Recognize that Canadian industries typically have either a large number of small firms or a small number of large firms. Graphics: Table Category: Quantitative

6) The table below shows the market shares for the only firms in a domestic cement market.

Firm A Firm B Firm C Firm D Firm E Firm F Firm G Firm H

Market Share 45% 22% 10% 8% 7% 5% 2% 1%

TABLE 11-1 Refer to Table 11-1. The eight-firm concentration ratio in this industry is ________%. A) 100 B) 92 C) 85 D) 67 E) 45 Answer: A Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied Learning Obj.: 11-1 Recognize that Canadian industries typically have either a large number of small firms or a small number of large firms. Graphics: Table Category: Quantitative 7) Suppose the 2-firm concentration ratio (measuring output) in a Canadian manufacturing industry is over 90%. Why might the market power of these 2 firms be less than the concentration ratio suggests? A) The product is purely domestic and there is no international trade. B) A high concentration ratio usually indicates low degrees of market power. C) The product is traded internationally and the two Canadian firms compete with many global rivals. D) The relevant market is regional and so the concentration ratio is not relevant. E) A 2-firm concentration ratio does not provide enough information. Answer: C Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied Learning Obj.: 11-1 Recognize that Canadian industries typically have either a large number of small firms or a small number of large firms.

Category: Qualitative 8) Suppose the market for gasoline retailing (gas stations) in an island economy has 12 firms. The two largest firms each account for 30% of sales, the third accounts for 15%, the fourth for 7%, the fifth for 4% and the remaining firms for 2% each. What is the fourfirm concentration ratio? A) 8% B) 60% C) 75% D) 82% E) 100% Answer: D Diff: 1 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied Learning Obj.: 11-1 Recognize that Canadian industries typically have either a large number of small firms or a small number of large firms. Category: Quantitative 9) Suppose the market for gasoline retailing (gas stations) in an island economy has 12 firms. The two largest firms each account for 30% of sales, the third accounts for 15%, the fourth for 7%, the fifth for 4% and the remaining firms for 2% each. Which of the following statements best describes the structure of this local industry? A) This industry is an oligopoly. B) This industry is perfectly competitive. C) This industry is a monopoly. D) This industry is monopolistically competitive. E) Either A or D could be correct. Answer: E Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied Learning Obj.: 11-1 Recognize that Canadian industries typically have either a large number of small firms or a small number of large firms. Category: Qualitative 10) Which of the following products is best considered a differentiated product? A) wheat B) steel C) soap D) topsoil E) sugar Answer: C Diff: 1 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied

Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 11) An imperfectly competitive industry is often allocatively inefficient when compared to the performance of a competitive industry, because imperfect competitors A) maximize profits. B) make profits. C) obtain economies of scale. D) operate in the global economy. E) set price above the marginal cost. Answer: E Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 12) A characteristic common to most imperfectly competitive markets is A) inelastic market demand curves. B) a homogeneous product. C) non-price competition among firms. D) unexploited economies of scale. E) common pricing among firms. Answer: C Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 13) In an imperfectly competitive market, changes in market conditions are often signalled to the individual firms by a change in the A) firm's sales. B) price of the product. C) government policy. D) cost conditions. E) elasticity of supply. Answer: A Diff: 1 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative

14) A monopolistically competitive firm and a monopoly are similar because A) both firms will earn zero profits in the long run. B) both firms always operate at their point of minimum average cost. C) each firm can raise its price without losing all of its sales. D) both firms must behave strategically toward other firms in the industry. E) each firm has a large number of competitors. Answer: C Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 15) A monopolistically competitive firm and a monopoly are similar because A) both firms will earn zero profits in the long run. B) both firms always operate at their point of minimum average cost. C) they each face a downward-sloping demand curve. D) both firms must behave strategically toward other firms in the industry. E) each firm has a large number of competitors. Answer: C Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 16) In which market structure are price fluctuations most common? A) Price fluctuations occur with the same frequency in all market structures. B) monopoly C) oligopoly D) monopolistic competition E) perfect competition Answer: E Diff: 1 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative

17) In imperfectly competitive markets, "administered" prices usually change ________ than prices in perfectly competitive markets, because ________. A) more often; they are more flexible B) more often; perfectly competitive firms are price takers C) more often; price becomes a strategic choice D) less often; changing prices is costly E) less often; changing prices is costless Answer: D Diff: 1 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 18) One difference between a perfectly competitive market and a monopolistically competitive market is that A) there are no barriers to entry in monopolistic competition. B) there are no barriers to exit in monopolistic competition. C) there is no product differentiation in perfect competition D) there is no product differentiation in monopolistic competition E) there is strategic interaction among firms in monopolistic competition. Answer: C Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 19) Which of the following characteristics is NOT associated with imperfectly competitive markets? A) Firms are price setters. B) Products are differentiated. C) Firms engage in non-price competition. D) Firms are price takers. E) Firms can shift the demand curve for their product by advertising. Answer: D Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative

20) Which of the following characteristics is NOT typically associated with imperfectly competitive market structures? A) Each firm faces a downward-sloping demand curve. B) Products are differentiated. C) Firms engage in non-price competition. D) Each firm faces a horizontal demand curve for its product. E) Firms can shift the demand curve for their product by advertising. Answer: D Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 21) Consider the following characteristics of a particular industry: - each firm faces a demand curve with price elasticity greater than 10 000 - each firm produces at a minimum efficient scale in long-run equilibrium This industry is likely to be A) an oligopoly. B) highly concentrated. C) monopolistically competitive. D) perfectly competitive. E) a cartel. Answer: D Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 22) Consider the following characteristics of a particular industry: - the four-firm concentration ratio is 78% (in the relevant market) - each firm produces output where P > MC - the products are highly differentiated This industry is likely to be A) an oligopoly. B) one where each firm has limited market power. C) monopolistic. D) perfectly competitive. E) a cartel. Answer: A Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative

23) Consider the following characteristics of a particular industry: - there is freedom of entry and exit - in long-run equilibrium, each firm is producing a level of output where there are increasing returns to scale This industry is likely to be A) an oligopoly. B) highly concentrated. C) monopolistically competitive. D) perfectly competitive. E) a cartel. Answer: C Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 24) Consider the following characteristics of a particular industry: - the firms in the industry are maximizing their joint profits - entry of new firms is restricted This industry is likely to be A) a monopoly. B) one where each firm has limited market power. C) monopolistically competitive. D) perfectly competitive. E) a cartel. Answer: E Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Recall Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative

25) Consider the following characteristics of a particular industry: - there are natural barriers to entry - market price exceeds marginal cost of production - there is no strategic behaviour in the industry This industry is likely to be A) an oligopoly. B) a monopoly. C) monopolistically competitive. D) perfectly competitive. E) one where each firm has limited market power. Answer: B Diff: 2 Type: MC Topic: 11.1. imperfectly competitive market structures Skill: Applied Learning Obj.: 11-2 Identify the characteristics of imperfectly competitive firms. Category: Qualitative 11.2 Monopolistic Competition 1) Which of the following is most characteristic of a monopolistically competitive market structure? A) Each firm's marginal revenue curve lies above its demand curve. B) The firms in the industry engage in strategic, non-price competition. C) Entry into the industry is difficult. D) Each firm faces a downward-sloping demand curve. E) The firms sell an identical product. Answer: D Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 2) Which of the following is most characteristic of a monopolistically competitive market? A) Firms engage in strategic behaviour. B) There are many small firms in the industry. C) Economic profits are often positive in the long run. D) Each firm faces a horizontal demand curve. E) All firms are price takers. Answer: B Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic

competition. Category: Qualitative

3) If there are economic profits in a monopolistically competitive industry, they will generally be competed away through the A) introduction of brand name products by existing firms. B) entry of new firms. C) increasing advertising budgets of existing firms. D) manipulation of the demand curve. E) exit of existing firms. Answer: B Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 4) Suppose there are many independent dry cleaners in your city, each of which is earning economic profits. According to the theory of monopolistic competition, A) existing dry cleaners will cooperate and maximize their joint profits. B) existing dry cleaners will engage in non-price competition and maintain their profits in the long run. C) existing dry cleaners will expand until they reach the quantity associated with minimum long-run average cost. D) existing dry cleaners will cooperate and restrict entry of new firms. E) new dry cleaners will enter this market until each firm is earning zero profits. Answer: E Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 5) Suppose there are many independent dry cleaners in your city, each of which provides essentially the same service. However, one offers local delivery, another offers free coffee in the shop, while another offers one-hour dry cleaning. Which of the following statements explains what is happening in this market? A) These firms are perfectly competitive and are attempting to increase sales and maximize their profits. B) These firms are oligopolistic and are engaging in strategic behaviour. C) These firms are perfectly competitive and are engaging in non-price competition. D) These firms are monopolistically competitive and are attempting to differentiate their product. E) These firms are perfectly competitive and are engaging in strategic behaviour. Answer: D Diff: 2 Type: MC Topic: 11.2. monopolistic competition

Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 6) In a monopolistically competitive industry, the freedom of entry and exit leads to A) a negatively sloped demand curve for the industry. B) strategic behaviour with regard to other firms in the industry. C) brand proliferation. D) zero profits in long-run equilibrium. E) deficient capacity in the industry. Answer: D Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 7) Monopolistic competition is similar to perfect competition in that A) firms in both types of market structures produce a standardized product. B) strategic behaviour is common to both market structures. C) neither has significant barriers to entry. D) each firm faces a horizontal demand curve. E) firms in both types of market structure engage in non-price competition. Answer: C Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 8) If entry into a monopolistically competitive industry occurs because of positive profits earned by the existing firms, the A) industry demand curve will shift to the left. B) industry demand curve will shift to the right. C) demand curve for each existing firm will shift to the left. D) demand curve for each existing firm will shift to the right. E) demand curves for the existing firms will remain unchanged. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition.

Category: Qualitative

9) Compared with perfect competition, monopolistic competition results in A) a wider variety of the good produced, but at higher unit costs. B) the same degree of variety of the good, but higher unit costs. C) fewer varieties of the good produced at lower unit costs. D) fewer varieties of the good produced at higher unit costs. E) a clearly more efficient social outcome. Answer: A Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 10) A monopolistically competitive firm maximizes profits in the short run A) by equating MC with price. B) by equating MC with MR. C) when P = AVC. D) when P = ATC. E) by maximizing total revenue. Answer: B Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 11) Suppose a monopolistically competitive firm decides to raise its price in response to an increase in its costs. The theory of monopolistic competition predicts that A) this firm would lose some, but not all of its customers. B) this firm would increase its profits. C) this firm would lose all of its customers. D) increasing the price has no effect on profits. E) this firm would lose none of its customers. Answer: A Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative

12) Of the following, which is the best example of a monopolistically competitive firm? A) Apple B) Air Canada C) Burger King D) a PEI potato farmer E) a local hair salon Answer: E Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 13) Consider an industry in which there are significant scale economies. An implication is that A) a large share of the market would be required by each firm to achieve the lowest possible cost per unit. B) the minimum efficient scale of operation occurs at fairly low output levels. C) barriers to entry in the industry are non-existent. D) this industry is more efficient than others. E) the firms in the industry will behave as perfect competitors. Answer: A Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 14) Why is the demand curve facing a monopolistically competitive firm quite elastic? A) There are many close substitutes to the good the firm is producing. B) Goods that are complements to the good the firm is producing also have elastic demand curves. C) There is the possibility of entry of new firms. D) The industry is producing a homogeneous product. E) Firms are not behaving strategically. Answer: A Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative

15) Which of the following statements is true for an industry that is monopolistically competitive? A) Only one firm is present in the industry. B) Firms set prices without any threat of competition. C) Firms set prices and are constrained by the existence of close substitutes for their product. D) Firms do not have any price-setting ability because the product is homogeneous. E) Firms can charge slightly different prices even though they produce identical goods. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 16) Which of the following refers to products that differ from each other enough that they can be sold at different prices, but are similar enough that they can be considered the same product? A) complementary products B) standardized products C) necessary products D) differentiated products E) inferior products Answer: D Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 17) One prediction about monopolistic competition as a market structure is that it has higher unit costs than perfect competition. But it is unreasonable to conclude that monopolistic competition is therefore bad for consumers because A) consumers benefit from lower prices. B) consumers benefit from an increased variety of products. C) consumers benefit because of an increase in quantity available. D) consumers benefit from products becoming more homogeneous. E) higher production costs means more employment. Answer: B Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition.

Category: Qualitative

18) A monopolistically competitive firm is predicted to earn positive profits A) because there are barriers to entry. B) only in the long run. C) only in the short run. D) only if it advertises its own product. E) only if it maintains excess capacity in the production of it product. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 19) Why do we say that a monopolistically competitive firm has some degree of market power? A) It always makes positive profits. B) There are few firms in the industry. C) There are natural barriers to entry. D) There are legal barriers to entry. E) It sells a differentiated product. Answer: E Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative

20) The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-1 Refer to Figure 11-1. What price will this profit-maximizing firm set? A) $5 B) $10 C) $15 D) $20 E) $25 Answer: D Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Quantitative

21) The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-1 Refer to Figure 11-1. What quantity of output will this profit-maximizing firm choose to sell? A) 80 units B) 100 units C) 120 units D) 140 units E) 150 units Answer: B Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Quantitative

22) The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-1 Refer to Figure 11-1. Assuming this firm is producing its profit-maximizing level of output, what is the per-unit profit being earned by this firm? A) -$5 B) -$10 C) $20 D) $10 E) $5 Answer: E Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Quantitative

23) The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-1 Refer to Figure 11-1. Assuming that this firm is producing its profit-maximizing level of output, what are the profits or losses being earned by this firm? A) -$500 B) -$1000 C) $2000 D) $1000 E) $500 Answer: E Diff: 3 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Quantitative

24)

FIGURE 11-2 Refer to Figure 11-2. A perfectly competitive firm with zero economic profits is depicted in diagram A) 1. B) 2. C) 3. D) 4. E) 2 or 4. Answer: C Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph

Category: Quantitative 25)

FIGURE 11-2 Refer to Figure 11-2. In diagram 2, the firm's short-run supply curve is A) ATC above AVC. B) MC above AVC. C) MC above ATC. D) AR. E) MC. Answer: B Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition.

Graphics: Graph Category: Qualitative

26)

FIGURE 11-2 Refer to Figure 11-2. In diagram 1, the profit-maximizing output for a competitive firm is one where A) ATC is at the minimum. B) P > MC. C) P < MC. D) AR = ATC. E) P = AR = MC. Answer: E Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph

Category: Qualitative 27)

FIGURE 11-2 Refer to Figure 11-2. In diagram 4, the profit-maximizing output for a single-price monopolist occurs where A) P = MR. B) P > AR. C) P > MC. D) P = MC. E) P < MC. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic

competition. Graphics: Graph Category: Qualitative 28)

FIGURE 11-2 Refer to Figure 11-2. In diagram 2, at the short-run profit-maximizing position, the firm A) is making profits. B) should produce zero output. C) is losing money. D) should raise its price. E) should increase output. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied

Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

29)

FIGURE 11-2 Refer to Figure 11-2. Diagram 3 depicts a typical firm in long-run equilibrium in A) a perfectly competitive industry. B) a monopolistic industry. C) a monopolistically competitive industry. D) an oligopolistic industry. E) an imperfectly competitive industry. Answer: A Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

30)

FIGURE 11-2 Refer to Figure 11-2. Diagram 4 depicts the only possible long-run equilibrium for a typical firm in A) a perfectly competitive industry. B) a monopolistic industry. C) a monopolistically competitive industry. D) an oligopolistic industry. E) None of the above — it is not a long-run equilibrium. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph

Category: Qualitative 31)

FIGURE 11-2 Refer to Figure 11-2. The position of a typical firm when the industry is in long-run equilibrium with free entry and exit and product differentiation is exhibited in diagram A) 1. B) 2. C) 3. D) 4. Answer: D Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition.

Graphics: Graph Category: Qualitative

32) In long-run equilibrium, a monopolistically competitive industry is characterized by A) positive profits for all firms in the industry. B) a perfectly elastic demand curve facing each firm in the industry. C) zero profits for all firms in the industry. D) positive profits as a result of barriers to entry. E) all firms operating at the minimum point of their long-run average cost curves. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 33) When a monopolistically competitive industry is in long-run equilibrium, each firm will be operating where price is A) greater than average total cost but equal to marginal cost. B) greater than average total cost and greater than marginal cost. C) equal to average total cost and to marginal cost. D) greater than marginal cost but equal to average total cost. E) less than marginal cost and equal to average total cost. Answer: D Diff: 3 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 34) When a monopolistically competitive industry is in long-run equilibrium, the excess capacity in an individual firm is indicated by the difference between A) price and marginal cost. B) the output at which ATC is at a minimum and the output at which price equals marginal cost. C) zero and the output at which the demand curve is tangent to the ATC curve. D) price and average cost. E) the output at which ATC is at a minimum and the output at which marginal revenue is equal to marginal cost. Answer: E Diff: 3 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative

35) Which of the following is true of a monopolistically competitive firm in the long run? The firm will A) lose money. B) operate where price = marginal cost. C) earn positive economic profits. D) produce where price exceeds the minimum of average costs. E) produce the output where average costs are minimized. Answer: D Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative

36) The diagram below shows demand and cost curves for a monopolistically competitive firm.

FIGURE 11-3 Refer to Figure 11-3. In the long run, a monopolistically competitive firm will produce A) Q2 at Price P1. B) Q1 at Price P2. C) Q1 at Price P1. D) Q2 at Price P2. E) the output where AC is at its minimum. Answer: C Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

37) The diagram below shows demand and cost curves for a monopolistically competitive firm.

FIGURE 11-3 Refer to Figure 11-3. Which of the following statements about a monopolistically competitive firm in the long run is correct? This firm will A) make profit by producing at Q2 and charging price P1. B) lose money by producing at Q1 and charging price P2. C) maximize profit and make positive profit by producing at Q 1 and charging price P1. D) maximize profit but only break even by producing at Q 1 and charging price P1. E) maximize profit by producing output level Q2, the minimum point of its LRAC curve. Answer: D Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

38) The diagram below shows demand and cost curves for a monopolistically competitive firm.

FIGURE 11-3 Refer to Figure 11-3. This monopolistically competitive firm is allocatively inefficient because in long-run equilibrium, A) LRAC is not at its minimum. B) MC is greater than price. C) price is greater than MC at Q1. D) price is greater than LRAC at Q1. E) None of the above - the long-run equilibrium is allocatively efficient. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

39) The diagram below shows demand and cost curves for a monopolistically competitive firm.

FIGURE 11-3 Refer to Figure 11-3. This monopolistically competitive firm is said to be inefficient because in long-run equilibrium, A) MC is greater than LRAC. B) MC is greater than price. C) price is greater than MC at Q1. D) price is greater than LRAC at Q1. E) LRAC at Q1 is not at its minimum. Answer: E Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

40) The diagram below shows demand and cost curves for a monopolistically competitive firm.

FIGURE 11-3 Refer to Figure 11-3. If an increase in industry demand led to an outward shift in each firm's demand curve, and no change to the firm's costs, the typical firm would A) be making profits and new firms would enter the industry in the long run. B) be making losses and some firms would exit the industry in the long run. C) expand its output in the long run. D) increase costs in order to break even at P1 and Q1 in the long run. E) decrease costs in order to break even at P1 and Q1 in the long run. Answer: A Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

41) The diagram below shows demand and cost curves for a monopolistically competitive firm.

FIGURE 11-3 Refer to Figure 11-3. If a decrease in industry demand led to an inward shift of each firm's demand curve, a typical firm would A) be making profits and new firms would enter the industry in the long run. B) be making losses and some firms would exit the industry in the long run. C) exit the industry and the industry would shut down. D) increase costs in order to break even at PL and QL in the long run. E) decrease costs in order to break even at PL and QL in the long run. Answer: B Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

42) The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-4 Refer to Figure 11-4. How is the excess-capacity theorem demonstrated in this diagram? A) The short-run equilibrium occurs where the firm is producing output at , which is less than that corresponding to the lowest point on its LRAC curve. B) The long-run equilibrium occurs where the firm is producing output at , which is the same as for a perfectly competitive industry. C) In long-run equilibrium, the firm is earning positive profits, but has unexploited economies of scale. D) In long-run equilibrium, this firm has excess capacity because they are selling output at a price below their LRAC. E) The long-run equilibrium occurs where the firm is producing output at , which is less than that corresponding to the lowest point on its LRAC curve. Answer: E Diff: 3 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

43) The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-4 Refer to Figure 11-4. Which of the following best describes this industry if all firms have the same cost and revenue curves and are producing output of ? A) Firms are earning positive profits, and new firms will enter the industry until all firms are operating at their minimum LRAC. B) All firms are earning positive profits, and there is no incentive for firms to enter or exit the industry. C) Firms are earning zero profits, and there is no incentive for firms to enter or leave the industry. D) All firms will try to minimize costs and move toward minimum LRAC. E) Firms are incurring losses, and firms will exit this industry. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

44) The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-4 Refer to Figure 11-4. Assuming this firm is producing its profit-maximizing level of output, what are the profits or losses being earned by this firm? A) $0 profit or loss per unit B) $7 loss per unit C) $13 profit per unit D) $6 profit per unit E) $20 loss per unit Answer: A Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Quantitative

45) The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-1 Refer to Figure 11-1. If this firm is maximizing its profits, does the diagram depict a long-run equilibrium situation? A) Yes, because this firm is producing where MC = MR and is earning zero profits. B) Yes, because this firm is producing where MC = MR and is earning economic profits. C) No, because this firm is earning profits which will attract new firms to this market. D) No, because this firm is suffering losses and firms will exit this market. E) No, because this firm is a natural monopoly. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

46) The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-1 Refer to Figure 11-1. Which of the following statements best describes the path to longrun equilibrium for this firm? A) New firms will enter, causing this firm's demand curve to shift to the left until its profits are eliminated. B) The firm will continue to earn its existing level of profits. C) The firm will continue to earn its existing level of profits because it can prevent the entry of new firms to the market. D) Firms with similar cost structures will exit the industry until profits are zero. E) The AC curve will shift down in the long run and profits for this particular firm will increase. Answer: A Diff: 3 Type: MC Topic: 11.2. monopolistic competition Skill: Applied Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Graphics: Graph Category: Qualitative

47) With regard to the long-run equilibrium in the two market structures, the higher unit costs in monopolistic competition relative to perfect competition implies that A) society would be better off if there were fewer, and more homogeneous, goods produced at the scale at which average costs are minimized. B) resources are being used inefficiently in perfect competition. C) there is a tradeoff between product variety and the ability to minimize cost per unit. D) firms are restricting output to extract positive economic profits. E) the government should force monopolistically competitive firms to behave like perfectly competitive firms. Answer: C Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 48) In long-run equilibrium, a monopolistically competitive industry operates where A) P > LRAC. B) MR > MC. C) LRAC is increasing. D) LRAC > minimum average cost. E) LRAC = MC. Answer: D Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 49) If a monopolistically competitive industry is in long-run equilibrium, then for each firm A) the demand curve is tangent to its LRAC curve. B) the MC curve intersects MR at the minimum level of its LRAC curve. C) price equals MC at the minimum level of the firm's LRAC curve. D) the demand curve cuts the MC curve at the minimum level of the LRAC curve. E) positive profits are being earned. Answer: A Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative

50) Which of the following correctly states the main prediction of the excess-capacity theorem? A) When price-taking firms maximize their profits by setting price equal to marginal cost, each firm operates with some excess capacity. B) Long-run equilibrium in a monopolistically competitive industry occurs with all firms producing at a lower output level than that which minimizes average total costs. C) Profit-maximizing firms will always choose to operate with some degree of excess capacity, in order to be flexible in the face of shifts in demand. D) Monopolistic firms will achieve positive economic profits by restricting output below the economically efficient level at which average total costs are minimized. E) All firms in a perfectly competitive industry will produce at a lower output level than that which minimizes average total costs. Answer: B Diff: 2 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 51) Consider a monopolistically competitive industry. Since firms are able to freely enter and exit the industry, we can predict A) a negatively sloped demand curve for the industry. B) strategic behaviour with regard to other firms in the industry. C) brand proliferation. D) zero profits in long-run equilibrium. E) that exit will occur until no firm has excess capacity. Answer: D Diff: 1 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative

52) Consider the following statement: "A monopolistically competitive market in which there are no entry barriers will have the identical long-run equilibrium as if the market were perfectly competitive." Is this statement correct? A) Yes, in the absence of entry barriers, firms in the monopolistically competitive market will expand until they are producing at the minimum of their LRAC curves, just as in perfect competition. B) No, because firms in the monopolistically competitive market do not produce at an output level where MC = MR, as in perfect competition, which leads to a different price and output in long-run equilibrium. C) No, firms in the monopolistically competitive market earn economic profits in the long run because they are facing a downward-sloping demand curve, whereas in perfect competition they earn zero profits. D) Yes, in the absence of entry barriers, new firms enter the industry until industry price and output are identical to perfect competition. E) No, because firms in the monopolistically competitive market will not reach their minimum efficient scale as they would in perfect competition — the result is higher prices and lower output. Answer: E Diff: 3 Type: MC Topic: 11.2. monopolistic competition Skill: Recall Learning Obj.: 11-3 Describe the key elements of the theory of monopolistic competition. Category: Qualitative 11.3 Oligopoly and Game Theory 1) Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The non-cooperative outcome in this situation is A) both firms bid $100. B) both firms bid $180. C) one firm bids $100, the other firm bids $180. D) both firms bid $50. E) both firms bid $90. Answer: A Diff: 2 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Quantitative

2) Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The cooperative outcome in this situation is A) both firms bid $100. B) both firms bid $180. C) one firm bids $100, the other firm bids $180. D) both firms bid $50. E) both firms bid $90. Answer: B Diff: 2 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Quantitative 3) Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a highway-construction contract and each firm is allowed to bid either $100 million or $120 million. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The non-cooperative outcome in this situation is A) both firms bid $50 million. B) both firms bid $60 million. C) one firm bids $100 million, the other firm bids $120 million. D) both firms bid $100 million. E) both firms bid $120 million. Answer: D Diff: 2 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Quantitative

4) Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a highway-construction contract and each firm is allowed to bid either $100 million or $120 million. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The cooperative outcome in this situation is A) both firms bid $50 million. B) both firms bid $60 million. C) one firm bids $100 million, the other firm bids $120 million. D) both firms bid $100 million. E) both firms bid $120 million. Answer: E Diff: 2 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Quantitative 5) Which of the following statements is the best description of a Nash equilibrium? A) An equilibrium outcome achieved by cooperation between players in the game. B) An outcome where each player's best strategy is to maintain its present behaviour given the present behaviour of the other players. C) An outcome that is achieved when players in the game have jointly maximized profits and divided those profits according to market share of each player. D) An outcome where each player's strategy depends on the behaviour of its opponents. E) An equilibrium outcome that is achieved by collusion, and no party has an incentive to change their behaviour. Answer: B Diff: 2 Type: MC Topic: 11.3b. game theory Skill: Recall Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Qualitative

6) Which of the following is an incorrect statement about a Nash equilibrium? A) A Nash equilibrium is an example of a non-cooperative equilibrium. B) In a Nash equilibrium, all players are maximizing their payoffs given the current behaviour of the other players. C) In a Nash equilibrium, all players are better off than they would be with any other combination of strategies. D) A Nash equilibrium is a self-policing equilibrium. E) Once a Nash equilibrium is established, no individual firm has an incentive to depart from it. Answer: C Diff: 2 Type: MC Topic: 11.3b. game theory Skill: Recall Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Qualitative

7) Suppose two firms, Allstom from France, and Bombardier from Canada, are bidding on a contract to replace train cars for the subway system in Mexico City. If they bid the same amount, they share the contract—otherwise, the low bid wins. The figure below shows the payoff matrix for this contest.

FIGURE 11-5 Refer to Figure 11-5. If Allstom and Bombardier co-operated with each other when bidding on the contract, then the likely outcome is that A) each firm bids $35 million, and each earns profit of $2.5 million. B) each firm bids $50 million, and each earns profit of $10 million. C) Bombardier bids $50 million, and earns profit of $0, while Allstom bids $35 million and earns profit of $5 million. D) Bombardier bids $35 million, and earns profit of $5 million, while Allstom bids $50 million and earns profit of $0. Answer: B Diff: 3 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Graphics: Graph Category: Qualitative

8) Suppose two firms, Allstom from France, and Bombardier from Canada, are bidding on a contract to replace train cars for the subway system in Mexico City. If they bid the same amount, they share the contract—otherwise, the low bid wins. The figure below shows the payoff matrix for this contest.

FIGURE 11-5 Refer to Figure 11-5. What is the Nash equilibrium in this bidding contest between Allstom and Bombardier? A) The two firms will co-operate and maximize their joint profits at $10 million each. B) Each firm will bid the high price, expecting a larger total profit. C) Each firm will bid the low price, and each will earn a profit of $2.5 million. D) There is no Nash equilibrium in this bidding contest, because each firm can expect to earn at least $5 million. E) both A and C are Nash equilibria. Answer: E Diff: 3 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Graphics: Graph Category: Qualitative

9) Suppose two firms, Allstom from France, and Bombardier from Canada, are bidding on a contract to replace train cars for the subway system in Mexico City. If they bid the same amount, they share the contract—otherwise, the low bid wins. The figure below shows the payoff matrix for this contest.

FIGURE 11-5 Refer to Figure 11-5. Given the information provided in the figure, what is the cost to either firm of completing this project on its own? A) $2.5 million B) $5 million C) $10 million D) $20 million E) $30 million Answer: E Diff: 3 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Graphics: Graph Category: Quantitative

10) What is a Nash equilibrium? A) an example of a cooperative equilibrium B) a situation where all players are maximizing their payoffs given the current behaviour of the other players C) a situation where all players are better off than they would be with any other combination of strategies D) an unstable equilibrium E) will in general produce the greatest payoff for the players Answer: B Diff: 2 Type: MC Topic: 11.3b. game theory Skill: Recall Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Qualitative 11) The payoff matrix below shows the payoffs for Firm A and Firm B, each of whom can either "cooperate" or "cheat." The numbers in parentheses are (payoff for A, payoff for B). Firm B Firm A

TABLE 11-2 Refer to Table 11-2. If Firm A is indifferent between cheating or cooperating when Firm B chooses to cooperate, x must be equal to A) 0. B) 10. C) 20. D) 30. E) 40. Answer: D Diff: 2 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Graphics: Table Category: Quantitative

12) The payoff matrix below shows the payoffs for Firm A and Firm B, each of whom can either "cooperate" or "cheat." The numbers in parentheses are (payoff for A, payoff for B). Firm B Firm A

TABLE 11-2 Refer to Table 11-2. If x = 40, what is the Nash equilibrium in this game? A) (Firm A: cooperate, Firm B: cooperate) B) (Firm A: cooperate, Firm B: cheat) C) (Firm A: cheat, Firm B: cooperate) D) (Firm A: cheat, Firm B: cheat) E) There is no Nash equilibrium for this value of x. Answer: D Diff: 3 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Graphics: Table Category: Quantitative

13) The payoff matrix below shows the payoffs to Firms A and B from producing different levels of output. The numbers in parentheses are (payoff to A, payoff to B).

TABLE 11-3 Refer to Table 11-3. From the payoff matrix we can infer that A) it is optimal for Firm A to produce 1000 units of output regardless of what Firm B is doing. B) both firms are indifferent between an equilibrium (Produce 1000 units, Produce 1000 units) and (Produce 2000 units, Produce 2000 units). C) it is optimal for Firm A to produce 2000 units of output regardless of what Firm B is doing. D) it is optimal for Firm B to produce 1000 units of output regardless of what Firm A is doing. E) there is no Nash equilibrium in the game. Answer: C Diff: 3 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Graphics: Table Category: Quantitative

14) The payoff matrix below shows the payoffs to Firms A and B from producing different levels of output. The numbers in parentheses are (payoff to A, payoff to B).

TABLE 11-3 Refer to Table 11-3. The Nash equilibrium in this game is A) (Firm A: produce 1000 units, Firm B: produce 1000 units). B) (Firm A: produce 2000 units, Firm B: produce 1000 units). C) (Firm A: produce 2000 units, Firm B: produce 2000 units). D) (Firm A: produce 1000 units, Firm B: produce 2000 units). E) non-existent. Answer: C Diff: 3 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Graphics: Table Category: Quantitative 15) Suppose there are only two firms in an industry. If they each set a high price, they each earn $5000. If they each set a low price, they each earn $2500. If one firm sets a low price while the other sets a high price, the low-price firm earns $7000 while the highprice firm earns $1000. Does a prisoners' dilemma exist? A) Yes, because there is always a prisoner's dilemma in game theory. B) Yes, the Nash equilibrium does not maximize the joint payoff. C) No, the Nash equilibrium does not maximize the joint payoff. D) No, the Nash equilibrium does not maximize the individual payoff. E) It cannot be determined from the information provided. Answer: B Diff: 3 Type: MC Topic: 11.3b. game theory Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Quantitative

11.4 Oligopoly in Practice 1) Which of the following is a characteristic of oligopolistic markets? A) ease of entry and exit B) zero profits in the long run C) mutual interdependence between firms D) a horizontal demand curve facing each individual firm E) a large number of firms in the industry Answer: C Diff: 1 Type: MC Topic: 11.3a. oligopoly Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 2) Oligopolistic firms make decisions after taking into account the expected reaction of their competitors. In doing this, oligopolists are exhibiting A) non-strategic behaviour. B) collusive behaviour. C) cooperative behaviour. D) non-cooperative behaviour. E) strategic behaviour. Answer: E Diff: 1 Type: MC Topic: 11.3a. oligopoly Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 3) Unlike perfectly competitive and monopolistically competitive firms, oligopolistic firms A) operate where MR = MC. B) take account of the likely reactions of their competitors to their actions. C) always make positive profits. D) always have differentiated products. E) earn zero profits in the long run. Answer: B Diff: 2 Type: MC Topic: 11.3a. oligopoly Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative

4) What is a duopoly? A) an oligopoly with only two products B) an oligopoly with only two sellers C) an oligopoly with only two buyers D) a monopoly firm that has only two suppliers E) a monopolist that has two related products Answer: B Diff: 1 Type: MC Topic: 11.3a. oligopoly Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 5) When the firms in an oligopoly are in a cooperative equilibrium and are maximizing their joint profits, which of the following statements is true? A) An individual firm could increase profits by cheating. B) P > MC for each individual firm. C) MR > MC for each individual firm. D) The firms in the industry will jointly be earning monopoly profits. E) All of the above statements are true. Answer: E Diff: 2 Type: MC Topic: 11.3a. oligopoly Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 6) For firms in an oligopoly, the main advantage of explicit collusion is that it A) removes much of the uncertainty about rivals' reactions. B) makes all firms more productively efficient. C) leads to greater product differentiation. D) reduces the cost per unit of advertising. E) eliminates the gains from cheating. Answer: A Diff: 1 Type: MC Topic: 11.3a. oligopoly Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative

7) Which of the following is a characteristic of oligopoly? A) Firms compete solely on the basis of price. B) The pricing policies of one firm have no impact on pricing policies of other firms. C) There are large numbers of significantly sized sellers. D) The industry usually has a low concentration ratio. E) Prices are usually above marginal costs. Answer: E Diff: 2 Type: MC Topic: 11.3a. oligopoly Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 8) Which of the following statements about "tacit collusion" in an oligopolistic industry is correct? A) It occurs when firms make an explicit agreement to cooperate. B) It results in a non-cooperative equilibrium. C) It occurs when firms achieve the cooperative outcome without an explicit agreement. D) It results in competitive behaviour. E) It is a form of predatory pricing. Answer: C Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 9) Which of the following statements about "explicit collusion" in an oligopolistic industry is correct? A) It occurs when firms make an explicit agreement to cooperate. B) It results in a non-cooperative equilibrium. C) It occurs when firms achieve the cooperative outcome without an explicit agreement. D) It results in competitive behaviour. E) It is a form of predatory pricing. Answer: A Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative

10) Suppose Proctor and Gamble introduces a new brand of laundry detergent. Brand proliferation is an example of A) explicit collusion. B) tacit collusion. C) a Nash equilibrium. D) a firm-created barrier to entry. E) a cooperative outcome. Answer: D Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 11) Consider an oligopolistic industry with a homogeneous product. If joint profits are to be maximized, the firms A) can produce whatever output they want at the agreed-upon price. B) need to determine the output each firm will produce. C) must form a cartel in order to be legal. D) have no individual incentive to cheat on the agreement. E) None of the above — differentiated products are required for joint-profit maximization in oligopoly. Answer: B Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 12) Consider an oligopolistic industry. An ineffective means of discouraging the entry of new firms by existing firms in this industry is A) producing a wide range of brands of their products. B) carrying out industrial sabotage. C) spending heavily on advertising. D) raising their prices. E) seeking greater patent protection. Answer: D Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative

13) "Brand proliferation" in an oligopolistic industry A) allows easier entry to a new entrant with small sales. B) can shift the average total cost curve down and raise the overall minimum scale of operation. C) allows new entrants to the industry to gain significant market share. D) will generally reduce the expected market share of new entrants to the industry. E) allows firms to cooperate to maximize their joint profits. Answer: D Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 14) "Brand proliferation" is an example of A) an economy of scale. B) a firm-created barrier to entry. C) an absolute cost advantage. D) collusive behaviour. E) predatory pricing. Answer: B Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 15) Consider an oligopolistic industry. Advertising by existing firms A) will increase the expected market share of new entrants to the industry. B) can be an effective entry barrier to potential entrants to the industry. C) only exists where natural entry barriers are weak. D) allows easy entry to a new entrant with small sales. E) maximizes joint profits for firms in the industry. Answer: B Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative

16) An oligopolistic firm often detects a change in the demand for its product by first observing a change in A) average cost. B) market price. C) marginal revenue. D) marginal cost. E) sales. Answer: E Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 17) Which of the following industries in Canada can best be thought of as oligopolies? 1) breweries 2) women's clothing retailers 3) automobile manufacturers A) 1 only B) 2 only C) 3 only D) 1 and 3 only E) 1, 2, and 3 Answer: D Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Qualitative 18) The process of "creative destruction" in an oligopolistic industry suggests that A) profits are driven to zero by the entry of new firms. B) no firm can survive in the long run. C) firms can enter and leave without incurring any sunk costs of entry. D) there are no costs of exit in oligopoly. E) the prospect of keeping the resulting profits provides an incentive for firms to innovate. Answer: E Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-4 Use game theory to explain the difference between cooperative and non-cooperative outcomes among oligopolists. Category: Qualitative

19) Which of the following is suggested by the theory of oligopoly? A) Entry into the industry is an important force preventing the exploitation of market power by existing firms. B) Oligopoly may be the best of the feasible alternative market structures when major scale economies exist. C) The tendency toward joint maximization of profits is greater for a large number of sellers than for a small number of sellers. D) Game theory is interesting theory but not useful for real corporate managers. E) Innovation is weak when there is no price competition. Answer: B Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 20) Both empirical evidence and everyday observation suggest that oligopolies contribute to economic growth in the very-long-run by A) achieving allocative efficiency. B) consistently producing at full-capacity output. C) achieving technological improvements and innovations through research and development. D) decreasing minimum efficient scale. E) rarely laying off workers. Answer: C Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 21) The following statements describe a cooperative equilibrium in an oligopoly where the firms are jointly maximizing profits by restricting output. Which statement is FALSE? A) An individual firm could increase profits by cheating. B) P > MC for each individual firm. C) MR > MC for each individual firm. D) The firms in the industry will jointly be earning monopoly profits. E) No individual firm will have an incentive to change output. Answer: E Diff: 3 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among

oligopolists and the most common entry barriers. Category: Qualitative 22) In an oligopolistic industry, which of the following is an example of a firm-created entry barrier? A) LRAC curve negatively sloped over a large range of output B) large set-up costs C) brand proliferation D) decreasing demand for the product E) price competition Answer: C Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 23) In a typical oligopolistic market, there are A) no barriers to entry, but firms sell differentiated products. B) substantial barriers to entry and firms interact strategically with each other. C) no barriers to entry and firms sell homogeneous products. D) substantial entry barriers, and firms are too large to strategically interact with each other. E) no barriers to entry and firms interact strategically with each other. Answer: B Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 24) An oligopolistic firm can earn positive profits A) because there are barriers to entry. B) only in the long run. C) only in the short run. D) only if it advertises its own product. E) only if it maintains excess capacity in the production of it product. Answer: A Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative

25) Which of the following explains one reason why an oligopolistic firm may have market power? A) The firm always makes positive profits. B) The firm produces a significant fraction of total industry output. C) The market may be "contestable." D) The firm has diseconomies of scale. E) There are many similar producers. Answer: B Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 26) A special kind of imperfectly competitive market that has only two firms is called A) an incidental monopoly. B) a two-tier competitive structure. C) a duopoly. D) a dublet. E) a natural monopoly. Answer: C Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 27) Consider the three largest cell-phone service providers in Canada - Bell, Telus, and Rogers. If we observe that all three companies increase their monthly service fees simultaneously, we might conclude that A) there is tacit collusion among these firms. B) these firms have monopolized the industry. C) they are perfect competitors and they are unable to set the price. D) they are engaged in predatory pricing. E) they are creating entry barriers to prevent entry by new firms. Answer: A Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative

28) Assume the world's largest smart-phone producers (Apple, Nokia, Samsung, etc.) operate in an oligopolistic industry. In the long run, which of the following is the most important form of competition between these firms? A) predatory pricing B) tacit collusion C) product innovation D) brand proliferation E) advertising Answer: C Diff: 1 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 29) Suppose there are only five construction companies in a particular region that are each large enough to take on large public infrastructure projects (roads, bridges, sewers, etc.). Representatives of these companies meet regularly for coffee or on the golf course and agree on which company will submit the lowest bid for a particular project. This type of firm behaviour is an example of A) cooperative behaviour that results in higher output and lower prices. B) cooperative behaviour that results in increased consumer welfare. C) tacit collusion, and is legal as long as output is not restricted. D) predatory pricing, and is meant to prevent new entrance to the industry. E) explicit collusion and is illegal. Answer: E Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative

30) The sugar industry in Canada is effectively a duopoly with two large firms competing with each other for market share. Suppose the two firms collude and successfully restrict joint output to that of a profit-maximizing monopolist. As a result, they each realize an increase in their profits. Why would this collusive agreement be difficult to sustain? A) Because each firm has an incentive to break the agreement by further restricting output in order to increase the price, thereby increasing their own profits. B) Because each firm has an incentive to break the agreement by increasing output in order to increase their own profits. C) Because the firm with the lower long-run average costs will be able to capture all sales, driving the second firm out of the market. D) Because a non-cooperative outcome is inevitable in which output is further restricted and each firm's profit is reduced. Answer: B Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Applied Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative 31) In what way can an oligopolistic market structure be beneficial to society? A) Oligopolistic firms compete through advertising, which increases economic efficiency. B) Oligopolistic firms are able to exploit all existing economies of scale and operate at the minimum of long-run average costs, and thereby reduce the use of society's resources. C) An oligopolistic market structure is most conducive to non-competitive behaviour, which leads to lower prices for consumers in the long run. D) An oligopolistic market structure is most adaptive to today's rapid rate of technological change. E) Oligopolistic firms compete through innovation, which is a driving force of economic growth and increasing living standards. Answer: E Diff: 2 Type: MC Topic: 11.4. oligopoly in practice Skill: Recall Learning Obj.: 11-5 Provide examples of the nature of the competition among oligopolists and the most common entry barriers. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 12 Economic Efficiency and Public Policy 12.1 Productive and Allocative Efficiency 1) Which of the following is required for an individual firm to be productively efficient? A) All resources must be fully used. B) MC = P for all goods.

C) The firm must be on its LRAC curve. D) The firm must be allocatively efficient. E) P = ATC for all goods. Answer: C Diff: 1 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 2) Which of the following is required for an entire economy to be allocatively efficient? A) Goods are allocated equitably across markets. B) Marginal cost equals price for all goods. C) MRP is equated for all factors of production. D) Price equals average cost for all goods. E) Price is greater than marginal cost for all goods. Answer: B Diff: 1 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 3) Consider two firms, A and B, that are producing the same product but with different marginal costs. In this case, we know that A) a reallocation of output between the firms can lower the industry's total cost. B) neither firm is producing its output at the lowest attainable cost. C) some resources must be unemployed. D) each firm is being wasteful. E) one firm is not maximizing profits. Answer: A Diff: 1 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative

4) If the total output of some industry is allocated among its individual firms in such a way that the total cost of producing the industry's output is minimized, we know the industry has achieved 1) full employment of resources; 2) productive efficiency; 3) allocative efficiency. A) 1 only B) 2 only C) 3 only D) both 1 and 3 E) both 2 and 3 Answer: B Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 5) All points on a country's production possibilities boundary are A) allocatively efficient. B) points at which P = MC for all goods. C) productively efficient. D) Pareto optimal. E) not productively efficient. Answer: C Diff: 1 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 6) Consider two firms, A and B, that are producing the same product but with different average costs. Economists say this situation reflects a problem of A) unemployed resources. B) economic inefficiency. C) productive inefficiency. D) allocative inefficiency. E) Not necessarily any of the above. Answer: E Diff: 3 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative

7) Which of the following is required for an economy to be allocatively efficient? A) The economy's resources must be fully employed. B) All firms are breaking even. C) The average cost of production is the lowest possible for all goods produced. D) Price equals marginal cost for all products. E) The price equals average cost for all goods. Answer: D Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 8) Which of the following is required for an economy to be allocatively efficient? A) All firms employ least-cost production techniques. B) The marginal costs of all firms in an industry are equal. C) Marginal cost equals price for all goods. D) The economy's resources are fully employed. E) Imperfectly competitive markets are regulated. Answer: C Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 9) If all firms are profit maximizers, then the following is assured: A) allocative efficiency. B) each firm is productively efficient. C) allocative and productive efficiency. D) that the economy is operating inside the production possibilities boundary. E) that firms attain the lowest possible average costs. Answer: B Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative

10) Do firms actively seek allocative efficiency? A) Yes, profit-maximizing firms in all market structures seek allocative efficiency. B) Yes, but only perfectly-competitive firms seek allocative efficiency. C) Yes, but only profit-maximizing, imperfectly-competitive firms seek allocative efficiency. D) No, firms do not seek allocative efficiency. E) Yes, all firms in all market structures seek allocative efficiency. Answer: D Diff: 1 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 11) Do firms actively seek productive efficiency (at the level of the firm)? A) Yes, profit-maximizing firms in all market structures seek productive efficiency. B) Yes, but only perfectly-competitive firms seek productive efficiency. C) Yes, but only profit-maximizing, imperfectly-competitive firms seek productive efficiency. D) No, firms do not seek productive efficiency. E) Yes, all firms in all market structures seek productive efficiency. Answer: A Diff: 1 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 12) We can correctly state that allocative efficiency is a property of which of the following? A) individual firms B) all firms in an industry C) perfectly-competitive firms D) monopolies E) the overall economy Answer: E Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative

13) Which of the following describes a characteristic of allocative efficiency? A) Output is produced at lowest possible cost. B) Resources are allocated such that total economic surplus is maximized. C) Monopoly market structures are encouraged if it generates innovation. D) All monopoly markets are discouraged. E) Resources are distributed equitably. Answer: B Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 14) At the level of the industry, the condition for productive efficiency is that A) goods are allocated equitably. B) there are no idle resources in the industry. C) MC = P for all goods. D) MRP = P for all inputs. E) MC is equal for all firms in the industry. Answer: E Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 15) We can safely say that each point on a country's production possibilities boundary (PPB) is A) allocatively efficient. B) one at which P = MC for all goods. C) productively efficient. D) Pareto optimal. E) not productively efficient. Answer: C Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative

16) An economy in which there are no market failures and all industries are in a competitive long-run equilibrium is one where 1. allocative efficiency is achieved; 2. the economy is on the production possibilities boundary; 3. there is no incentive for firms to enter or leave industries. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1, 2, and 3 E) 2 only Answer: D Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Recall Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 17) Consider a monopolistically competitive industry in long-run equilibrium. Will this industry be productively efficient? A) Yes. Since the firms are in long-run equilibrium, they will all be producing at the minimum of their LRAC curves. B) Yes. Since the firms are in long-run equilibrium, they will all be operating on their LRAC curves. C) Yes. In long-run equilibrium, each firm is producing at an output level where price is equal to marginal cost. D) No. Firms are selling their output at a level where price exceeds marginal cost and thus, by definition, cannot be productively efficient. E) No. Since firms are selling differentiated products and there is no industry-wide price, we cannot conclude that marginal cost will be equated across all firms. Answer: E Diff: 3 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative

18) Consider an industry with three profit-maximizing firms producing identical soccer jerseys. At their current levels of output, Firm A has a MC of $22, Firm B has a MC of $26, and Firm C has a MC of $27. Each firm is minimizing its costs for its given level of output. Which of the following statements is definitely true? A) Each firm and the industry are productively efficient. B) Each firm is productively efficient but the industry is not. C) The industry is productively efficient but each firm is not. D) Each firm is allocatively efficient but the industry is not. E) Each firm and the industry are allocatively efficient. Answer: B Diff: 3 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 19) Consider three firms, A, B and C, all producing kilos of potatoes (per year) in a perfectly competitive market. The diagrams below show marginal cost curves for each of the three firms.

FIGURE 12-1 Refer to Figure 12-1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Is this industry productively efficient? A) No, because the marginal cost curve for each firm has a different slope. B) Yes, because output is equated for all firms. C) No, because each firm could easily produce more than 500 kilos. D) No, because marginal costs are not equated for all firms. E) It is not possible to say whether this industry is productively efficient because we do not know the market price of the product. Answer: D Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency.

Graphics: Graph Category: Qualitative 20) Consider three firms, A, B and C, all producing kilos of potatoes (per year) in a perfectly competitive market. The diagrams below show marginal cost curves for each of the three firms.

FIGURE 12-1 Refer to Figure 12-1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Which of the following statements correctly describes the productive efficiency of this industry? A) Productive efficiency would be achieved if Firm B produced all the output, since it has the lowest MC for the production of 500 kilos. B) It is possible to reduce the total cost of the given output by reallocating production among the three firms. C) The total output of 1500 kilos is the productively efficient output for this industry, so no reallocation is necessary. D) It is not possible to say whether this industry is productively efficient because we do not know the market price of the product. E) It is not possible to say whether this industry is productively efficient because we do not know the average costs for each firm. Answer: B Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Graphics: Graph Category: Qualitative

21) Consider three firms, A, B and C, all producing kilos of potatoes (per year) in a perfectly competitive market. The diagrams below show marginal cost curves for each of the three firms.

FIGURE 12-1 Refer to Figure 12-1. Suppose each of Firms A, B and C are producing 500 kilos of potatoes. Keeping total output unchanged, what level of output should each firm be producing such that the industry is productively efficient? A) Firm A: 200 kilos, Firm B: 500 kilos, Firm C: 800 kilos B) Firm A: 700 kilos, Firm B: 800 kilos, Firm C: 0 kilos C) Firm A: 500 kilos, Firm B: 800 kilos, Firm C: 200 kilos D) Firm A: 500 kilos, Firm B: 500 kilos, Firm C: 500 kilos E) Firm A: 500 kilos, Firm B: 200 kilos, Firm C: 200 kilos Answer: C Diff: 3 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Graphics: Graph Category: Quantitative

22) Consider three firms, A, B and C, all producing kilos of potatoes (per year) in a perfectly competitive market. The diagrams below show marginal cost curves for each of the three firms.

FIGURE 12-1 Refer to Figure 12-1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Is this industry allocatively efficient? A) It is not possible to say whether this industry is allocatively efficient because we do not know the market price for kilos of potatoes. B) It is not possible to say whether this industry is allocatively efficient because we do not know the average costs for each firm. C) Yes, because output is equated for all firms. D) No, since marginal costs are not equated for all firms, the industry is not productively efficient, and thus cannot be allocatively efficient. E) No, because the marginal cost curve for each firm has a different slope. Answer: D Diff: 3 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Graphics: Graph Category: Qualitative

23) The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country. The lower diagram shows demand and supply for butter.

FIGURE 12-2 Refer to Figure 12-2. Suppose demand and supply for butter are shown by D and S, respectively. And suppose the economy is at point (a) on the production possibilities boundary. Is this output of guns and butter allocatively efficient?

A) No, because the marginal value to consumers of the butter produced is greater than the marginal cost to producers. B) No, because the marginal cost to producers of the butter produced is more than the marginal value to consumers. C) Yes, because all points on the production possibilities boundary are allocatively efficient. D) Yes, because the marginal cost of producing the butter equals the marginal value of consuming the butter. E) No, because the marginal costs for guns and butter are not equated. Answer: A Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Graphics: Graph Category: Qualitative

24) The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country. The lower diagram shows demand and supply for butter.

FIGURE 12-2 Refer to Figure 12-2. Suppose demand and supply for butter are shown by D and S, respectively. And suppose the economy is at point (a) on the production possibilities boundary. How can this economy move toward allocative efficiency? A) expand the production possibilities boundary outward B) increase the supply of guns C) increase the demand for butter D) produce less butter, more guns

E) produce more butter, fewer guns Answer: E Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Graphics: Graph Category: Qualitative

25) The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country. The lower diagram shows demand and supply for butter.

FIGURE 12-2 Refer to Figure 12-2. Suppose demand and supply for butter are shown by D and S, respectively. And suppose the economy is at point (b) on the production possibilities boundary, producing units of butter. We can say that this economy is ________ efficient because ________. A) allocatively; guns and butter are both produced to the point where the marginal cost to producers equals the marginal value to consumers B) productively; the marginal cost of production across guns and butter is equated

C) allocatively; the price of guns is equal to the price of butter D) productively; the economy is operating at a point inside the production possibilities boundary E) allocatively; the economy is operating at a point on the production possibilities boundary Answer: A Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Graphics: Graph Category: Qualitative

26) The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country. The lower diagram shows demand and supply for butter.

FIGURE 12-2 Refer to Figure 12-2. Suppose this economy is allocatively efficient at Q1 units of butter. Now suppose there is an increase in demand for butter from D to D 1. After this shift in demand,

A) the supply curve will shift up to S1 and allocative efficiency will be maintained. B) the marginal value to consumers of butter is less than the marginal cost to producers; the price of butter (relative to the price of guns) rises; the economy moves to output Q2 of butter and point (c) on the PPB. C) the marginal value to consumers of butter is greater than the marginal cost to producers; the price of butter (relative to the price of guns) rises; the economy moves to output Q2 of butter and point (c) on the PPB. D) the increase in the price of butter (relative to the price of guns) will cause the demand curve to shift back down to D and allocative efficiency will be maintained. E) the price of guns (relative to the price of butter) rises and the economy moves to point (a) on the PPB. Answer: C Diff: 3 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Graphics: Graph Category: Qualitative 27) The Canadian economy would achieve allocative efficiency in which of the following circumstances? A) Price equals average cost in all industries. B) There are no idle resources in the economy. C) Marginal product is equal for all factors of production. D) Marginal cost equals price in all industries. E) Marginal cost is equalized across industries. Answer: D Diff: 2 Type: MC Topic: 12.1a. productive and allocative efficiency Skill: Applied Learning Obj.: 12-1 Distinguish between productive efficiency and allocative efficiency. Category: Qualitative 28) An important defence of oligopoly as a market structure is that A) it involves less allocative inefficiency than monopoly. B) it results in lower prices than perfect competition. C) it is the most efficient available alternative when the minimum efficient scale is large. D) it generates less unused capacity than monopolistic competition. E) it is more productively efficient than monopoly. Answer: C Diff: 2 Type: MC Topic: 12.1b. market structure and efficiency Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative

29) Consider the efficiency of various market structures and complete the following sentence. The larger the minimum efficient scale of firms, ceteris paribus, the A) more likely we are to have a concentrated market and allocative inefficiency. B) less the tendency toward monopoly inefficiency. C) lower the advantages of large-scale production. D) greater the number of firms comprising an industry. E) more likely firms will display productive efficiency. Answer: A Diff: 2 Type: MC Topic: 12.1b. market structure and efficiency Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 30) Why have economists traditionally regarded monopoly as an undesirable market structure? A) because of its ability to minimize costs through large output B) because it is allocatively inefficient C) because of its wasteful innovation D) because it is usually characterized by wastefully confrontational labour relations E) because it allows producers to earn large profits Answer: B Diff: 1 Type: MC Topic: 12.1b. market structure and efficiency Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 31) Why is monopoly allocatively inefficient? A) because the price exceeds the marginal cost of the last unit produced B) because the opportunity cost exceeds the marginal cost of the last unit produced C) because the marginal cost exceeds the average cost for the last unit produced D) because lower costs could be achieved E) because the firm has no incentive to maximize profits Answer: A Diff: 1 Type: MC Topic: 12.1b. market structure and efficiency Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative

32) Consider the efficiency of various market structures. In the absence of other market failures, allocative efficiency is achieved only under perfect competition because only this market structure results in A) zero long-run profits. B) P = MC. C) complete freedom of entry and exit. D) maximization of profits through competition. E) productive efficiency. Answer: B Diff: 2 Type: MC Topic: 12.1b. market structure and efficiency Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 33) What would happen if a perfectly competitive industry was suddenly monopolized without any change in cost conditions? A) Both price and quantity produced would increase. B) Both price and quantity produced would decrease. C) Price would increase and quantity produced would decrease. D) Price would decrease and quantity produced would increase. E) There would be no change in either price or quantity produced. Answer: C Diff: 2 Type: MC Topic: 12.1b. market structure and efficiency Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 34) In principle, a comparison of the long-run equilibrium of competitive and (singleprice) monopoly industries leads to the following conclusion: A) Both the competitive industry and the monopoly will allocate resources efficiently. B) The competitive industry is consistent with allocative efficiency whereas the monopoly is not. C) Neither industry is capable of allocative efficiency. D) The competitive industry will achieve productive efficiency but the monopoly will not. E) Both the competitive industry and the monopoly will allocate resources inefficiently. Answer: B Diff: 1 Type: MC Topic: 12.1b. market structure and efficiency Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient.

Category: Qualitative

35)

FIGURE 12-3 Refer to Figure 12-3. If the diagram is depicting a perfectly competitive industry, the equilibrium price and quantity is A) P1 and q1. B) P1 and q2. C) P2 and q1. D) P2 and q2. E) P3 and q1. Answer: D Diff: 1 Type: MC Topic: 12.1b. market structure and efficiency Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

36)

FIGURE 12-3 Refer to Figure 12-3. If the diagram is depicting the market situation for a monopoly, the equilibrium price and quantity are A) P1 and q1. B) P1 and q2. C) P2 and q1. D) P2 and q2. E) P3 and q1. Answer: E Diff: 1 Type: MC Topic: 12.1b. market structure and efficiency Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

37) When comparing a perfectly competitive firm and a (single-price) monopolist, a major difference is that A) the monopolist produces where MR = MC, but the perfect competitor does not. B) the perfect competitor achieves productive efficiency, but the monopolist does not. C) the perfect competitor produces where P = MC, but the monopolist does not. D) the monopolist achieves allocative efficiency but the perfect competitor does not. E) the perfect competitor minimizes its costs, but the monopolist does not. Answer: C Diff: 2 Type: MC Topic: 12.1b. market structure and efficiency Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 38) Choose the statement that best compares the long-run equilibrium of a competitive industry with that in a monopolized industry (with a single price). A) Resources will be allocated efficiently in both the competitive and monopolized industries. B) Allocative efficiency will be achieved in the competitive, but not the monopolized industry. C) Allocative efficiency is not possible in either industry. D) Allocative efficiency will be achieved in the monopolized, but not the competitive industry. E) It is not possible to make this comparison because firms in a competitive industry operate only in the short run. Answer: B Diff: 1 Type: MC Topic: 12.1b. market structure and efficiency Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 39) In the absence of other market failures, allocative efficiency is achieved in a perfectly competitive industry because A) firms do not need to maximize profits. B) the industry produces a level of output such that the marginal cost of production is minimized. C) the industry produces a level of output such that there are increasing returns to scale. D) there are barriers to entry. E) the industry produces a level of output such that the marginal cost to producers equals the marginal benefit to consumers. Answer: E Diff: 2 Type: MC Topic: 12.1b. market structure and efficiency

Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 40) The diagram below shows supply, demand, and quantity exchanged of Monday matinee movie tickets. Assume it is a perfectly competitive market.

FIGURE 12-4 Refer to Figure 12-4. What is the total revenue received by the sellers of this product at the allocatively efficient level of output? A) $5 B) $125 C) $250 D) $375 E) $500 Answer: C Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Quantitative

41) The diagram below shows supply, demand, and quantity exchanged of Monday matinee movie tickets. Assume it is a perfectly competitive market.

FIGURE 12-4 Refer to Figure 12-4. What is the value of the consumer surplus generated in this market at the allocatively efficient level of output? A) $0 B) $5 C) $10 D) $125 E) $250 Answer: D Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Quantitative

42) The diagram below shows supply, demand, and quantity exchanged of Monday matinee movie tickets. Assume it is a perfectly competitive market.

FIGURE 12-4 Refer to Figure 12-4. What is the value of the producer surplus generated in this market at the free-market equilibrium? A) $0 B) $5 C) $10 D) $125 E) $250 Answer: D Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Quantitative

43) The diagram below shows supply, demand, and quantity exchanged of Monday matinee movie tickets. Assume it is a perfectly competitive market.

FIGURE 12-4 Refer to Figure 12-4. What is the total economic surplus generated in this market at the allocatively efficient level of output? A) $5 B) $10 C) $125 D) $250 E) $500 Answer: D Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Quantitative

44) The diagram below shows supply, demand, and quantity exchanged of Monday matinee movie tickets. Assume it is a perfectly competitive market.

FIGURE 12-4 Refer to Figure 12-4. Suppose a disequilibrium price of $7.50 per movie ticket is imposed in this market. The consumer surplus becomes ________ and the producer surplus becomes ________. A) $0; $62.50 B) $2.50; $7.50 C) $62.50; $125 D) $62.50; $250 E) $31.25; $156.25 Answer: E Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Quantitative

45) The diagram below shows supply, demand, and quantity exchanged of Monday matinee movie tickets. Assume it is a perfectly competitive market.

FIGURE 12-4 Refer to Figure 12-4. Suppose a disequilibrium price of $7.50 per movie ticket is imposed on this market. The total economic surplus is now ________, which is ________ than the total economic surplus generated at the allocatively efficient level of output. A) $125; $250 less B) $125; $125 less C) $187.50; $62.50 less D) $62.50; $125 less E) $187.50; $187.50 less Answer: C Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Quantitative

46) The diagram below shows supply, demand, and quantity exchanged of Monday matinee movie tickets. Assume it is a perfectly competitive market.

FIGURE 12-4 Refer to Figure 12-4. If a disequilibrium price of $7.50 per movie ticket were imposed on this market, this market would not be allocatively efficient because 1) the sum of consumer and producer surplus would not be maximized; 2) the marginal benefit to consumers of the last movie consumed would be greater than the marginal cost to the seller; 3) the marginal cost to the seller of the last movie consumed would be more than the marginal benefit to consumers. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: D Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

47)

FIGURE 12-3 Refer to Figure 12-3. The area representing consumer surplus in a monopoly equilibrium is outlined by A) ACE. B) ABE. C) 0P4Eq2. D) P3P4C. E) P2P4E. Answer: D Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

48)

FIGURE 12-3 Refer to Figure 12-3. The area representing consumer surplus in a perfectly competitive equilibrium is outlined by A) ACE. B) ABE. C) 0P4Eq2. D) P3P4C. E) P2P4E. Answer: E Diff: 1 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

49)

FIGURE 12-3 Refer to Figure 12-3. The area representing producer surplus at the monopoly equilibrium is outlined by A) 0P0Aq1. B) P0P2BA. C) P0AP1. D) P0P3CA. E) 0P3Cq1. Answer: D Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

50)

FIGURE 12-3 Refer to Figure 12-3. Comparing the perfectly competitive equilibrium to the monopoly equilibrium, the reduction in consumer surplus due to monopoly is outlined by A) P2EP4. B) P2ECP3. C) BCE. D) q1CEq2. E) P2P3E. Answer: B Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

51)

FIGURE 12-3 Refer to Figure 12-3. Comparing the monopoly equilibrium to the perfectly competitive equilibrium, the area representing the gain in producer surplus due to monopoly is outlined by A) P1P3CA less ACE. B) P2P3CB less ABE. C) P0P3CA less ACE. D) P3P4 less ABE. E) P2P4E. Answer: B Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

52)

FIGURE 12-3 Refer to Figure 12-3. Comparing the monopoly equilibrium to the perfectly competitive equilibrium, the area P2P3CB represents A) the dead-weight loss of monopoly. B) a redistribution of income from consumers to the monopolist. C) the net gain in the monopolist's profits. D) the net loss in the monopolist's profits. E) a redistribution of income from the monopolist to the consumer. Answer: B Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

53)

FIGURE 12-3 Refer to Figure 12-3. Comparing the perfectly competitive equilibrium to the monopoly equilibrium, the deadweight loss of monopoly is given by A) q1BEq2. B) AP4E. C) q1CEq2. D) ACE. E) P2P4E. Answer: D Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

54) The deadweight loss of monopoly is A) its fixed cost. B) any negative profit due to cyclical decreases in demand. C) the loss of economic surplus due to the low monopoly output level. D) the cost of maintaining effective barriers to entry. E) the extra administrative costs of operating a large firm. Answer: C Diff: 1 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 55) Suppose we compare two monopolists with identical cost and demand conditions. Monopolist A charges a single price. Monopolist B engages in price discrimination, charging a different price for different units of the product. Which one of the following statements is correct? A) B will produce less than A, resulting in a larger deadweight loss. B) B will generally produce more than A, resulting in less deadweight loss. C) A will produce less than B, resulting in smaller deadweight loss. D) A will produce more than B, and there is no deadweight loss. E) A and B will both produce the same amount. Answer: B Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 56) We can say an economy is allocatively efficient when A) producer surplus is maximized. B) consumer surplus is maximized. C) the sum of consumer and producer surplus is maximized. D) the economy achieves the frontier of the production possibilities boundary. E) deadweight loss is achieved. Answer: C Diff: 1 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative

57) In general, the sum of consumer and producer surplus is maximized under the conditions of A) perfect competition. B) monopoly. C) monopolistic competition. D) oligopoly. E) any market structure. Answer: A Diff: 1 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 58) Which of the following results from a monopolist's pricing and output behaviour, as compared to a perfectly competitive outcome? A) a reduction in producer surplus and increase in consumer surplus B) an increase in both consumer and producer surplus C) a reduction in both consumer and producer surplus D) a reduction in the sum of consumer and producer surplus E) an increase in the sum of consumer and producer surplus Answer: D Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 59) When comparing a monopoly equilibrium to a competitive market equilibrium, the consumer suffers two types of losses. They are A) the deadweight loss due to the output that is produced beyond the competitive level, and the transfer of consumer surplus to the monopolist . B) the loss of both consumer surplus and producer surplus. C) a loss of consumer surplus due to the output that is not produced, and the transfer of consumer surplus to the monopolist. D) the deadweight loss due to the output that is produced and the reduced incentive for innovation by the monopolist. E) the deadweight loss due to the output that is not produced and the transfer of producer surplus to the monopolist. Answer: C Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas

monopoly is allocatively inefficient. Category: Qualitative 60) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. Allocative efficiency in this industry occurs A) at output level Q3. B) at output level Q1. C) at price P1 and output Q3. D) at price P2 and output Q2. E) where the areas 1, 2, 3, and 4 are maximized. Answer: D Diff: 1 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

61) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. At the free-market equilibrium, consumer surplus is represented by the area A) P2P3E. B) P1P2E. C) P1P3E. D) 1 + 2. E) 1 + 2 + 3 + 4. Answer: A Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

62) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. In the free-market equilibrium, producer surplus is shown by the area A) P3P2E. B) P1P2E. C) P1P3E. D) 1 +2. E) 1 + 2 + 3 + 4. Answer: B Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

63) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. In the free-market equilibrium, producer plus consumer surplus is maximized and is illustrated by the area A) P3P2E. B) P1P2E. C) P1P3E. D) 1 + 2. E) 1 + 2 + 3 + 4. Answer: C Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

64) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. If output in this market were Q1, but the price was still at its freemarket level, the loss in consumer surplus relative to the competitive equilibrium would be illustrated by area A) P3P2E. B) P1P3E. C) 1. D) 2. E) 1 + 2. Answer: C Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

65) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. If output in this market were Q1, and the price were still equal to its free-market level, the loss in producer surplus relative to the competitive equilibrium would be illustrated by area A) P3P2E. B) P1P3E. C) 1. D) 2. E) 1 + 2. Answer: D Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

66) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. If output in this market were Q1, the total loss in economic surplus relative to the competitive equilibrium would be illustrated by area A) P1P3E. B) 1. C) 2. D) 1 + 2. E) 1 + 2 + 3 + 4. Answer: D Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

67) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. If output in this market were Q3, and the price were still P2, the loss in consumer surplus relative to the competitive equilibrium would be illustrated by area A) 1. B) 2. C) 3. D) 4. E) 3 + 4. Answer: D Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

68) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. If output in this market were Q3, and the price was still equal to its free-market level, the loss in producer surplus relative to the competitive equilibrium would be illustrated by area A) 1. B) 2. C) 3. D) 4. E) 3 + 4. Answer: C Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

69) The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 Refer to Figure 12-5. If output in this market were Q3, the loss in total economic surplus relative to the competitive equilibrium would be illustrated by area A) 1. B) 2. C) 3. D) 4. E) 3 + 4. Answer: E Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Graphics: Graph Category: Qualitative

70) Which of the following is the best definition of producer surplus? A) the total revenue received by the producer for a good minus the total cost of producing that good B) the price of a good minus the marginal cost of producing it, summed over the quantity produced C) the revenue received for a good, minus the cost of producing it D) the price of a good minus the cost of producing it E) quantity produced in excess of the allocatively efficient amount Answer: B Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 71) Which of the following is the best definition of consumer surplus? A) the total value that consumers place on the quantity consumed of some good B) the quantity consumed in excess of the allocatively efficient amount C) the value that consumers place on the last unit consumed of a good D) the difference between the value that consumers place on a good and the payment they make to buy the good, summed over the quantity consumed E) the marginal value that consumers place on the last unit consumed of a good Answer: D Diff: 3 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Recall Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 72) Which of the following is an example of an industry that succeeds in formally restricting entry, thereby maintaining prices above competitive levels? A) transport trucking B) beef cattle ranching C) window washing D) dentistry E) book publishing Answer: D Diff: 2 Type: MC Topic: 12.1c. consumer and producer surplus Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative

12.2 Economic Regulation to Promote Efficiency 1) In which of the following situations would a natural monopoly exist? A) A firm has a government charter to be the sole producer of some good. B) A firm is able to operate at the minimum point of its long-run average total cost curve. C) A firm produces a product essential to national security. D) Only one firm is supplying a natural resource. E) One firm can most efficiently supply the entire market demand. Answer: E Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 2) In general, which of the following statements guides policymakers with respect to a natural monopoly? The monopoly firm A) should be broken up into a large number of competitive firms. B) should be taken over by government and run as a crown corporation. C) is in the best position to produce a given product and should be left alone. D) generally needs to be regulated in order to reduce allocative inefficiency. E) will not achieve productive efficiency without regulation. Answer: D Diff: 1 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 3) One method of regulating a natural monopoly is known as average-cost pricing. Using this method, the regulator requires that the price be set equal to A) internal cost. B) marginal cost. C) average variable cost. D) long-run average cost. E) average fixed cost. Answer: D Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative

4) Choose the statement that best describes the dilemma facing the regulator of a natural monopoly. A) Marginal-cost pricing leads to profit or losses; average-cost pricing results in allocative inefficiency. B) Marginal-cost pricing will result in allocative inefficiency; average-cost pricing leads to profits or losses. C) Marginal-cost pricing will result in productive and allocative inefficiency; averagecost pricing will not. D) Both kinds of regulation have the same implications for allocative efficiency. E) There is no dilemma. Answer: A Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 5) Consider the case of a natural monopoly with falling long-run average costs. If regulation sets the price equal to marginal cost, then A) shortages would result. B) the demand curve would shift to the left. C) the firm would operate at a loss and eventually go out of business. D) the firm would earn economic profits. E) the outcome would be allocatively inefficient. Answer: C Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 6) Consider a natural monopoly that has declining LRAC over the entire range of the market demand curve. If it is regulated and required to charge a price that is equal to marginal cost, the resulting level of output is A) allocatively efficient, and profit is earned. B) allocatively efficient, but the firm must be paid a subsidy or it will eventually go out of business. C) less than the allocatively efficient level, and profit is zero. D) less than the allocatively efficient level, but losses occur. E) greater than the allocatively efficient level, but losses occur. Answer: B Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative

7) Consider a public utility that is a natural monopoly with falling long-run average costs. If a regulatory agency ordered this firm to price all of its output at marginal cost, then the firm A) would lose money unless it is subsidized. B) could incur profits or losses depending on the position of the demand curve and the LRAC curve. C) would earn profits since the demand curve is perfectly inelastic. D) would incur losses since the demand curve is perfectly elastic. E) would have to shut down. Answer: A Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 8) Consider a public utility that is a natural monopoly with falling long-run average costs. If a regulatory agency orders the price to be set at average cost, the result will be A) exit from the industry in the short run. B) zero economic profit. C) economic profits. D) economic losses. E) losses and exit from the industry in the long run. Answer: B Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 9) If a regulatory agency imposes a lump-sum tax on a monopolist (i.e., a tax that is independent of the level of output) it will reduce the firm's profits because the tax increases A) both the LRAC and the MC, leaving price and output unchanged. B) all costs as it shifts the demand curve to the left. C) all costs as it shifts the demand curve to the right. D) price whereas quantity demanded falls. E) the LRAC but not the MC, leaving price and output unchanged. Answer: E Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative

10) Regulation can reduce the profits of a natural monopoly by imposing a per-unit output tax (rather than directly regulating price). Such a tax would cause the monopolist's 1) average total cost curve to shift upward; 2) marginal cost curve to shift upward; 3) demand curve to shift to the left. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: D Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 11) Suppose a cell-phone service provider has monopoly rights for a geographical region and is earning monopoly profits. If the government then imposes a lump-sum tax (i.e., a tax that is independent of the level output) of $X on this firm, the effect is A) an increase in consumer surplus due to the tax revenue. B) to increase the firm's marginal costs and reduce its profit by $X. C) to increase the firm's average costs and reduce its profit by $X. D) a reduction in output and an increase in price. E) an increase in output and a decrease in price. Answer: C Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 12) The economic efficiency of a natural monopoly can be improved with the use of twopart tariffs because it allows the monopoly to A) charge users according to their willingness to pay. B) charge residential users different rates than business users. C) charge users according to their ability to pay. D) charge users separately for fixed and variable costs. E) lower its total costs. Answer: D Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative

13) Suppose your municipality charges your household a flat fee of $100 per year plus $2 per cubic metre of water used. This pricing policy is an example of A) marginal-cost pricing. B) average cost pricing. C) a two-part tariff. D) utility pricing. E) linear pricing. Answer: C Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 14) In the long run, the imposition of average-cost pricing in natural monopolies, such as Manitoba Hydro and New Brunswick Power, would generally lead to A) allocative efficiency. B) productive efficiency. C) distorted investment decisions. D) a reduction in the output by these firms. E) both allocative efficiency and productive efficiency. Answer: C Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 15) Consider a regulated natural monopoly, such as an electricity distribution company, that faces falling long-run average costs. If it is forced to price its output at average cost it will provide A) less output than what is socially optimal. B) more output than what is socially optimal. C) the socially optimal amount of output. D) more output than can be absorbed by the market. E) so little output that there will be a shortage. Answer: A Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative

16) A regulated monopoly that faces rising long-run costs (at its current level of output) and which is forced to price its output at average cost will provide A) less output than what is socially optimal. B) more output than what is socially optimal. C) the socially optimal amount of output. D) more output than what can be absorbed by the market. E) so little output that there will be a shortage. Answer: B Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 17) Consider a natural monopoly that is producing an output level such that it is experiencing decreasing returns to scale. If government policy requires the firm to set price equal to marginal cost, A) the outcome will be allocatively efficient and the firm will be earning profits. B) the outcome will be allocatively inefficient and the firm will be earning profits. C) the outcome will be allocatively efficient and the firm will be incurring losses. D) the outcome will be allocatively inefficient and the firm will be incurring losses. E) the outcome will be allocatively efficient and the firm will be earning zero profits. Answer: A Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative

18) Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve. (Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month - minimum efficient scale = 2 million units - current output = 2.3 million units - LRAC at current output = $10.25 per month If this firm is currently being regulated and is following an average-cost pricing policy, the price of the service is ________ per month. A) less than $9.00 B) $9.00 C) between $9.00 and $10.25 D) $10.25 E) higher than $10.25 Answer: D Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Quantitative 19) Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve. (Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month - minimum efficient scale = 2 million units - current output = 2.3 million units - LRAC at current output = $10.25 per month Suppose the firm is currently being regulated and is required to follow a marginal-cost pricing policy. The price of the service will be ________ per month. A) lower than $9.00 B) $9.00 C) between $9.00 and $10.25 D) $10.25 E) higher than $10.25 Answer: E Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Quantitative

20) Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve. (Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month - minimum efficient scale = 2 million units - current output = 1.7 million units - current LRAC = $10.25 per month If this firm is currently being regulated and is following an average-cost pricing policy, the price of service is ________ per month. A) lower than $9.00 B) $9.00 C) between $9.00 and $10.25 D) $10.25 E) higher than $10.25 Answer: D Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Quantitative 21) Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve. (Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month - minimum efficient scale = 2 million units - current output = 1.7 million units - current LRAC = $10.25 per month Suppose the firm is currently being regulated and is required to follow a marginal-cost pricing policy. The price of the service will be ________ per month. A) lower than $9.00 B) $9.00 C) lower than $10.25 D) $10.25 E) higher than $10.25 Answer: C Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Quantitative

22) According to economist George Stigler, the process of regulating firms with market power becomes suspect over time. Why? A) Regulators impose additional costs on regulated firms because they are expected to accomplish other social goals. B) Regulators shift from protecting the consumer to protecting the regulated firm from competition. C) Regulated firms are allowed to expand into other markets and drive out competing firms. D) Regulated firms devise methods to circumvent the regulations. E) Regulation leads to corruption of political parties. Answer: B Diff: 1 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative

23) The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 Refer to Figure 12-6. The firm depicted in the diagram is A) a perfectly competitive firm. B) a monopolistically competitive firm. C) a natural monopoly. D) an oligopoly. E) a cartel. Answer: C Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Qualitative

24) The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 Refer to Figure 12-6. Suppose the firm is being regulated using a policy of average-cost pricing. The resulting price and output would be A) P1 and Q2. B) P1 and Q1. C) P2 and Q2. D) P3 and Q1. E) P3 and Q2. Answer: D Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Qualitative

25) The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 Refer to Figure 12-6. Suppose this firm is being regulated using a policy of average-cost pricing. In this case, economic profits to the firm are represented by the area A) P2P3ad. B) P2P3ab. C) 0P3aQ1. D) P1P2bc. E) There are no economic profits. Answer: E Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Qualitative

26) The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 Refer to Figure 12-6. Suppose this firm is being regulated using a policy of average-cost pricing. In this case, A) the result is allocatively efficient because economic profits are zero. B) the result is allocatively inefficient because price exceeds marginal cost. C) the level of output is too low, but the price is allocatively efficient. D) the result is as close to the competitive outcome as possible. E) the result is allocatively inefficient because the marginal cost curve is downward sloping. Answer: B Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Qualitative

27) The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 Refer to Figure 12-6. Suppose this firm is being regulated using the policy of marginalcost pricing. The resulting price and output would be A) P2 and Q2. B) P3 and Q1. C) P1 and Q2. D) P3 and Q2. E) P1 and Q1. Answer: C Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Qualitative

28) The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 Refer to Figure 12-6. Suppose this firm is being regulated using a policy of marginal-cost pricing. In this case, the firm would experience ________ represented by the area ________. A) losses; P1P2bc B) losses; edbc C) losses; 0P2bQ2 D) profits; P2P3ad E) profits; edbc Answer: A Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Qualitative

29) The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 Refer to Figure 12-6. Suppose this firm is being regulated using a policy of marginal-cost pricing. In this case, A) allocative efficiency is achieved because profits are maximized. B) the result is allocatively inefficient because the firm is suffering losses. C) the result is allocatively inefficient because the firm is earning profits. D) the result is allocatively inefficient because the marginal cost curve lies below the ATC curve. E) allocative efficiency is achieved because price equals marginal cost. Answer: E Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Qualitative

30) The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 Refer to Figure 12-6. Suppose this firm is being regulated using a policy of marginal-cost pricing. To maintain the resulting level of output, A) the regulator would have to allow the firm to keep the monopoly profits at this level of output. B) the government would have to accept the allocative inefficiency associated with this level of output. C) the government would have to subsidize the firm or it will eventually shut down. D) the average total cost curve would have to shift up. E) the demand curve would have to the left. Answer: C Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Qualitative

31) The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 Refer to Figure 12-6. Suppose this firm is a government-owned natural monopoly and imposes a price so as to achieve allocative efficiency in this market. The amount of tax revenue that the government must raise elsewhere in the economy to offset the losses of this firm is represented by the area A) P1P3ae. B) P1P2bc. C) edbc. D) Q1dbQ2. E) 0P2bQ2. Answer: B Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Qualitative

32) The diagram below shows cost and revenue curves for a natural monopoly producing electricity. Price is dollars per kilowatt hour and quantity is kilowatt hours per day.

FIGURE 12-7 Refer to Figure 12-7. If this firm were unregulated and profit maximizing, its profit would be ________ per day. A) $0 B) $10 000 C) $60 000 D) $110 000 E) $120 000 Answer: B Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Quantitative

33) The diagram below shows cost and revenue curves for a natural monopoly producing electricity. Price is dollars per kilowatt hour and quantity is kilowatt hours per day.

FIGURE 12-7 Refer to Figure 12-7. If this firm were unregulated and profit maximizing, its price and output would be ________ per kwh and ________ kwh per day. A) $0.08; 1.5 million B) $0.09; 1.4 million C) $0.12; 1 million D) $0.11; 1 million E) $0.07; 1.5 million Answer: C Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Quantitative

34) The diagram below shows cost and revenue curves for a natural monopoly producing electricity. Price is dollars per kilowatt hour and quantity is kilowatt hours per day.

FIGURE 12-7 Refer to Figure 12-7. Suppose this firm is being regulated using a policy of average-cost pricing. The resulting price and output would be ________ per kwh and ________ kwh per day. A) $0.06; 1 million B) $0.07; 1.5 million C) $0.09; 1.4 million D) $0.11; 1 million E) $0.12; 1 million Answer: C Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Quantitative

35) The diagram below shows cost and revenue curves for a natural monopoly producing electricity. Price is dollars per kilowatt hour and quantity is kilowatt hours per day.

FIGURE 12-7 Refer to Figure 12-7. Suppose this firm is being regulated using a pricing policy of average-cost pricing. In this case, economic profits are equal to A) $10 000. B) $6000. C) $126 000. D) $28 000. E) $0. Answer: E Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Quantitative

36) The diagram below shows cost and revenue curves for a natural monopoly producing electricity. Price is dollars per kilowatt hour and quantity is kilowatt hours per day.

FIGURE 12-7 Refer to Figure 12-7. Suppose this firm is being regulated using a policy of marginal-cost pricing. The resulting price and output would be ________ per kwh and ________ kwh per day. A) $0.06; 1 million B) $0.07; 1.5 million C) $0.08; 1.5 million D) $0.09; 1.4 million E) $0.12; 1 million Answer: B Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Quantitative

37) The diagram below shows cost and revenue curves for a natural monopoly producing electricity. Price is dollars per kilowatt hour and quantity is kilowatt hours per day.

FIGURE 12-7 Refer to Figure 12-7. Suppose this firm is being regulated using a policy of marginal-cost pricing. In this case, economic profits are equal to A) -$15 000. B) -$28 000. C) $0. D) $90 000. E) -$50 000. Answer: A Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Graphics: Graph Category: Quantitative

38) Which of the following is a possible negative result of a policy of average-cost pricing as a method of regulating a natural monopoly? A) Economic losses will accumulate over time to unsustainable levels. B) Taxpayers will have to subsidize the economic losses of the regulated monopoly. C) The regulated monopoly earns unreasonable profits. D) Socially desirable capital investment may not occur. E) The induced technological change leads to more industries becoming natural monopolies. Answer: D Diff: 3 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 39) There has been a trend toward less government regulation and ownership in oligopolistic industries in most industrialized countries since the 1980s. One reason for this is A) policymakers came to understand that many oligopolistic firms were operating at their minimum efficient scale, thereby producing an efficient outcome. B) policymakers came to understand that many oligopolistic firms were producing output levels that resulted in allocative efficiency. C) policymakers realized that they did not have effective tools for promoting efficiency. D) Canada's Competition Bureau, and similar agencies in other countries were so successful at promoting competition that such regulation is no longer required. E) domestic firms are now exposed to more international competition due to falling transportation and communication costs. Answer: E Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative

40) In many cases throughout Canadian history, governments have sought to control the behaviour of oligopolistic firms through either ownership or regulation. Policymakers are now skeptical of such practices because 1) many innovations in products and production methods that have led to increases in living standards are attributable to firms in oligopolistic industries; 2) it became clear that oligopolistic industries can achieve both productive and allocative efficiency without government intervention; 3) the regulatory body often ends up protecting the firms from competition. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Diff: 2 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Recall Learning Obj.: 12-3 Describe alternative methods for regulating a natural monopoly. Category: Qualitative 41) The regulation of oligopoly power has become more challenging for government authorities in recent years, especially in the technology industry. A major concern for regulators in this sector is increasing market power. What is a major contributing factor to this increasing market power? A) network effects B) productive efficiency C) lack of investment in infrastructure D) decreasing returns to scale E) prisoners' dilemma outcomes that diminish competitive behaviour Answer: A Diff: 1 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative

42) Policymakers who are responsible for maintaining a competitive environment face particular challenges in the technology sector. Which of the following is a relatively new and potent entry barrier that is particular to the technology sector? A) The imposition of regulations prohibiting the creation of new firms. B) The technology giants have unprecedented access to financial capital due to extraordinarily high sales revenues. C) The ability to target advertising directly to their consumers through the use of big data. D) The benefits to any individual user increase with growth in the total number of users of the technology sector. E) The significant political contributions made by tech industry leaders in an effort to influence policy decisions regarding their industry. Answer: D Diff: 1 Type: MC Topic: 12.2. regulation of monopoly and oligopoly Skill: Applied Learning Obj.: 12-2 Explain why perfect competition is allocatively efficient, whereas monopoly is allocatively inefficient. Category: Qualitative 12.3 Canadian Competition Policy 1) The objective of government regulation and competition policy can be described as a means to A) promote economic efficiency. B) make at least one person better off at the expense of others. C) reduce inequality in the economy. D) increase fairness in economic activities. E) make all industries perfectly competitive. Answer: A Diff: 1 Type: MC Topic: 12.3. Canadian competition policy Skill: Recall Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative 2) A major aim of Canadian competition policy is to A) eliminate oligopolies and the allocative inefficiency that they entail. B) prevent further concentration of industries where such concentration would lessen competition. C) monitor the pricing practices of crown corporations. D) protect Canadian companies from unfair foreign competition. E) achieve a perfectly competitive market structure in all markets in the Canadian economy. Answer: B Diff: 1 Type: MC Topic: 12.3. Canadian competition policy

Skill: Recall Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative 3) Prior to the 1986 amendments to the Canadian Competition Act, cases brought against mergers were almost always unsuccessful. The reason most often cited for this is A) that merging firms were always successful in destroying the incriminating evidence. B) that judges were influenced. C) that mergers that were detrimental to the public interest previously fell under criminal law, rather than civil law, making them particularly hard to prove. D) that mergers that were detrimental to the public interest previously fell under civil law, rather than criminal law, making them particularly hard to prove. E) the lack of a director responsible for prosecution. Answer: C Diff: 1 Type: MC Topic: 12.3. Canadian competition policy Skill: Recall Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative 4) An allowable defence for a merger according to Canada's Competition Bureau is that A) merging firms find it easier to decide how they will share the market. B) merging firms are more profitable because they no longer have to compete with one another. C) the gains in efficiency resulting from the merger more than offset any reductions in competition. D) merged and therefore bigger firms are better placed to compete globally. E) larger firms are easier to regulate. Answer: C Diff: 1 Type: MC Topic: 12.3. Canadian competition policy Skill: Recall Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative 5) In Canada, a significant challenge for the Competition Bureau when reviewing a possible merger between firms in a concentrated industry is to A) determine whether efficiency gains make the merger desirable. B) determine whether monopoly no longer poses a threat to the Canadian economy. C) impose effective entry barriers to the industry. D) determine whether criminal charges are required due to unlawful collusion. E) allow those mergers that lead to larger firms that are easier to regulate. Answer: A Diff: 1 Type: MC Topic: 12.3. Canadian competition policy Skill: Recall

Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative

6) In Canada, the Competition Act specifies that in antitrust cases the "watchdog" is the A) Senate. B) Commissioner of the Competition Bureau. C) Supreme Court of Canada. D) minister responsible for Industry Canada. E) prime minister. Answer: B Diff: 1 Type: MC Topic: 12.3. Canadian competition policy Skill: Recall Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative 7) The administrative agency established to enforce the provisions of the Competition Act is the A) Competition Bureau. B) Federal Free Trade Practices Commission. C) Department of Consumer and Corporate Affairs. D) Competition Tribunal Act. E) Director of Investigations. Answer: A Diff: 1 Type: MC Topic: 12.3. Canadian competition policy Skill: Recall Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative 8) Canadian governments (federal, provincial and municipal) employ public ownership or regulation of industries in an effort to A) ensure that the goal of profit maximization is being pursued because this ensures allocative efficiency. B) produce a more equitable distribution of income between consumers and producers with monopoly power. C) protect consumers from the high prices and restricted output associated with monopoly power. D) promote productive efficiency in all industries. E) transfer monopoly profits from private firm owners to the government. Answer: C Diff: 2 Type: MC Topic: 12.3. Canadian competition policy Skill: Recall Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative

9) Suppose there are only two firms (Firms A and B) in Canada that produce good X, and the two firms propose a merger to create a single firm (Firm AB). Is there any circumstance under which the authorities enforcing Canadian competition policy might approve of such a merger? A) According to the Competition Act, as long as the revenues of the merged firm are less than $100 million per year. B) According to the Competition Act, if the merged firm enhances the status of a Canadian cultural industry. C) If the market is defined as being within Canada's borders, and the merger allows Firm AB to exploit economies of scale. D) If international trade in good X is such that Firm AB faces a fully competitive environment, both within and outside of Canada's borders. Answer: D Diff: 2 Type: MC Topic: 12.3. Canadian competition policy Skill: Recall Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative 10) In Canada, alleged violations of the Competition Act are referred to the ________ for adjudication. A) Commissioner of the Competition Bureau B) Competition Tribunal C) minister responsible for Industry Canada D) RCMP E) provincial Courts of Appeal Answer: B Diff: 1 Type: MC Topic: 12.3. Canadian competition policy Skill: Recall Learning Obj.: 12-4 Discuss some details about Canadian competition policy. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 13 How Factor Markets Work 13.1 The Demand for Factors 1) For any firm in any market structure, what is a factor's marginal revenue product? A) the average product of the factor multiplied by the price of the output B) the change in revenue generated by the sale of the product produced by an additional unit of the factor C) the change in revenue caused by the sale of an additional unit of output D) the increase in output resulting from the use of an additional unit of the factor multiplied by the cost of that factor E) marginal revenue multiplied by total product Answer: B

Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Recall Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 2) The marginal revenue product of labour is the change in the value of the firm's output resulting from A) a change in the product's price. B) an increase in the marginal physical product of labour. C) a change in the wage rate paid to labour. D) producing one more unit of output. E) hiring one more unit of labour input. Answer: E Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Recall Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative

3) What is the profit-maximizing condition for the use of any factor of production? (Where MP = marginal product, w = the price of a factor of production, p = price of one unit of the firm's output, MR = marginal revenue, MC = marginal cost, MRP = marginal revenue product.) A) MRP = MP × p B) MR = C) MC = MR × w D) w = MP × p E) MRP = MR × MC Answer: D Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Recall Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative 4) Suppose the last unit of a factor of production employed has a marginal product of 12. The factor's price is $8, and the product's competitive market price is $6. This factor's marginal revenue product is A) $6. B) $36. C) $48. D) $72. E) $96. Answer: D Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative 5) Profit-maximizing firms increase production up to the point at which the last unit of the variable factor employed adds A) nothing to marginal cost. B) nothing to marginal revenue. C) positive economic profits. D) just as much to revenue as to profit. E) just as much to revenue as to cost. Answer: E Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of

production. Category: Qualitative

6) If a firm is a perfect competitor in its product market, the marginal product of a factor multiplied by the product's price equals A) marginal cost. B) marginal profit. C) total revenue. D) marginal revenue. E) marginal revenue product. Answer: E Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Recall Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 7) Consider labour that is hired for $18 per hour. If the last hour of labour hired produces 8 units of output which sells for $10 per unit, that labour-hour's marginal revenue product is A) $1.20. B) $4.44. C) $64. D) $80. E) $144. Answer: D Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative 8) Consider labour that is hired for $18 per hour. If the last hour of labour hired produces 8 units of output which sells for $10 per unit, that labour-hour adds ________ to the firm's profit and so ________ labour should be hired. A) $80; more B) -$80; less C) $62; less D) $62; more E) $0; no Answer: D Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative

9) Consider labour that is hired for $18 per hour. If the last hour hired produces 8 units of output which sells for $2 per unit, ________ labour should be hired in this situation since the wage is ________ MRP. A) more; greater than B) more; less than C) less; greater than D) less; less than E) no; equal to Answer: C Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative 10) Consider labour that is hired for $18 per hour. If the last hour hired produces 8 units of output which sells for $2 per unit, that labour-hour adds ________ to the firm's profit and so ________ labour should be hired. A) -$128; more B) -$2; less C) $16; less D) $16; more E) $0; no Answer: B Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative 11) Consider labour hired for $18 per hour. If the last hour of labour hired produces 8 units of output which sells for $10 per unit, ________ labour should be hired in this situation since the wage is ________ MRP. A) more; greater than B) more; less than C) less; greater than D) less; less than E) no; equal to Answer: B Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production.

Category: Quantitative

12) Consider labour hired for $1000 per week. If the last week of labour hired produces 0.25 units of output which sells for $5000 per unit, ________ labour should be hired in this situation since the wage is ________ MRP. A) more; greater than B) more; less than C) less; greater than D) less; less than E) no; equal to Answer: B Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative 13) Consider a small firm that is producing winter jackets. It can lease an additional sewing machine for one month for $750. With this additional machine, the firm can produce an additional 6 jackets during that time period that it sells for $125 each. Hiring the marginal machine adds ________ to the firm's profit and so it should ________ the machine. A) -$750; not lease B) -$750; lease C) $0; be indifferent as to whether to lease D) $750; not lease E) $750; lease Answer: C Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative 14) Consider a small firm that is producing winter jackets. It can lease an additional sewing machine for one month for $1200. With this additional machine, the firm can produce an additional 7 jackets during that time period that it sells for $250 each. Hiring the marginal machine adds ________ to the firm's profit and so it should ________ the machine. A) -$1200; not lease B) $0; be indifferent as to whether to lease C) $1200; lease D) $550; lease E) $1750; lease Answer: D Diff: 2 Type: MC

Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative 15) Consider a small firm that is producing winter jackets. It can lease an additional sewing machine for one month for $2400. With this additional machine, the firm can produce an additional 4 jackets during that time period that it sells for $550 each. Hiring the marginal machine adds ________ to the firm's profit and so it should ________ the machine. A) -$2400; not lease B) -$200; not lease C) $0; be indifferent as to whether to lease D) $200; lease E) $2400; lease Answer: B Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Quantitative 16) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. The marginal product of the 15th unit of the factor of production is A) -2. B) 0. C) 2. D) 82. E) 84. Answer: C

Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

17) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. The marginal product of the 12th unit of the factor of production is A) 4. B) 14. C) 20. D) 44. E) 64. Answer: C Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Qualitative

18) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. The total revenue earned by the firm when it employs 12 units of the factor is A) $120. B) $520. C) $640. D) $768. E) $1440. Answer: C Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

19) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. The total revenue earned by the firm when it employs 15 units of the factor is A) $860. B) $150. C) $640. D) $780. E) $1440. Answer: A Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

20) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. The marginal revenue product of the 14th unit of the factor is A) -$60. B) $60. C) $140. D) $700. E) $840. Answer: B Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

21) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. The marginal revenue product of the 15th unit of the factor is A) -$20. B) $20. C) $60. D) $150. E) $820. Answer: B Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

22) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. Diminishing marginal returns are present for which units of the factor of production? A) 11th unit only B) 12th unit only C) 13th unit only D) 14th unit only E) units from 11 and above Answer: E Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

23) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. How many units of this factor of production would the profitmaximizing firm choose to hire? A) 11 B) 12 C) 13 D) 14 E) It is not possible to determine with the data provided. Answer: E Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

24) Consider the following table for a firm. The first column shows the number of units of a variable factor of production employed by the firm; the second column shows the associated levels of output. Total Number of Units of the Factor 2 3 4 5 6 7 8

Total Number of Units of Output 100 110 128 148 162 170 166

TABLE 13-2 Refer to Table 13-2. The marginal product of the 7th unit of the factor is A) -8. B) 0. C) 8. D) 162. E) 170. Answer: C Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

25) Consider the following table for a firm. The first column shows the number of units of a variable factor of production employed by the firm; the second column shows the associated levels of output. Total Number of Units of the Factor 2 3 4 5 6 7 8

Total Number of Units of Output 100 110 128 148 162 170 166

TABLE 13-2 Refer to Table 13-2. Suppose the firm is a perfect competitor and faces a given price of the product equal to $2 per unit. The marginal revenue product of the 5th unit of the factor is A) $128. B) $148. C) $20. D) $40. E) $2. Answer: D Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

26) Consider the following table for a firm. The first column shows the number of units of a variable factor of production employed by the firm; the second column shows the associated levels of output. Total Number of Units of the Factor 2 3 4 5 6 7 8

Total Number of Units of Output 100 110 128 148 162 170 166

TABLE 13-2 Refer to Table 13-2. This firm begins to experience diminishing marginal productivity when it hires the ________ unit of the factor. A) 3rd B) 4th C) 5th D) 6th E) 7th Answer: D Diff: 3 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

27) Consider the following table for a firm. The first column shows the number of units of a variable factor of production employed by the firm; the second column shows the associated levels of output. Total Number of Units of the Factor 2 3 4 5 6 7 8

Total Number of Units of Output 100 110 128 148 162 170 166

TABLE 13-2 Refer to Table 13-2. Suppose this firm is a perfect competitor and faces a given price of the product equal to $10 per unit. The marginal revenue product of the 3rd unit of the factor is A) $30. B) $100. C) $110. D) $1000. E) $1100. Answer: B Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

28) Consider the following table for a firm. The first column shows the number of units of a variable factor of production employed by the firm; the second column shows the associated levels of output. Total Number of Units of the Factor 2 3 4 5 6 7 8

Total Number of Units of Output 100 110 128 148 162 170 166

TABLE 13-2 Refer to Table 13-2. Suppose this firm is a perfect competitor and faces a given price of the product equal to $15 per unit. The marginal revenue product of the 5th unit of the factor is A) $30. B) $100. C) $75. D) $300. E) $2220. Answer: D Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

29) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 2 3 4 5 6 7

Total Number of Units of Output 12 20 26 30 32 32

Price per Unit of Output $10 $9 $8 $7 $6 $5

Total Cost of Production $50 $55 $60 $65 $70 $75

TABLE 13-3 Refer to Table 13-3. The marginal product of the 4th unit of the factor of production is A) 4. B) 6. C) 8. D) 26. E) 30. Answer: B Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

30) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 2 3 4 5 6 7

Total Number of Units of Output 12 20 26 30 32 32

Price per Unit of Output $10 $9 $8 $7 $6 $5

Total Cost of Production $50 $55 $60 $65 $70 $75

TABLE 13-3 Refer to Table 13-3. The marginal product of the 6th unit of the factor of production is A) -2. B) 2. C) 4. D) 8. E) 32. Answer: B Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

31) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 2 3 4 5 6 7

Total Number of Units of Output 12 20 26 30 32 32

Price per Unit of Output $10 $9 $8 $7 $6 $5

Total Cost of Production $50 $55 $60 $65 $70 $75

TABLE 13-3 Refer to Table 13-3. The total revenue earned by the firm if the 5th unit of the factor of production is hired is A) $160. B) $180. C) $192. D) $202. E) $210. Answer: E Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

32) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 2 3 4 5 6 7

Total Number of Units of Output 12 20 26 30 32 32

Price per Unit of Output $10 $9 $8 $7 $6 $5

Total Cost of Production $50 $55 $60 $65 $70 $75

TABLE 13-3 Refer to Table 13-3. The total revenue earned by the firm if the 7th unit of the factor of production is hired is A) $160. B) $180. C) $192. D) $202. E) $210. Answer: A Diff: 1 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

33) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 2 3 4 5 6 7

Total Number of Units of Output 12 20 26 30 32 32

Price per Unit of Output $10 $9 $8 $7 $6 $5

Total Cost of Production $50 $55 $60 $65 $70 $75

TABLE 13-3 Refer to Table 13-3. The rise in total revenue generated by hiring the 4th unit of the factor of production is ________. A) -$11.00 B) $2.00 C) $3.67 D) $7.50 E) $28.00 Answer: E Diff: 3 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

34) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 2 3 4 5 6 7

Total Number of Units of Output 12 20 26 30 32 32

Price per Unit of Output $10 $9 $8 $7 $6 $5

Total Cost of Production $50 $55 $60 $65 $70 $75

TABLE 13-3 Refer to Table 13-3. The increase in total revenue generated by hiring the 5th unit of the factor of production is ________. A) -$11.00 B) -$2.00 C) $2.00 D) $7.50 E) $11.00 Answer: C Diff: 3 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

35) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 2 3 4 5 6 7

Total Number of Units of Output 12 20 26 30 32 32

Price per Unit of Output $10 $9 $8 $7 $6 $5

Total Cost of Production $50 $55 $60 $65 $70 $75

TABLE 13-3 Refer to Table 13-3. A profit-maximizing firm would never hire more than the ________ unit of this factor of production. A) 3rd B) 4th C) 5th D) 6th E) 7th Answer: B Diff: 3 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative 36) The marginal revenue product curve for a monopolist would be ________ its marginal product curve because ________. A) steeper than; its MR decreases as output increases B) steeper than; its product's price increases as output increases C) flatter than; it must pay a higher wage to labour D) flatter than; its product's price decreases as output increases E) the same as; the MRP curve always has the same shape as the MP curve Answer: A Diff: 3 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative

37) The shape of the marginal revenue product curve for a perfectly competitive firm would be ________ its marginal product curve because ________. A) the same as; MR is constant as output increases B) steeper than; MR decreases as output increases C) steeper than; its product's price increases as output increases D) flatter than; its product's price decreases as output increases E) flatter than; it must pay a higher wage to the variable factor as output increases Answer: A Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Recall Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 38) The table below shows the total production for varying numbers of hours worked producing yo-yos. The firm sells its product and hires its workers in competitive markets. Number of Hours Worked 10 11 12 13 14 15

Number of Yo-Yos Produced 60 70 78 84 88 90

Wage Rate per Hour ($) 10 10 10 10 10 10

Price of Yo-Yos ($) 5 5 5 5 5 5

TABLE 13-4 Refer to Table 13-4. What is the MRP for the 13th hour worked? A) $78 B) $84 C) $5 D) $30 E) $10 Answer: D Diff: 3 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

39) The table below shows the total production for varying numbers of hours worked producing yo-yos. The firm sells its product and hires its workers in competitive markets. Number of Hours Worked 10 11 12 13 14 15

Number of Yo-Yos Produced 60 70 78 84 88 90

Wage Rate per Hour ($) 10 10 10 10 10 10

Price of Yo-Yos ($) 5 5 5 5 5 5

TABLE 13-4 Refer to Table 13-4. What is the marginal cost of the variable factor employed by this firm? A) $0 B) $5 C) $10 D) $20 E) $30 Answer: C Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

40) The table below shows the total production for varying numbers of hours worked producing yo-yos. The firm sells its product and hires its workers in competitive markets. Number of Hours Worked 10 11 12 13 14 15

Number of Yo-Yos Produced 60 70 78 84 88 90

Wage Rate per Hour ($) 10 10 10 10 10 10

Price of Yo-Yos ($) 5 5 5 5 5 5

TABLE 13-4 Refer to Table 13-4. A profit-maximizing firm will continue to hire labour to produce yoyos until they have equated A) the price of yo-yos and the wage rate per hour. B) the marginal product of an additional hour of labour and the price of the yo-yos. C) the wage rate per hour and the value of the yo-yos produced by hiring one additional hour of labour. D) the marginal revenue product of an additional hour of labour and the price of yo-yos. E) the wage rate per hour and the marginal product of labour. Answer: C Diff: 2 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

41) The table below shows the total production for varying numbers of hours worked producing yo-yos. The firm sells its product and hires its workers in competitive markets. Number of Hours Worked 10 11 12 13 14 15

Number of Yo-Yos Produced 60 70 78 84 88 90

Wage Rate per Hour ($) 10 10 10 10 10 10

Price of Yo-Yos ($) 5 5 5 5 5 5

TABLE 13-4 Refer to Table 13-4. Which of the following statements best describes the situation of this firm when it is employing 12 hours of labour? The 12th hour of labour hired A) adds $10 to revenue and costs $10 to hire, so this firm is maximizing its profit at 12 hours of labour. B) adds $5 to revenue, but costs $10 to hire, so this firm should hire less labour. C) adds $30 to revenue, but only costs $10 to hire, so this firm should hire more labour. D) adds $8 to revenue, but costs $10 to hire, so this firm should hire less labour. E) adds $40 to revenue, but only costs $10 to hire, so this firm should hire more labour. Answer: E Diff: 3 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

42) The table below shows the total production for varying numbers of hours worked producing yo-yos. The firm sells its product and hires its workers in competitive markets. Number of Hours Worked 10 11 12 13 14 15

Number of Yo-Yos Produced 60 70 78 84 88 90

Wage Rate per Hour ($) 10 10 10 10 10 10

Price of Yo-Yos ($) 5 5 5 5 5 5

TABLE 13-4 Refer to Table 13-4. Which of the following statements best describes the situation of this firm when it is employing 15 hours of labour? The 15th hour of labour hired A) adds $5 to revenue, but costs $10 to hire, so this firm should hire less labour. B) adds $20 to revenue, but only costs $10 to hire, so this firm should hire more labour. C) adds $10 to revenue and costs $10 to hire, so this firm is maximizing its profit at 15 hours of labour. D) adds $50 to revenue, but only costs $10 to hire, so this firm should hire more labour. E) adds $2 to revenue, but costs $10 to hire, so this firm should hire less labour. Answer: C Diff: 3 Type: MC Topic: 13.1a. marginal product and marginal revenue product Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

43) The table below shows the total production for varying numbers of hours worked producing yo-yos. The firm sells its product and hires its workers in competitive markets. Number of Hours Worked 10 11 12 13 14 15

Number of Yo-Yos Produced 60 70 78 84 88 90

Wage Rate per Hour ($) 10 10 10 10 10 10

Price of Yo-Yos ($) 5 5 5 5 5 5

TABLE 13-4 Refer to Table 13-4. If plotted on a graph, the marginal revenue product curve for the "number of hours worked" would be the same as A) the firm's marginal product curve, and would be downward sloping and concave to the origin. B) the firm's marginal product curve, and would be downward sloping and convex to the origin. C) the firm's demand curve for hours worked, and would be downward sloping and linear. D) the firm's demand curve for yo-yos, and would be downward sloping and linear. E) the firm's marginal revenue curve, and would be horizontal at $5 because this firm is operating in a competitive labour market. Answer: C Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

44) The table below shows the total production for varying numbers of hours worked producing yo-yos. The firm sells its product and hires its workers in competitive markets. Number of Hours Worked 10 11 12 13 14 15

Number of Yo-Yos Produced 60 70 78 84 88 90

Wage Rate per Hour ($) 10 10 10 10 10 10

Price of Yo-Yos ($) 5 5 5 5 5 5

TABLE 13-4 Refer to Table 13-4. How many worker-hours should this profit-maximizing firm hire? A) 11 B) 12 C) 13 D) 14 E) 15 Answer: E Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

45) The table below shows the total production for varying numbers of hours worked producing yo-yos. The firm sells its product and hires its workers in competitive markets. Number of Hours Worked 10 11 12 13 14 15

Number of Yo-Yos Produced 60 70 78 84 88 90

Wage Rate per Hour ($) 10 10 10 10 10 10

Price of Yo-Yos ($) 5 5 5 5 5 5

TABLE 13-4 Refer to Table 13-4. If the market price of yo-yos drops to $2.50, how many workerhours should this profit-maximizing firm hire? A) 11 B) 12 C) 13 D) 14 E) 15 Answer: D Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative 46) In a competitive labour market, an increase in the demand for labour might be due to an increase in the A) supply of labour. B) wage rate. C) supply of the product that labour produces. D) demand for the product that labour produces. E) supply of the other factors. Answer: D Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative

47) A demand for a factor of production is said to be "derived" because the factor's demand depends A) entirely on the cost of the factor. B) entirely on corporate advertising. C) heavily on government policy. D) heavily on public choice. E) on the demand for the good or services it helps to make. Answer: E Diff: 1 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Recall Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 48) Which of the following is the best example of a derived demand? A) A decrease in interest rates increases the demand for housing. B) An increase in the wage rate causes firms to substitute capital for labour. C) An increase in demand for cars will increase the demand for auto workers. D) A decrease in the price of internet connection will increase the demand for tablet computers. E) An increase in the price of butter increases the demand for margarine. Answer: C Diff: 1 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 49) Which of the following is the best example of a derived demand? A) An increase in the wage for yoga instructors causes an increase in the demand for yoga classes. B) A decrease in the price of Pilates classes causes an increase in the demand for yoga classes. C) An increase in demand for yoga classes causes an increase in demand for yoga instructors. D) A decrease in the demand for yoga mats causes a decrease in demand for yoga classes. E) An increase in awareness about fitness causes an increase in demand for yoga classes. Answer: C Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative

50) Which of the following statements about the demand curve for a variable factor of production is correct? A) It is the same as that factor's marginal cost curve. B) It is the same as that factor's MRP curve. C) It is the same as that factor's MP curve. D) It is steeper than that factor's MRP curve. E) It is flatter than that factor's MRP curve. Answer: B Diff: 1 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Recall Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 51) In a perfectly competitive labour market, a profit-maximizing firm will employ labour until the A) MPP = MRP. B) wage = MP. C) MRP = the product's price. D) wage = MRP. E) wage = the product's price. Answer: D Diff: 1 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 52) Under what condition will the demand for a factor be more elastic? A) when there is little substitutability between factors B) when it is easier to substitute between this factor and others C) when that factor determines a small percentage of total cost D) when the demand for the good being produced is inelastic E) when the supply of the factor is elastic Answer: B Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Recall Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative

53) Consider a firm's demand curve for labour. If a technological change makes it easier to substitute capital for labour, the demand curve for labour A) shifts parallel to the right. B) shifts parallel to the left. C) becomes more inelastic. D) becomes more elastic. E) is not affected. Answer: D Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Recall Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 54) Other things being equal, if it becomes more difficult to substitute capital for labour in the production of cell phones, the demand curve for labour in that industry A) will shift parallel to the left. B) will shift parallel to the right. C) will remain unchanged. D) will become more elastic. E) will become more inelastic. Answer: E Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 55) Consider a firm's demand curve for labour. If a technological change makes it harder to substitute capital for labour, the demand curve for labour A) shifts parallel to the right. B) shifts parallel to the left. C) becomes less elastic. D) becomes more elastic. E) is not affected. Answer: C Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative

56) The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is hours of labour.

FIGURE 13-1 Refer to Figure 13-1. Assume that the firm is a perfect competitor and the price of the firm's output is fixed. We know that the firm's MRP curve is A) the same shape as the firm's marginal product curve for labour. B) the same shape as the firm's marginal revenue curve. C) horizontal, if the firm is perfectly competitive. D) steeper than the firm's marginal product curve for labour. E) flatter than the firm's marginal product curve for labour. Answer: A Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Qualitative

57) The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is hours of labour.

FIGURE 13-1 Refer to Figure 13-1. This firm's MRP curve is the firm's A) derived demand for copper plumbing pipe. B) demand curve for labour. C) market demand curve for copper plumbing pipe. D) marginal product of labour curve. E) total product curve for labour. Answer: B Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Qualitative

58) The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is hours of labour.

FIGURE 13-1 Refer to Figure 13-1. Suppose this firm initially has the marginal revenue product curve MRP1. One reason that the curve could shift to MRP 2 is A) a decrease in demand for the firm's output, copper plumbing pipe. B) an increase in the supply of labour. C) a decrease in the wage rate. D) an increase in the wage rate. E) an improvement in workers' productivity. Answer: E Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Qualitative

59) The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is hours of labour.

FIGURE 13-1 Refer to Figure 13-1. Suppose this firm initially has the marginal revenue product curve MRP1. One reason that the curve could shift to MRP 3 is A) an increase in demand for the firm's output, copper plumbing pipe. B) a decrease in the market price of copper plumbing pipe. C) a decrease in the supply of labour. D) an increase in the wage rate. E) an increase in the marginal product of labour. Answer: B Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Qualitative

60) The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is hours of labour.

FIGURE 13-1 Refer to Figure 13-1. Suppose this firm has the marginal revenue product curve MRP 1. At a wage rate of $12, the profit-maximizing firm will hire ________ units of labour. A) 100 B) 120 C) 140 D) 160 E) 180 Answer: C Diff: 1 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Qualitative

61) The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is hours of labour.

FIGURE 13-1 Refer to Figure 13-1. Suppose this firm is facing MRP1, a wage rate of $12 per hour and is employing 150 units of labour. At this level of employment, A) the last unit of labour is adding less to the firm's cost than it is adding to the firm's revenue, so it should increase the use of labour. B) the last unit of labour contributes as much to the firm's costs as to the firm's revenues and so the firm should not change its use of labour. C) the last unit of labour is adding more to the firm's cost than it is adding to the firm's revenue, so it should reduce the use of labour. D) the firm has shifted the MRP curve to MRP2. E) the firm has shifted the MRP curve to MRP3. Answer: C Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Qualitative

62) The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is hours of labour.

FIGURE 13-1 Refer to Figure 13-1. Suppose this firm is facing MRP1, a wage rate of $16 per hour and is employing 100 units of labour. At this level of employment, A) the last unit of labour is adding less to the firm's cost than it is adding to the firm's revenue, so it should increase the use of labour. B) the last unit of labour contributes as much to the firm's costs as to the firm's revenues and so the firm should not change its use of labour. C) the last unit of labour is adding more to the firm's cost than it is adding to the firm's revenue, so it should reduce the use of labour. D) the firm has shifted the MRP curve to MRP2. E) the firm has shifted the MRP curve to MRP3. Answer: A Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Qualitative

63) The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is hours of labour.

FIGURE 13-1 Refer to Figure 13-1. Suppose this profit-maximizing firm is facing MRP1 and a wage rate of $12 per hour. Now suppose there is, simultaneously, an increase in demand for copper plumbing pipe (such that MRP shifts to MRP2), and an increase in the wage rate to $16 per hour. The firm should A) employ 20 more units of labour. B) employ 40 more units of labour. C) employ the same number of units of labour. D) employ 40 fewer units of labour. E) employ 20 fewer units of labour. Answer: A Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Qualitative

64) The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-2 Refer to Figure 13-2. This factor market is in equilibrium at point B. What is the marginal revenue product of the 40th unit of the factor employed? A) $8 multiplied by the price of the product B) $320 C) $8 D) the marginal product of the 40th unit employed multiplied by the wage E) $8 multiplied by the marginal revenue of the 40th unit employed Answer: C Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Quantitative

65) The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-2 Refer to Figure 13-2. If the supply and demand curves for the factor are as shown in the diagram, but the wage being paid is $9, and the market is at point C, A) the wage is higher than the factor's marginal revenue product, and firms will reduce the amount of the factor employed. B) the wage is higher than the factor's marginal product, and firms will reduce the amount of the factor employed. C) the marginal revenue product is not equal to the marginal cost of the factor and firms will increase the amount of the factor employed. D) the demand curve will shift to the right until equilibrium factor price and quantity are re-established. E) the demand curve will shift to the left until equilibrium factor price and quantity are re-established. Answer: A Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Graph Category: Qualitative

66) Consider a firm's demand for a factor of production. A monopolist will continue to increase production until the marginal cost of the variable factor is A) greater than the marginal revenue of the firm's output. B) less than the marginal revenue of the firm's output. C) equal to zero. D) equal to the marginal revenue product of the factor. E) equal to the marginal revenue of the firm's output. Answer: D Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 67) Consider a firm's demand for a factor of production. A perfectly competitive firm will continue to increase production until the marginal cost of the variable factor is A) greater than the marginal revenue of the firm's output. B) less than the marginal revenue of the firm's output. C) equal to zero. D) equal to the marginal revenue product of the factor. E) equal to the marginal revenue of the firm's output. Answer: D Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative

68) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. How many units of this factor of production would the profitmaximizing firm hire if the price of each unit of the factor was $200? A) 10 B) 11 C) 12 D) 13 E) It is not possible to determine with the data given. Answer: C Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

69) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. How many units of this factor of production would the profitmaximizing firm hire if the price of each unit of the factor was $140? A) 11 B) 12 C) 13 D) 14 E) It is not possible to determine with the data given. Answer: C Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

70) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. How many units of this factor of production would the profitmaximizing firm hire if the price of each unit of the factor was $30? A) 12 B) 13 C) 14 D) 15 E) It is not possible to determine with the data given. Answer: C Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Quantitative

71) Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 10 11 12 13 14 15

Total Number of Units of Output 20 44 64 78 84 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 Refer to Table 13-1. In order to determine this firm's profit-maximizing number of units of the variable factor of production, what necessary information is missing from the table? A) the price per unit of the factor B) the per unit price of the output C) the marginal product of the factor D) the marginal revenue product of the factor E) the total output for the firm Answer: A Diff: 2 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Graphics: Table Category: Qualitative 72) Consider a perfectly competitive labour market for video-game designers. Which of the following will shift the demand curve for these workers to the right? 1) an increase in the equilibrium wage rate for video-game designers; 2) a decrease in the market price of video games; 3) new software that improves the design process. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: C Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of

production. Category: Qualitative

73) Assume the market for farmland in the fruit-growing region of southwestern Ontario is perfectly competitive. Which of the following will shift the demand curve for this land to the left? 1) a decrease in demand for Canadian-grown fruit; 2) a change in consumer preferences toward eating more fruit; 3) scientific reports that confirm a reduction in water supply to the region. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1 only E) 3 only Answer: C Diff: 3 Type: MC Topic: 13.1b. a firm's demand for a factor Skill: Applied Learning Obj.: 13-1 Determine a profit‐maximizing firm's demand for a factor of production. Category: Qualitative 13.2 The Supply of Factors 1) If a given factor of production is highly mobile across alternative uses, the factor's supply is A) highly price elastic. B) highly price inelastic. C) perfectly inelastic. D) irrelevant to its earnings. E) immobile at the industry level. Answer: A Diff: 2 Type: MC Topic: 13.2. factor mobility and supply Skill: Recall Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Category: Qualitative

2) The aggregate quantity of labour supplied will generally rise when there is an increase in 1) immigration; 2) labour-force participation rates; 3) the retirement age. A) 1 and 2 B) 1 and 3 C) 2 and 3 D) 1, 2, and 3 E) 1 only Answer: D Diff: 1 Type: MC Topic: 13.2. factor mobility and supply Skill: Applied Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Category: Qualitative 3) Consider the supply of factors of production. The elasticity of supply of computergame programmers will generally be relatively greater if we are analyzing the supply to A) the whole economy in the short run. B) the whole economy in the long run. C) a particular industry in the short run. D) a particular industry in the long run. E) a specific firm. Answer: E Diff: 2 Type: MC Topic: 13.2. factor mobility and supply Skill: Recall Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Category: Qualitative 4) Consider computer programmers as a factor of production. Their factor mobility is quite ________, and so to any specific firm the supply of this factor is quite ________. A) low; inelastic B) low; elastic C) high; inelastic D) high; elastic Answer: D Diff: 2 Type: MC Topic: 13.2. factor mobility and supply Skill: Applied Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Category: Qualitative

5) If small changes in incentives can induce a factor of production to shift between alternative uses, we say that the factor is A) efficient. B) mobile. C) inelastic. D) declining. E) flighty. Answer: B Diff: 1 Type: MC Topic: 13.2. factor mobility and supply Skill: Recall Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Category: Qualitative 6) Which of the following statements concerning factor mobility is FALSE? A) Land is a mobile resource in an economic sense, because it has many alternative uses. B) Once it is in place, a factory designed and built for a specific purpose is highly mobile. C) The allocation of labour tends to depend more on non-monetary considerations than does the allocation of either land or capital. D) The elasticity of the supply of labour to any particular use is likely to be greater in the long run than in the short run. E) Factor mobility is an important determinant of economic rent. Answer: B Diff: 2 Type: MC Topic: 13.2. factor mobility and supply Skill: Applied Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Category: Qualitative 7) Consider a manufacturing plant as an example of physical capital. Factor mobility with regard to this physical capital refers to A) the ease with which this plant can be relocated to another location. B) the ease with which this plant can be converted to a different use. C) the ease with which the labour employed at the plant can be retrained to produce a different product. D) the elasticity of supply of the labour employed in the plant. E) only the long-run concept of mobility because it is physical capital. Answer: B Diff: 2 Type: MC Topic: 13.2. factor mobility and supply Skill: Applied Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Category: Qualitative

8) The three diagrams below each show a supply curve for oil tankers over a relatively short period of time.

FIGURE 13-3 Refer to Figure 13-3. Consider the supply of oil tankers to an individual Canadian shipping firm, the North American shipping industry, and the world shipping industry. Which diagram best shows the supply of oil tankers that is relevant to the North American shipping industry? A) diagram 1 B) diagram 2 C) diagram 3 D) diagrams 2 or 3 E) diagrams 1 or 2 Answer: C Diff: 2 Type: MC Topic: 13.2. factor mobility and supply Skill: Applied Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Graphics: Graph Category: Qualitative

9) The three diagrams below each show a supply curve for oil tankers over a relatively short period of time.

FIGURE 13-3 Refer to Figure 13-3. Consider the supply of oil tankers to an individual Canadian shipping firm, the North American shipping industry, and the world shipping industry. Which diagram best shows the supply of oil tankers that is relevant to an individual Canadian firm? A) diagram 1 B) diagram 2 C) diagram 3 D) diagrams 2 or 3 E) diagrams 1 or 2 Answer: A Diff: 2 Type: MC Topic: 13.2. factor mobility and supply Skill: Applied Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Graphics: Graph Category: Qualitative

10) The three diagrams below each show a supply curve for oil tankers over a relatively short period of time.

FIGURE 13-3 Refer to Figure 13-3. Consider the supply of oil tankers to an individual Canadian shipping firm, the North American shipping industry, and the world shipping industry. Which diagram best shows the supply of oil tankers that is relevant to the world shipping industry? A) diagram 1 B) diagram 2 C) diagram 3 D) diagrams 2 or 3 E) diagrams 1 or 2 Answer: B Diff: 2 Type: MC Topic: 13.2. factor mobility and supply Skill: Applied Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Graphics: Graph Category: Qualitative

11) The three diagrams below each show a supply curve for oil tankers over a relatively short period of time.

FIGURE 13-3 Refer to Figure 13-3. Consider oil tankers as a factor of production (for example, for the production of gasoline). Which diagram shows the most mobility of this factor of production? A) diagram 1 B) diagram 2 C) diagram 3 D) none of the diagrams E) each diagram shows mobility Answer: A Diff: 3 Type: MC Topic: 13.2. factor mobility and supply Skill: Applied Learning Obj.: 13-2 Examine the role of factor mobility in determining factor supply. Graphics: Graph Category: Qualitative 13.3 Factor Markets in Action 1) Which of the following statements about equilibrium factor-price differentials is correct? They A) tend to be self-eliminating. B) may be caused by differences in the intrinsic qualities of factors. C) will be eliminated when the allocation of resources is in long-run equilibrium. D) are unrelated to differences in non-monetary benefits. E) are unrelated to acquired differences in factors. Answer: B Diff: 1 Type: MC Topic: 13.3a. factor-price differentials Skill: Recall Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative

2) Consider the allocation of factors of production to their various uses. Non-monetary considerations tend to be most important in the allocation of A) land. B) capital. C) labour. D) raw materials. E) natural resources. Answer: C Diff: 1 Type: MC Topic: 13.3a. factor-price differentials Skill: Applied Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 3) Factors of production (land, labour, and capital) tend to move between uses so as to A) equalize distribution of wealth. B) equalize the amount of industry in separate regions of a nation. C) maximize the net advantages to the owners of the factors. D) increase the ratio of capital to labour. E) maximize only the monetary advantages to the owners of the factors. Answer: C Diff: 1 Type: MC Topic: 13.3a. factor-price differentials Skill: Recall Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 4) What is the difference between temporary factor-price differentials and equilibrium factor-price differentials? A) Equilibrium differentials are affected by shifts in demand whereas temporary differentials are not. B) Equilibrium differentials lead to, and are eliminated by, factor mobility whereas temporary differentials do not. C) the government can eliminate equilibrium differentials, but not temporary differentials. D) Temporary differentials lead to, and are eliminated by, factor mobility whereas equilibrium differentials are not. E) Equilibrium differentials are affected by shifts in supply whereas temporary differentials are not. Answer: D Diff: 2 Type: MC Topic: 13.3a. factor-price differentials Skill: Recall Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price

differentials. Category: Qualitative

5) The theory of equal net advantage is a theory concerning A) the demand for factors. B) the supply of factors. C) the marginal product of the factors. D) the production process. E) economic versus accounting profit. Answer: B Diff: 1 Type: MC Topic: 13.3a. factor-price differentials Skill: Recall Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 6) With regard to the supply of factors of production, what is the hypothesis of "equal net advantage"? A) Owners of factors will use their factors in a way that results in the largest financial return. B) In equilibrium, owners of identical factors of production will receive different net returns for different uses of the factors. C) Owners of factors will use them in a way that results in the largest combined monetary and non-monetary rewards. D) Supply curves for a factor in any particular use are not likely to shift. E) Demand curves for a factor in any particular use are not likely to shift. Answer: C Diff: 2 Type: MC Topic: 13.3a. factor-price differentials Skill: Recall Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 7) A temporary factor-price differential is one which A) will tend to be eliminated in the long run. B) will hamper the reallocation of resources from declining to growing industries. C) derives from intrinsic differences in the factors themselves. D) will reflect a permanent state of disequilibrium. E) is seldom self-eliminating. Answer: A Diff: 1 Type: MC Topic: 13.3a. factor-price differentials Skill: Recall Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative

8) Which of the following can be explained by the hypothesis of equal net advantage? A) Two workers doing the same job in the same office are sometimes paid different wage rates. B) Higher wages must be paid to entice workers to accept less desirable occupations or a less desirable location. C) The supply of unskilled labour in Canada is as high as it is. D) A hard-working employee may get paid less than other employees. E) Lower wages are paid to workers with less qualifications. Answer: B Diff: 1 Type: MC Topic: 13.3a. factor-price differentials Skill: Recall Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 9) Consider similar workers with equal wages in jobs A and B. When the wage paid to workers in job A increases relative to the wage in job B, then, ceteris paribus, the A) net advantage of job B will increase relative to job A. B) non-monetary advantages of job A will increase. C) non-monetary advantages of job B will decrease. D) net advantage of job A will increase relative to job B. E) monetary advantage of job A will increase, but not its net advantage. Answer: D Diff: 1 Type: MC Topic: 13.3a. factor-price differentials Skill: Recall Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 10) Consider a competitive labour market. If, at a particular wage rate, the quantity demanded of labour is less than quantity supplied of labour, then A) some workers will begin to accept lower wages and induce employers to hire more workers. B) there will be a shortage of labour, thereby increasing the equilibrium wage rate. C) the demand curve for labour will shift to the right. D) the supply curve for labour will shift to the right. E) a black market for labour will form, with firms offering workers very high wages. Answer: A Diff: 2 Type: MC Topic: 13.3a. factor-price differentials Skill: Applied Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative

11) Other things equal, if a particular province has some non-monetary advantages, such as a temperate climate, the wage rate in that province will be A) higher than national average and the market will be in equilibrium. B) higher than national average and the market will be in disequilibrium. C) lower than national average and the market will be in equilibrium. D) lower than national average and the market will be in disequilibrium. E) the same as any other province. Answer: C Diff: 2 Type: MC Topic: 13.3a. factor-price differentials Skill: Applied Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 12) Suppose the following conditions existed in the Canadian labour market: 1) All labour is mobile and possesses the same skills. 2) Non-monetary advantages are the same across industries and occupations. 3) The demand conditions for labour are the same across industries. In this situation, we expect wage rates to A) be the same in all industries. B) be higher in some industries than in others. C) be the same in most industries. D) differ because of the desirability of the location of the job. E) have equilibrium differentials. Answer: A Diff: 2 Type: MC Topic: 13.3a. factor-price differentials Skill: Applied Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 13) Suppose a cook at a diamond mining camp in Canada's North earns a much higher wage than a cook with similar training and experience at an office building in Halifax. Economists would likely call this A) a temporary factor-price differential. B) a compensating differential. C) an intrinsic difference. D) an acquired difference. E) an equilibrium differential. Answer: B Diff: 2 Type: MC Topic: 13.3a. factor-price differentials Skill: Applied Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price

differentials. Category: Qualitative 14) Suppose the government decides, in the interest of "fairness," to impose a policy prohibiting factor-price differentials. The likely result would be A) a horizontal factor supply curve. B) a decrease in net factor demands. C) an increase in factor mobility. D) a shortage of factors in uses with low net advantage. E) equilibrium in factor markets. Answer: D Diff: 2 Type: MC Topic: 13.3a. factor-price differentials Skill: Applied Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 15) All of the following are examples of equilibrium factor-price differentials, EXCEPT A) the different prices of two pieces of land, one with a good supply of water and one without. B) the different wages earned by labour of varying ability. C) the difference in average wages in Toronto and Dryden, Ontario. D) an income differential that induces increased rates of entry into the higher paid professions. E) higher pay to a dentist than to a dental hygienist. Answer: D Diff: 2 Type: MC Topic: 13.3a. factor-price differentials Skill: Applied Learning Obj.: 13-3 Distinguish between temporary and equilibrium factor‐price differentials. Category: Qualitative 16) The term "economic rent" refers to A) a payment for use of land. B) transfer earnings plus opportunity cost. C) the opportunity cost of land. D) economic profit. E) factor payments in excess of transfer earnings. Answer: E Diff: 1 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Recall Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative

17) Alfred Marshall's concept of "transfer earnings" denotes A) the value of the factor to its user. B) a return to a particular factor which must be the same for all uses of that factor. C) the amount a factor earns over and above what is necessary to keep the factor from transferring to an alternative use. D) the amount that a factor must earn to keep it from transferring to another use. E) the amount the factor earns every time it transfers between locations. Answer: D Diff: 1 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Recall Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative 18) Which of the following concepts is most similar to the concept of "transfer earnings"? A) factor mobility B) factor price differentials C) factor payments D) equal net advantage E) opportunity cost Answer: E Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Recall Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative

19) Consider the following demand and supply curves in factor markets.

FIGURE 13-4 Refer to Figure 13-4. The diagram that best illustrates the short-run supply of a factor to the economy as a whole is A) 1. B) 2. C) 3. D) 4. E) 1 or 4. Answer: C Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Qualitative

20) Consider the following demand and supply curves in factor markets.

FIGURE 13-4 Refer to Figure 13-4. Assume that all four factor markets are labour markets. The total amount paid to the workers is "transfer earnings" in diagram A) 1. B) 2. C) 3. D) 4. E) 1 or 4 Answer: B Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Qualitative

21) Consider the following demand and supply curves in factor markets.

FIGURE 13-4 Refer to Figure 13-4. Assume that all four factor markets are labour markets. The total amount paid to the workers is "economic rent" in diagram A) 1. B) 2. C) 3. D) 4. E) 1 or 4. Answer: C Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Qualitative

22) Consider the following demand and supply curves in factor markets.

FIGURE 13-4 Refer to Figure 13-4. The diagram that best illustrates the supply of a factor to a specific firm in the economy is A) 1. B) 2. C) 3. D) 4. E) 1 or 4. Answer: B Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Qualitative

23) Consider the following demand and supply curves in factor markets.

FIGURE 13-4 Refer to Figure 13-4. In diagrams 1 and 4, the marginal worker is earning A) transfer earnings only. B) economic rent only. C) both transfer earnings and economic rent. D) a wage greater than the equilibrium market wage. E) a wage greater than the worker should receive for the product produced. Answer: A Diff: 3 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Qualitative

24) Suppose the supply curve for a factor is perfectly inelastic. In this case, the payments to the factor are A) wholly economic rent. B) wholly transfer earnings. C) partly economic rent and partly transfer earnings. D) neither economic rent nor transfer earnings. E) an unnecessary tax on the factor. Answer: A Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative 25) Suppose the supply curve for a factor is perfectly elastic. In this case, the payments to the factor are A) wholly economic rent. B) wholly transfer earnings. C) partly economic rent and partly transfer earnings. D) neither economic rent nor transfer earnings. E) an unnecessary tax on the factor. Answer: B Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Recall Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative 26) The earnings of a factor in its best alternative use is called its A) intrinsic value. B) alternative value. C) transfer earnings. D) economic earnings. E) economic profit. Answer: C Diff: 1 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Recall Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative

27) Suppose the municipal government of Calgary was able to quantify and then tax economic rent on a highly sought-after piece of land. The result would be A) little or no effect on the supply of the land. B) an increase in the supply of the land. C) a reduction in the supply of land. D) a shift of the entire tax onto the consumer. E) a rise in the price of land. Answer: A Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative 28) John Smith plays baseball for $500 000 per year, but if he were not a baseball player, his next best alternative would be to earn $35 000 per year as a sales representative. By playing baseball, Smith is earning economic rent of A) $535 000. B) $500 000. C) $465 000. D) $35 000. E) zero. Answer: C Diff: 1 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Quantitative 29) Which of the following would be least likely to earn economic rent? A) an owner of land located on Yonge Street, near downtown Toronto B) Lady Gaga C) John Smith, an auto-plant worker in Oshawa, Ontario D) Robert Bateman, famous wildlife artist E) a university professor who loves every bit of his job Answer: C Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative

30) Choose the statement that best describes the difference between "economic rent" and other factor payments. A) Economic rent is unearned income of the factor whereas other payments are earned. B) Economic rent is not a cost to the firm but other payments are. C) A reduction in economic rent will not reduce the availability of the factor whereas reducing other payments of factors will reduce their availability. D) There is no difference between economic rent and other factor payments. E) Economic rent is the sum of all factor payments. Answer: C Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Recall Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative 31) Consider the mobility of any factor of production. The more broadly we define the use of the factor, the ________ is the mobility of the factor and the ________ is the share of the factor payment that is economic rent. A) lower; lower B) lower; higher C) higher; higher D) higher; lower Answer: B Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Recall Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative 32) Suppose Harrison Ford makes 2 movies per year and earns $10 million per movie. Suppose that if he weren't making movies, his next best alternative would be to earn $500 000 per year endorsing shampoo. By making movies, Harrison Ford A) is earning economic rent of $20 500 000 per year. B) is earning economic rent of $20 000 000 per year. C) is earning economic rent of $19 500 000 per year. D) is earning economic rent of $500 000 per year. E) is not earning economic rent. Answer: C Diff: 2 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Quantitative

33) Kobe Bryant is a highly paid professional basketball player in the National Basketball Association. From the perspective of the whole NBA, Kobe Bryant's economic rent would be ________, while from the perspective of his individual team it would be ________. A) very small; very large B) zero; impossible to calculate C) close to his whole salary; very small D) zero; close to his whole salary E) very large; close to his whole salary Answer: C Diff: 3 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Category: Qualitative

34) The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-2 Refer to Figure 13-2. This factor market is in equilibrium at point B. Which of the following statements best describes factor payments at point B? A) Total income paid to the factor is $8. B) Total of economic rent plus transfer earnings is $320. C) Total factor earnings are $320 and the 40th unit earns zero rent. D) Total factor earnings are $320 and the 40th unit earns economic rent of $8. E) Economic rent to the 40th unit is $320. Answer: C Diff: 3 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Quantitative

35) The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-2 Refer to Figure 13-2. This factor market is initially in equilibrium at point B, but changes occur that cause the equilibrium to shift to point D (S curve shifts left). At the new equilibrium, total factor earnings ________ compared to the initial equilibrium. A) decreased by $30 B) increased by $30 C) remained the same D) increased by $10 E) increased by $330 Answer: D Diff: 3 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Quantitative

36) The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-2 Refer to Figure 13-2. This factor market is in equilibrium at point B. In equilibrium, the 20th unit of the factor is being paid transfer earnings of ________ and economic rent of ________. A) $120; -$2 B) $16; $2 C) $320; $80 D) $120; $40 E) $6; $2 Answer: E Diff: 3 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Quantitative

37) The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-2 Refer to Figure 13-2. This factor market is in equilibrium at point B. In equilibrium, the 30th unit of the factor is being paid transfer earnings of ________ and economic rent of ________. A) $120; -$2 B) $16; $2 C) $7; $1 D) $210; $1 E) $6; $2 Answer: C Diff: 3 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Quantitative

38) The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-2 Refer to Figure 13-2. This factor market is in equilibrium at point B. If a technological change occurs in the production of widgets that allows for increased production from each factor, then A) economic rents to the initial 40 units of the factor will decrease. B) equilibrium will move toward point D and the factor price will rise. C) total factor earnings will rise and economic rent to the 40th unit will be zero. D) equilibrium will move toward point C and economic rent to the initial 40 units will increase. E) total factor earnings will decrease and economic rent to the initial 40 units will increase. Answer: D Diff: 3 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Quantitative

39) The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-2 Refer to Figure 13-2. This factor market is initially in equilibrium at point B. Assume that there is a decrease in the demand for widgets and a new equilibrium is established at point A. Which of the following statements about point A is true? A) Total economic rent is $120. B) The marginal revenue product of the 20th unit of the factor is $6, and economic rent of the 20th unit of the factor is $0. C) The marginal revenue product of the 20th unit of the factor is $120, and economic rent of the 20th unit of the factor is $6. D) Total transfer earnings are $120. E) Transfer earnings for the 20th unit of the factor are $6, and economic rent of the 20th unit of the factor is $2. Answer: B Diff: 3 Type: MC Topic: 13.3b. transfer earnings and economic rent Skill: Applied Learning Obj.: 13-4 Discuss "economic rent" and how it relates to factor mobility. Graphics: Graph Category: Quantitative Economics - Canadian Edition, 16e (Ragan) Chapter 14 Labour Markets and Income Inequality 14.1 Wage Differentials 1) In a perfectly competitive labour market, all workers would earn the same wage if

A) the world was fair. B) workers' education and experience were identical. C) all jobs had the same working conditions. D) regional variables mattered. E) jobs and workers were identical in every way. Answer: E Diff: 1 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 2) Which of the following would hold true if labour markets were perfectly competitive? A) All workers would eventually earn the same wage. B) All workers would achieve the same levels of education and experience. C) Working conditions would be the same for all jobs. D) Wage differentials could still exist because of differences in workers and jobs. E) Discrimination could not create wage differentials. Answer: D Diff: 1 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 3) Consider wage differentials in labour markets. Other things being equal, individuals working in relatively risky working conditions generally A) earn higher wages due to the greater relative demand for these individuals. B) earn higher wages due to the reduced supply of risk-taking individuals. C) earn lower wages because of the scarcity of these jobs. D) do not concern economists as these situations are uncommon. E) work in perfectly competitive labour markets. Answer: B Diff: 1 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 4) All of the following are classified as human capital EXCEPT A) education. B) training. C) gender.

D) health. E) experience. Answer: C Diff: 1 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 5) One attempt to provide some minimum level of human capital for all citizens is a system of A) compulsory and publicly financed education. B) income taxation. C) unionism. D) comparable worth. E) minimum wages. Answer: A Diff: 1 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 6) If you choose to stay in school beyond the compulsory minimum period, you are A) realizing the benefits of your investment in human capital. B) delaying your investment in human capital. C) refusing to invest in your human capital. D) investing further in your human capital. E) wasting your time from an economic standpoint. Answer: D Diff: 1 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

7) During recessions, individual investment in higher education typically ________ due to the relatively ________ opportunity cost of time spent in university. A) rises; high B) rises; low C) falls; high D) falls; low E) stays constant; constant Answer: B Diff: 2 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 8) Investment in human capital can be very costly to the individual, but it can also generate large returns. Canadian census data from 2016 show that average employment income for a university graduate is approximately ________ of the average employment income of a worker with no more than a high school diploma. A) 50% B) 125% C) 185% D) 300% E) 400% Answer: C Diff: 2 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 9) Wage differentials due to cross-worker differences in human capital exist in labour markets. These differentials A) are not justifiable on efficiency grounds. B) will persist in competitive equilibrium. C) are not an important source of observed wage differentials. D) are an example of economic distortions due to monopoly power. E) exist because of distortions in labour markets. Answer: B Diff: 2 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

10) A typical firm hiring in a perfectly competitive labour market faces a marginal cost curve for labour that is A) horizontal. B) vertical. C) equal to the supply curve of the firm. D) parallel to the firm's marginal cost curve for its product. E) downward sloping. Answer: A Diff: 2 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 11) In terms of human capital, which of the following is the best example of an inherited skill? A) a neurosurgeon who can perform brain surgery after many years of training B) a retail worker who is able to work overtime each week C) a worker who exercises is healthier and therefore more productive D) a salesman doubles his sales after taking a training course E) a music teacher who can carry a tune for the school choir Answer: E Diff: 1 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 12) One or two generations ago, fewer Canadians completed post-secondary training and education. One explanation for this is A) a decrease in demand for more education in recent years. B) wage differentials due to formal education have diminished over time. C) a negative relationship between the acquisition of human capital and overall earnings. D) the relative wage of more highly educated people has increased in recent years. E) that the opportunity cost of post-secondary education has increased. Answer: D Diff: 2 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

13) In recent years, some business schools in Canada have begun charging tuition of more than $40 000 per year for a graduate degree, whereas Arts faculties charge much lower tuition for their graduate degrees. Students are prepared to pay the high tuition in a business school because A) the expected payoff in terms of higher future wages is large. B) the cost of providing the business education is far higher than the cost of the Arts education. C) the marginal revenue product of a business degree is lower than the marginal revenue product of an Arts degree. D) the marginal cost of a business degree is less than the marginal benefit of a business degree. E) they recognize that the investment in human capital is not worthwhile. Answer: A Diff: 2 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 14) The table below shows the labour demand and labour supply schedules in a competitive labour market.

Wage Rate ($/hour) 10 12 14 15 17

Quantity Demanded of Labour (hours/month) 1300 1000 800 400 200

Quantity Supplied of Labour (hours/month) 500 1000 1300 1500 1800

TABLE 14-1 Refer to Table 14-1. In a competitive labour market that clears, the equilibrium employment level would be A) 400 units. B) 500 units. C) 800 units. D) 1000 units. E) 1300 units. Answer: D Diff: 1 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive

labour markets. Graphics: Table Category: Quantitative 15) The table below shows the labour demand and labour supply schedules in a competitive labour market.

Wage Rate ($/hour) 10 12 14 15 17

Quantity Demanded of Labour (hours/month) 1300 1000 800 400 200

Quantity Supplied of Labour (hours/month) 500 1000 1300 1500 1800

TABLE 14-1 Refer to Table 14-1. If the wage rate is $15 per hour, how many hours per month are supplied to this market but are not actually employed? A) 0 B) 400 C) 1000 D) 1100 E) 1500 Answer: D Diff: 2 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Table Category: Quantitative

16) The table below shows the labour demand and labour supply schedules in a competitive labour market.

Wage Rate ($/hour) 10 12 14 15 17

Quantity Demanded of Labour (hours/month) 1300 1000 800 400 200

Quantity Supplied of Labour (hours/month) 500 1000 1300 1500 1800

TABLE 14-1 Refer to Table 14-1. In this labour market, if the wage rate is $10 per hour, how many hours of labour per month are actually employed? A) 0 B) 500 C) 1000 D) 1300 E) 1850 Answer: B Diff: 2 Type: MC Topic: 14.1a. wage differentials in competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Table Category: Quantitative 17) What is a likely result of discrimination in a labour market? A) lower demand for labour in all occupations B) higher demand for labour in both occupations C) lower supply of labour in discriminating occupations and a higher supply in nondiscriminating occupations D) higher supply of labour in discriminating occupations and a lower supply in nondiscriminating occupations E) lower supply of labour in all occupations Answer: C Diff: 2 Type: MC Topic: 14.1b. discrimination Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

18) Labour-market discrimination, which keeps one group of workers out of elite (E) occupations and limits them to ordinary (O) occupations, will have which of the following effects? A) a decrease in supply and higher wages in the E occupations B) more employment in the E occupations C) a decrease in supply and lower wages in the O occupations D) more unemployment in the E occupations E) a decrease in supply and higher wages in the O occupation Answer: A Diff: 2 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 19) Labour-market discrimination, which keeps one group of workers out of elite (E) occupations and limits them to ordinary (O) occupations, will have which of the following effects? A) a decrease in supply and lower wages in the O occupations B) an increase in supply and lower wages in the E occupations C) an increase in supply and higher wages in the E occupations D) a decrease in supply and lower wages in the E occupations E) an increase in supply and lower wages in the O occupations Answer: E Diff: 2 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 20) If competitive labour market E discriminates against one group of workers and market O does not, we can predict an increase in A) employment in market E. B) wages in market E. C) wages in market O. D) the welfare of the average worker. E) economy-wide wage rates. Answer: B Diff: 2 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

21) Suppose market E discriminates against one group of workers and market O does not. Unemployment in market O would result if A) the free-market equilibrium wage in market O is below the legal minimum wage. B) some workers are unwilling to work in E-market jobs. C) there is no statutory minimum wage. D) the supply curve in market O shifts to the left and wages are slow to adjust. E) the demand curve in market O shifts to the right and wages are slow to adjust. Answer: A Diff: 3 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 22) In Canada, an average full-time female worker earns less than an average full-time male worker. Evidence suggests that a significant part of this wage differential can be explained by A) the nature of the jobs and differences in acquired human capital. B) differences in the innate abilities between men and women. C) higher marginal revenue product for female workers. D) the labour-force participation rate of adult women being above that of adult men. E) None of the above can explain part of the wage differentials. Answer: A Diff: 2 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 23) Which of the following is most likely to limit some types of discrimination in the labour market? A) a minimum wage B) entry of of discriminating firms into the market C) an increase in the number of individuals discriminated against D) the desire of firms to maximize profits E) greater monopoly power in the market Answer: D Diff: 2 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

24) The following statements describe the adverse effects suffered by groups subject to labour-market discrimination. Which of the statements is FALSE? A) They will be more likely to experience spells of unemployment. B) Their children's ability and willingness to invest in human capital will be less on average than those of children of other groups. C) They will receive lower wages on average than other groups. D) Their human capital will increase. E) The discriminatory wage differentials will persist as long as the discrimination exists. Answer: D Diff: 1 Type: MC Topic: 14.1b. discrimination Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 25) If there is discrimination against some workers in market A but no discrimination in market B, then we can predict 1) a decrease in supply and higher wages in the A occupations; 2) more employment in the A occupations; 3) more unemployment in the B occupations if there is a binding minimum wage. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Diff: 3 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

26) Suppose an island economy has only two labour markets— fishing (high skill) and farming (low skill). There are 1000 males and 1000 females in the labour force. There is an equal distribution of skilled and non-skilled workers among each sex.

FIGURE 14-1 Refer to Figure 14-1. The two labour markets are each in a ________ equilibrium at point E. The wage differential between the industries is a(n) ________ wage differential. A) non-competitive; discriminatory B) competitive; temporary C) competitive; equilibrium D) non-competitive; temporary E) competitive; discriminatory Answer: C Diff: 2 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

27) Suppose an island economy has only two labour markets— fishing (high skill) and farming (low skill). There are 1000 males and 1000 females in the labour force. There is an equal distribution of skilled and non-skilled workers among each sex.

FIGURE 14-1 Refer to Figure 14-1. Suppose the employers in the fishers labour market begin to discriminate against male workers. Which of the following can we expect to occur in the fishers labour market? A) There will be an equal flow of workers between the two markets, equilibrium will remain at point E and the wage at $100 per day. B) The demand for labour curve shifts to the right until a new equilibrium is reached at point B and the wage rises to $120 per day. C) The labour supply curve shifts to the left until a new equilibrium is reached at point A and the wage rises to $120 per day. D) The demand for labour curve shifts to the left until a new equilibrium is reached at point C and the wage falls to $80 per day. E) The labour supply curve shifts to the right until a new equilibrium is reached at point D and the wage falls to $80 per day. Answer: C Diff: 2 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Quantitative

28) Suppose an island economy has only two labour markets— fishing (high skill) and farming (low skill). There are 1000 males and 1000 females in the labour force. There is an equal distribution of skilled and non-skilled workers among each sex.

FIGURE 14-1 Refer to Figure 14-1. Suppose the employers in the fishers labour market begin to discriminate against male workers. Which of the following can we expect to occur in the farmers labour market? A) There will be an equal flow of workers between the two markets, equilibrium will remain at point E and the wage at $80 per day. B) The demand for labour curve shifts to the right until a new equilibrium is reached at point B and the wage rises to $100 per day. C) The labour supply curve shifts to the left until a new equilibrium is reached at point A and the wage rises to $100 per day. D) The demand for labour curve shifts to the left until a new equilibrium is reached at point C and the wage falls to $60 per day. E) The labour supply curve shifts to the right until a new equilibrium is reached at point D and the wage falls to $60 per day. Answer: E Diff: 2 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Quantitative

29) Suppose an island economy has only two labour markets— fishing (high skill) and farming (low skill). There are 1000 males and 1000 females in the labour force. There is an equal distribution of skilled and non-skilled workers among each sex.

FIGURE 14-1 Refer to Figure 14-1. Suppose the employers in the fishers labour market begin to discriminate against male workers, and we move to a new equilibrium in each market. In the absence of any government intervention in these markets, what forces might we expect to see over time? 1) All female workers will migrate to the fishers labour market due to the higher wage. 2) The discriminatory wage differential will tend to be eliminated by the pursuit of profit. 3) Some firm owners in the fishing labour market will find it profitable to hire high-skill males, thus reducing the wage differential. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: E Diff: 3 Type: MC Topic: 14.1b. discrimination Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

30) Certain professions limit the number of students who are eligible to enroll in their programs in university — engineering, architecture, dentistry, and law, for example. Other things being equal, what is one predicted effect of such restrictions? A) increased wages across all segments of the labour market B) decreased wages across all segments of the labour market C) decreased wages in the labour market outside of these professions D) increased wages in the labour market outside of these professions E) There will be no effect on any wages. Answer: C Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 31) If there is only a single buyer in the labour market, that buyer is called A) a monopolist. B) a monopsonist. C) an oligopolist. D) an oligopsonist. E) a single-product firm. Answer: B Diff: 1 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 32) As a seller of labour services, a labour union is a form of A) monopoly. B) monopsony. C) oligopoly. D) monopolistic competitor. E) illegal cartel. Answer: A Diff: 1 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

33) How can a labour union most easily raise the wages received by its members? A) increasing the demand for the product union members are producing B) decreasing the supply of labour from union members C) raising employment D) increasing the demand for labour E) improving productivity Answer: B Diff: 1 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 34) In the 1950s and 1960s, Arvida, Quebec, was basically a one-company town where Alcan was the sole buyer of labour services. This is a good example of A) pure monopoly. B) monopolistic competition. C) oligopoly. D) monopsony. E) union power. Answer: D Diff: 1 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 35) Suppose a labour union enters a competitive labour market and is successful in raising wages above the competitive equilibrium level. In this situation, A) each firm in the industry will face a horizontal supply curve for labour at the union wage, up to the maximum quantity of labour that is prepared to work at that wage. B) those workers already employed will earn a lower wage than before. C) employment in the industry will surely increase. D) the market supply curve for labour will be upward sloping over its entire range. E) the number of firms in the industry will increase and the demand for labour curve will shift to the right, causing a subsequent increase in the wage. Answer: A Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

36) Suppose a professional association strengthened the limits to entry into their profession and at the same time lengthened its required apprenticeship program. The likely effect would be that A) the supply curve for labour would shift to the left. B) the supply curve for labour would shift to the right. C) both the demand and supply curves for labour would shift to the left. D) the demand curve for labour would shift to the right. E) there would be an increase in the quantity of labour supplied. Answer: A Diff: 1 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 37) Certain professions limit the number of students who are eligible to enroll in their programs in university - engineering, architecture, dentistry, and law, for example. What is the predicted effect of such a policy in each of these professions? A) An increase in supply and a wage that is lower than it otherwise would be. B) A reduction in supply and a wage that is lower than it otherwise would be. C) An increase in supply and a wage that is higher than it otherwise would be. D) A reduction in supply and a wage that is higher than it otherwise would be. E) These professions are a relatively small portion of the labour market and so there will be no detectible change in wages. Answer: D Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 38) Suppose the professional association of dentists reduces entry into their profession by lengthening the required training program. The likely effect is that A) the supply curve of dentists will shift to the left. B) the supply curve of dentists will shift to the right. C) both the demand and supply curves for dentists will shift to the left. D) the demand curve for dentists will shift to the right. E) there will be an increase in the quantity of dentists supplied. Answer: A Diff: 1 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets.

Category: Qualitative 39) Consider a monopsonist employer in a labour market. The average cost curve of labour facing the monopsonist A) lies above the supply curve of labour. B) lies below the supply curve of labour. C) is the supply curve of labour, which lies below the marginal cost curve for labour. D) is the marginal cost curve of labour when the supply curve is upward sloping. E) coincides with the marginal cost curve of labour only below the profit-maximizing wage rate. Answer: C Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 40) For a monopsonist in a labour market, the firm's MC curve for labour lies ________ the competitive supply curve for labour; just as the marginal revenue curve for a monopolist lies ________ the demand curve for its product. A) below; below B) below; above C) above; above D) above; below Answer: D Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Recall Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 41) For a monopsonist that faces an upward-sloping labour supply curve, the marginal cost of labour curve will be ________ the labour supply curve because ________. A) below; the increased wage necessary to attract an extra worker is paid to that worker alone B) above; the increased wage necessary to attract an extra worker must be paid to everyone already employed C) above; the average wage exceeds the marginal wage when the average wage is rising D) the same as; the marginal cost of labour equals the average cost of labour E) below; the extra labour supplied is less capable than previous units of labour supplied Answer: B Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied

Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

42) A profit-maximizing monopsonist in a labour market will continue to hire labour until the A) hourly wage of the labour is equated with its marginal cost. B) hourly wage of the labour is equated with its average cost. C) marginal revenue product of labour equals its marginal cost. D) marginal cost of labour equals its average revenue. E) marginal product of labour is maximized. Answer: C Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 43) Suppose your firm is a monopsonist hiring only one variable input. If you want to maximize profits, you will purchase that variable input up to the point where the A) demand curve intersects the supply curve of the input. B) MRP curve for the input intersects the marginal cost curve for the input. C) wage rate is the highest. D) marginal product of that input equals the price of one unit of the input. E) cost of the input equals the profit generated by the employment of that input. Answer: B Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 44) If we compare the wage rate and the level of employment achieved in a competitive labour market with those in a monopsonistic labour market, the latter will generate A) a lower level of employment and a higher wage rate. B) a higher level of employment and a lower wage. C) a higher level of employment and a higher wage rate. D) a lower level of employment and a lower wage. E) the same outcomes as in a competitive labour market. Answer: D Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

45) Consider a monopsonistic labour market. Ten units of labour will be supplied if the wage rate is $12, and 11 units of labour will be supplied if the wage rate is $14. The marginal cost of the eleventh worker is A) $2. B) $12. C) between $12 and $14. D) $14. E) more than $14. Answer: E Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative 46) Consider a monopsonistic labour market. One hundred units of labour will be supplied if the wage rate is $12, and 101 units of labour will be supplied if the wage rate is $14. The marginal cost of the 101st unit of labour is A) $14. B) $140. C) $214. D) $1414. E) Not enough information to know. Answer: C Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative

47) Consider a small, remote town with only one employer - a gold mining company. Suppose the current work force is 875 workers, each of whom is paid $6000 per month. In order to attract one additional worker, the employer must increase the wage to $6025 per month. The marginal cost of this additional worker is A) $21 875 per month. B) $21 900 per month. C) $27 900 per month. D) $5.25 million per month. E) $5.28 million per month. Answer: C Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative 48) Suppose a regional health authority is the only employer of nurses, and further, suppose that nurses are not unionized. The 625 currently employed nurses are paid $27 per hour. To attract an additional nurse, the employer must increase the wage to $28 per hour. The marginal cost of this additional worker is A) $653. B) $28. C) $17 500. D) $17 528. E) $27. Answer: A Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative

49) Suppose we have a labour market with a monopsonist employer in a town. Now suppose that all workers form a union and negotiate a wage with the employer. We refer to this as a situation of A) double monopsony. B) collective bargaining. C) union-wage premium. D) bilateral monopoly. E) monopsony. Answer: D Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative 50) Consider a wage-setting union in an otherwise competitive labour market. If the union sets a wage above the competitive level, the effect will be A) to raise wages for all workers who wish to work in the industry. B) to increase the amount of employment in the industry. C) to create a group of workers who would like to obtain jobs in the industry but cannot do so. D) a level of employment which is the same as that at the competitive equilibrium wage. E) to cause the labour supply curve to shift to the right. Answer: C Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Qualitative

51) The diagram below shows the supply and demand curves in a labour market. We will analyze both competitive and monopsonistic outcomes with this diagram.

Figure 14-2 Refer to Figure 14-2. In a perfectly competitive labour market, the equilibrium wage rate and the quantity of labour employed would be A) W4 and Q4. B) W2 and Q2. C) W5 and Q5. D) W1 and Q1. E) W5 and Q4. Answer: D Diff: 1 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

52) The diagram below shows the supply and demand curves in a labour market. We will analyze both competitive and monopsonistic outcomes with this diagram.

Figure 14-2 Refer to Figure 14-2. Suppose the labour market is perfectly competitive. If a minimum wage of W5 were then established, the predicted effect would be which one of the following? A) Q2 workers would be employed and unemployment would equal Q2Q3. B) Employment would fall by the amount Q1Q4. C) Employment would remain the same as in a competitive market. D) Q3 workers would now be employed. E) Q4 workers would be employed and there would be no unemployment. Answer: B Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

53) The diagram below shows the supply and demand curves in a labour market. We will analyze both competitive and monopsonistic outcomes with this diagram.

Figure 14-2 Refer to Figure 14-2. If the labour market were in a monopsonistic equilibrium, the predicted wage and number of workers employed would be A) W4 and Q4. B) W5 and Q4. C) W2 and Q1. D) W1 and Q2. E) W1 and Q3. Answer: A Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

54) The diagram below shows the supply and demand curves in a labour market. We will analyze both competitive and monopsonistic outcomes with this diagram.

Figure 14-2 Refer to Figure 14-2. Suppose the labour market is perfectly competitive. If a minimum wage of W4 is then established, the predicted change in the wage is A) an increase in the wage paid. B) a decrease in the wage paid. C) no change in the wage paid. D) a decrease equal to W1 - W4. E) an increase equal to W1 - W4. Answer: C Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

55) The diagram below shows the supply and demand curves in a labour market. We will analyze both competitive and monopsonistic outcomes with this diagram.

Figure 14-2 Refer to Figure 14-2. Suppose the labour market is initially in a monopsonistic equilibrium. If a strong union is then formed and establishes a minimum wage of W1, A) employment will decrease to Q2. B) the wage rate and employment will both increase to their competitive levels. C) the wage rate will increase but employment will decrease. D) there will be an effect on either wages or employment but not both. E) the wage rate will decrease but employment will increase. Answer: B Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

56) Refer to Figure 14-2. Suppose the labour market is in a monopsonistic equilibrium. If a minimum wage is then imposed at W5, the effect would be to A) increase employment only. B) waste policy effort, as there would be no effect whatsoever in the labour market. C) increase wages and maintain employment but create a pool of unemployed workers. D) increase wages and create a shortage of workers. E) decrease wages but employment would remain the same. Answer: C Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative 57) The three diagrams below show the supply and demand for teenage babysitters in one local area. The initial supply curve is S0 in all cases.

FIGURE 14-3 Refer to Figure 14-3. Suppose all of the teenage babysitters in one local area form an association and set a minimum age of 16 for working as a babysitter. Which diagram illustrates the new supply curve (SA) for babysitters? A) Diagram 1 B) Diagram 2 C) Diagram 3 D) none of the diagrams E) any of the diagrams Answer: B Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph

Category: Qualitative 58) The three diagrams below show the supply and demand for teenage babysitters in one local area. The initial supply curve is S0 in all cases.

FIGURE 14-3 Refer to Figure 14-3. Suppose all of the teenage babysitters in one local area form an association and set a minimum acceptable wage of $8 per hour. Which diagram illustrates the new supply curve (SA) for babysitters? A) Diagram 1 B) Diagram 2 C) Diagram 3 D) none of the diagrams E) any of the diagrams Answer: A Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

59) The diagram below shows the supply and demand for labour in a hypothetical town in northern British Columbia, with only one employer, a logging company.

FIGURE 14-4 Refer to Figure 14-4. The wage paid by this monopsonistic firm will be ________ and employment will be ________. A) below $25 per hour; below 750 units of labour B) between $25 and $35 per hour; between 750 and 1000 units of labour C) $30 per hour; 1000 units of labour D) $25 per hour; 750 units of labour E) $35 per hour; 750 units of labour Answer: D Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Quantitative

60) The diagram below shows the supply and demand for labour in a hypothetical town in northern British Columbia, with only one employer, a logging company.

FIGURE 14-4 Refer to Figure 14-4. Compared to the outcome in a competitive labour market, the wage and employment outcome in this town's monopsonistic labour market are as follows: A) Wages are lower by $5 per hour and employment is lower by 250 units of labour. B) Wages and employment are both the same as the competitive outcome. C) Wages are higher by $10 per hour and employment is lower by 250 units of labour. D) Wages are lower by $10 per hour and employment is the same as the competitive outcome. E) Wages are the same as the competitive outcome and employment is higher by 250 units of labour. Answer: A Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Quantitative

61) The diagram below shows the supply and demand for labour in a hypothetical town in northern British Columbia, with only one employer, a logging company.

FIGURE 14-4 Refer to Figure 14-4. Suppose the workers in this town form a union to negotiate the wage rate with the firm. Economists refer to this situation as A) a monopoly. B) a unionized monopoly. C) a competitive labour market. D) a monopolistic labour market. E) a bilateral monopoly. Answer: E Diff: 2 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Quantitative

62) The diagram below shows the supply and demand for labour in a hypothetical town in northern British Columbia, with only one employer, a logging company.

FIGURE 14-4 Refer to Figure 14-4. Suppose this labour market is in a monopsonistic equilibrium. Then, suppose the provincial government of British Columbia imposes a minimum wage for employees in this industry of $30 per hour. What will be the effects on wages and employment? A) Wages will fall by $5 per hour and employment will increase by 250 units of labour. B) Wages will not change and employment will increase by 250 units of labour. C) Wages will rise by $5 per hour and employment will increase by 250 units of labour. D) Wages will not change and employment will change by between 0 and 250 units of labour. E) Wages will not change and employment will not change. Answer: C Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

63) The diagram below shows the supply and demand for labour in a hypothetical town in northern British Columbia, with only one employer, a logging company.

FIGURE 14-4 Refer to Figure 14-4. Suppose this labour market is in a monopsonistic equilibrium. Then, suppose the provincial government of British Columbia imposes a minimum wage for employees in this industry of $38 per hour. What will be the effects on wages and employment? A) Wages will rise by $8 per hour and employment will fall below 750 units of labour. B) Wages will rise by $3 per hour and employment will fall by 125 units of labour. C) Wages will rise by $8 per hour and employment will remain unchanged. D) Wages will rise by $13 per hour and employment will fall below 750 units of labour. E) Wages will rise by $8 per hour and employment will fall by between 0 and 250 units of labour. Answer: D Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Graphics: Graph Category: Qualitative

64) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is Q D = 1000 - 20(w). The labour supply curve is QS = 400 + 40(w). What is the equilibrium level of employment? A) 20 B) 40 C) 400 D) 800 E) 1000 Answer: D Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative 65) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is Q D = 1000 - 20(w). The labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $11 (but does not affect the demand curve). The number of workers employed after unionization is A) 400. B) 780. C) 880. D) 1000. E) Not determinable from the information provided. Answer: B Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative

66) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is Q D = 1000 - 20(w). The labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $11 (but does not affect the demand curve). The number of workers who wish to work at the new wage is A) 400. B) 440. C) 780. D) 840. E) 1000. Answer: D Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative 67) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is Q D = 1000 - 20(w). The labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $11 (but does not affect the demand curve). One result is A) an increase in employment of 20 workers. B) an increase in employment of 40 workers. C) a decrease in employment of 20 workers. D) a decrease in employment of 40 workers. E) a decrease in employment of 60 workers. Answer: C Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative

68) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is Q D = 1000 - 20(w). The labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $11 (but does not affect the demand curve). The number of unemployed workers in this mall labour market becomes A) 20. B) 40. C) 60. D) 80. E) 100. Answer: C Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative 69) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is Q D = 1000 - 20(w). The labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $13 (but does not affect the position of the demand curve). One result is A) an increase in employment of 20 workers. B) an increase in employment of 60 workers. C) a decrease in employment of 100 workers. D) a decrease in employment of 140 workers. E) a decrease in employment of 60 workers. Answer: E Diff: 3 Type: MC Topic: 14.1c. wage differentials in non-competitive markets Skill: Applied Learning Obj.: 14-1 Explain wage differentials in both competitive and non-competitive labour markets. Category: Quantitative

70) A legislated minimum wage is said to be binding when A) it is below an industry's free-market equilibrium wage. B) an industry is poorly organized and composed largely of unskilled labour. C) the wage rate is set above the free-market equilibrium level. D) it decreases the turnover rate among employees. E) it is enforced by legal authorities. Answer: C Diff: 1 Type: MC Topic: 14.1d. legislated minimum wages Skill: Recall Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Category: Qualitative 71) A legislated minimum wage is comparable to A) bilateral monopoly. B) a black-market price. C) a rent control. D) a price ceiling. E) a price floor. Answer: E Diff: 1 Type: MC Topic: 14.1d. legislated minimum wages Skill: Recall Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Category: Qualitative 72) If a minimum wage is set above the free-market equilibrium wage in a competitive labour market, the labour market will experience an increase in wages and A) employment will increase. B) employment will decrease. C) there will be no unemployment. D) employment will remain the same. E) there is an unpredictable effect on employment. Answer: B Diff: 1 Type: MC Topic: 14.1d. legislated minimum wages Skill: Recall Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Category: Qualitative

73) Which of the following statements about a legislated minimum wage is true? A) In a competitive labour market, (if effective) it may increase wages and will increase employment. B) In a monopsonistic labour market, (if effective) it may increase wage rates but it must decrease employment. C) In a monopsonistic labour market, if set equal to the competitive wage, it will increase wages and employment. D) It will have the same wage and employment effects in competitive and monopsonistic labour markets. E) It will have no effect if the market is monopsonistic. Answer: C Diff: 3 Type: MC Topic: 14.1d. legislated minimum wages Skill: Recall Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Category: Qualitative

74)

FIGURE 14-5 Refer to Figure 14-5. If this labour market were perfectly competitive, the predicted wage and employment level would be A) W1 and Q2. B) W2 and Q3. C) W3 and Q2. D) W3 and Q4. E) W4 and Q5. Answer: B Diff: 1 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Graph Category: Qualitative

75)

FIGURE 14-5 Refer to Figure 14-5. Suppose this labour market is perfectly competitive. If a minimum wage of W1 is then imposed, the quantity of labour hired would be A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: C Diff: 1 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Graph Category: Qualitative

76)

FIGURE 14-5 Refer to Figure 14-5. Suppose this labour market is competitive. If a minimum wage of W3 is then imposed, the quantity of labour hired would be A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: B Diff: 1 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Graph Category: Qualitative

77)

FIGURE 14-5 Refer to Figure 14-5. Suppose this labour market is competitive. If a minimum wage of W4 is then imposed, the quantity of labour supplied would be A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: E Diff: 2 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Graph Category: Qualitative

78)

FIGURE 14-5 Refer to Figure 14-5. Suppose this labour market is competitive. If a minimum wage of W4 is then imposed, the number of unemployed workers would be A) 0Q1. B) Q5 - Q1. C) Q3 - Q1. D) 0Q3. E) 0Q5. Answer: B Diff: 2 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Graph Category: Qualitative

79)

FIGURE 14-5 Refer to Figure 14-5. Suppose the labour market is competitive. If a minimum wage of W3 is then imposed, the number of unemployed workers would be A) 0Q2. B) Q3 - Q1. C) Q3 - Q2. D) Q4 - Q2. E) 0Q4. Answer: D Diff: 2 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Graph Category: Qualitative

80)

FIGURE 14-5 Refer to Figure 14-5. If this labour market is perfectly competitive, an increase in the legislated minimum wage from W2 to W3 would A) have no effect on employment. B) create unemployment where there previously was none. C) increase employment from what would have initially occurred. D) create unemployment in other minimum wage sectors. E) increase employment in this industry but decrease it in other industries. Answer: B Diff: 2 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Graph Category: Qualitative

81) Which of the following statements about minimum-wage laws is most accurate? A) All Canadian provinces have the same minimum wage. B) There is some evidence that minimum-wage laws cause additional unemployment, particularly among youths. C) Minimum-wage laws only affect the income of the higher-skilled, lowest-wage workers. D) Minimum-wage laws are unfair. E) There is some evidence that minimum-wage laws create a lot of jobs, particularly among youths. Answer: B Diff: 1 Type: MC Topic: 14.1d. legislated minimum wages Skill: Recall Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Category: Qualitative 82) According to several Canadian studies on the effects of minimum-wage laws, there is broad consensus that A) suggests the laws have no effect whatsoever on employment. B) the laws lead to an increase in wages and employment. C) supports the theoretical predictions that minimum-wage laws increase employment. D) employment increases with increases in minimum wages, thus supporting the argument that labour markets are monopsonistic. E) the laws decrease the level of employment, particularly for low-skilled workers. Answer: E Diff: 2 Type: MC Topic: 14.1d. legislated minimum wages Skill: Recall Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Category: Qualitative

83) The three diagrams below show the supply and demand for teenage babysitters in one local area. The initial supply curve is S0 in all cases.

FIGURE 14-3 Refer to Figure 14-3. Suppose the teenage babysitters in one local area are earning an equilibrium wage of $6 per hour. Now suppose the local government imposes a minimum wage of $8 per hour for babysitters. Which diagram illustrates the new supply curve (S A) for babysitters? A) Diagram 1 B) Diagram 2 C) Diagram 3 D) none of the diagrams E) any of the diagrams Answer: A Diff: 2 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Graph Category: Qualitative

84) The three diagrams below show the supply and demand for teenage babysitters in one local area. The initial supply curve is S0 in all cases.

FIGURE 14-3 Refer to Figure 14-3. Suppose the teenage babysitters in one local area are earning an equilibrium wage of $6 per hour. Now suppose the local government reduces the minimum age for working as a babysitter from 14 to 12 years of age. Which diagram illustrates the new supply curve (SA) for babysitters? A) Diagram 1 B) Diagram 2 C) Diagram 3 D) none of the diagrams E) any of the diagrams Answer: D Diff: 2 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Graph Category: Qualitative

85) The table below shows the labour demand and labour supply schedules in a competitive labour market.

Wage Rate ($/hour) 10 12 14 15 17

Quantity Demanded of Labour (hours/month) 1300 1000 800 400 200

Quantity Supplied of Labour (hours/month) 500 1000 1300 1500 1800

TABLE 14-1 Refer to Table 14-1. In a competitive labour market, a legislated minimum wage imposed at $10 per hour would A) have no effect on the competitive equilibrium level of employment. B) lead to unemployment of 500 hours/month. C) lead to over-employment of 500 hours/month. D) lead to an equilibrium wage higher than the competitive wage. E) lead to an employment level lower than the competitive level. Answer: A Diff: 2 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Table Category: Qualitative

86) The table below shows the labour demand and labour supply schedules in a competitive labour market.

Wage Rate ($/hour) 10 12 14 15 17

Quantity Demanded of Labour (hours/month) 1300 1000 800 400 200

Quantity Supplied of Labour (hours/month) 500 1000 1300 1500 1800

TABLE 14-1 Refer to Table 14-1. In a competitive labour market, a legislated minimum wage imposed at $14 per hour would A) have no effect on the competitive equilibrium level of employment. B) have no effect on the competitive equilibrium wage. C) lead to unemployment of 500 hours/month. D) lead to unemployment of 300 hours/month. E) lead to an equilibrium wage lower than the competitive wage. Answer: C Diff: 2 Type: MC Topic: 14.1d. legislated minimum wages Skill: Applied Learning Obj.: 14-2 Analyze the possible effects of legislated minimum wages. Graphics: Table Category: Quantitative

14.2 Labour Unions 1)

FIGURE 14-6 Refer to Figure 14-6. The market begins in equilibrium with the curves labelled Demand and Supply. If a labour union negotiates the wage to W2, the difference between this wage and the competitive equilibrium wage is called A) the industry's wage premium. B) the union wage premium. C) a temporary wage differential. D) a discrimination differential. E) a legislated wage differential. Answer: B Diff: 1 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Graphics: Graph Category: Qualitative

2)

FIGURE 14-6 Refer to Figure 14-6. The market begins in equilibrium with the curves labelled Demand and Supply. If a labour union negotiates the wage to W2 in an otherwise competitive labour market, A) the supply of labour will stay the same. B) employers will hire L2 quantity of labour. C) the demand for labour will shift to D2. D) employers will hire L1 quantity of labour. E) equilibrium will occur at W1 and L2. Answer: D Diff: 1 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Graphics: Graph Category: Qualitative

3) In general, which of the following is true of collective bargaining between a labour union and a firm? A) The union sets the wage and the employer decides how much labour will be hired. B) The employer sets the wages and the union decides how many workers will be hired. C) The wage is negotiated, whereas the firm is generally free to choose the level of employment. D) The wage and the number of workers to be hired is negotiated. E) Only the level of employment is negotiated. Answer: C Diff: 1 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 4) Economists observe clear evidence of a union wage premium but do not observe the clear union effect on employment levels predicted from theory. One explanation for this is A) that the labour supply curve shifts to the right in the collective bargaining process, thereby eliminating any employment effect. B) that the labour supply curve, in the presence of a union, is very inelastic, which implies only a very small effect on employment. C) that union-based advertising for the product increases demand for the product, shifts the demand curve to the right and eliminates any employment effect. D) the union's ability, through the collective bargaining process, to pressure firms to hire more workers than they otherwise would at the union wage. E) Both C and D are correct. Answer: E Diff: 2 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 5) Suppose a wage-setting union enters a monopsonistic labour market. In this case, the union can cause A) wages to rise to what would have been the competitive level but no higher. B) wages to rise above the level set by the monopsonist, but only if it allows employment to fall below the level set by the monopsonist. C) both wages and employment to rise over the monopsonistic level. D) wages or employment to rise above the level set by the monopsonist, but not both. E) the level of non-wage benefits to rise but cannot affect either wages or employment. Answer: C Diff: 2 Type: MC

Topic: 14.2. labour unions Skill: Applied Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 6) Suppose a union succeeds in shifting the labour supply curve to the left. In this case, the union can achieve wages above the A) competitive level and all workers will gain. B) equilibrium level and an increase in employment. C) equilibrium level without affecting employment. D) competitive level but will reduce the level of employment. E) competitive level without a pool of unemployed workers seeking to work at the higher wage. Answer: D Diff: 2 Type: MC Topic: 14.2. labour unions Skill: Applied Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 7) What is the fundamental dilemma facing labour unions? A) job security versus worker safety B) wage increases versus employment growth C) wage increases versus publicly provided pensions D) members' roles as workers versus their roles as consumers E) "featherbedding" versus the union-wage premium Answer: B Diff: 2 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 8) The union wage premium refers to the A) portion of a union wage attributable to fees payable to the union. B) trade-off the union faces between the level of the wage and the size of the union. C) higher wage attributable only to the union status of the job. D) wage that a union is able to set unilaterally. E) wage that an employer is able to set unilaterally. Answer: C Diff: 1 Type: MC Topic: 14.2. labour unions Skill: Recall

Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative

9) The purpose of a labour union is to A) maintain a minimum level of employment. B) exploit its labour-market power in the same way a monopolist exploits its market power in product markets. C) exploit its labour-market power in the same way a monopolist exploits its market power in labour markets. D) increase employment in its industry. E) decrease employment in its industry. Answer: B Diff: 2 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 10) One of the most unionized industries in Canada is A) agriculture. B) finance and insurance. C) real estate. D) education. E) non-governmental administrative services. Answer: D Diff: 1 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 11) An important unanswered question about the role of unions in developed economies is whether the presence of unions affects long-run productivity. There is some evidence to suggest that the presence of a union A) increases the human capital of unionized workers, which leads to increased long-run productivity for the firm. B) reduces the demand for labour and therefore the demand for physical capital. C) decreases the human capital of unionized workers, and therefore reduces long-run productivity. D) reduces the level of employment (because of the union-wage premium) and thus raises the marginal product of labour. E) reduces the expected profitability of installed capital and therefore leads to reduced capital investment by firms. Answer: E Diff: 3 Type: MC Topic: 14.2. labour unions Skill: Recall

Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 12) Unions currently represent ________ employed workers in Canada. A) all of the B) half of the C) more than 50% of D) approximately 25% of E) less than 10% of Answer: D Diff: 1 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 13) Unions currently represent ________ government employees in Canada. A) all of the B) approximately half of the C) approximately 75% of D) less than 30% of E) less than 10% of Answer: C Diff: 1 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative 14) The average union wage premium in Canada is A) less than 10%. B) between 10 and 15%. C) between 15 and 30%. D) between 30 and 50%. E) more than 50%. Answer: B Diff: 1 Type: MC Topic: 14.2. labour unions Skill: Recall Learning Obj.: 14-3 Examine the tradeoff unions usually face between wages and employment. Category: Qualitative

14.3 Income Inequality 1) When studying income distribution, the Classical economists of the eighteenth and nineteenth centuries were primarily concerned with the distribution of income among A) workers and the government. B) workers and capitalists. C) the government and capitalists. D) workers and landowners. E) workers, capitalists, and landowners. Answer: E Diff: 1 Type: MC Topic: 14.3a. income distribution Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative 2) The "functional distribution of income" refers to the distribution of income A) among the various social classes. B) among the major factors of production. C) among the industrial nations. D) between the government and the factors of production. E) between the various economic sectors of a country. Answer: B Diff: 1 Type: MC Topic: 14.3a. income distribution Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative 3) The "size distribution of income" refers to the distribution of income A) among different households with reference to the source of the income. B) between capitalists and workers. C) between capitalists and landowners. D) among different individuals without reference to the source of the income. E) to a particular factor of production in different time periods. Answer: D Diff: 1 Type: MC Topic: 14.3a. income distribution Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative

4) What information is illustrated by a Lorenz curve? A) the degree of inequality across households in the distribution of income B) the ratio of workers' income to capitalists' income C) the level of a country's income relative to its productive capacity D) the level of a country's income relative to its foreign trade E) the functional distribution of income Answer: A Diff: 1 Type: MC Topic: 14.3a. income distribution Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative 5) In a Lorenz curve diagram, the size of the area between the Lorenz curve and the diagonal line represents A) the degree of inequality in the distribution of income. B) the percentage of income received by the bottom 20% of families. C) the dollar incomes of the bottom 40% of families. D) the percentage of income received by the top 5% of families. E) complete income equality. Answer: A Diff: 2 Type: MC Topic: 14.3a. income distribution Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative 6) The diagonal line on a Lorenz curve diagram represents A) the degree of inequality in the distribution of income. B) the percentage of income received by the bottom 50% of families. C) the dollar incomes of the bottom 50% of families. D) the percentage of income received by the top 50% of families. E) where the Lorenz curve would be if there were complete income equality. Answer: E Diff: 2 Type: MC Topic: 14.3a. income distribution Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative

7)

FIGURE 14-7 Refer to Figure 14-7. The diagonal line in the diagram A) illustrates the functional distribution of income. B) shows where the Lorenz curve would be if there were complete income equality. C) shows the actual distribution of income. D) has no real purpose. E) shows the distribution of income over time. Answer: B Diff: 1 Type: MC Topic: 14.3a. income distribution Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Graphics: Graph Category: Qualitative

8)

FIGURE 14-7 Refer to Figure 14-7. Which point shows that 100% of families earn 100% of the income? A) A B) B C) C D) D E) E Answer: E Diff: 1 Type: MC Topic: 14.3a. income distribution Skill: Applied Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Graphics: Graph Category: Qualitative

9)

FIGURE 14-7 Refer to Figure 14-7. Which point shows that 20% of families earn almost 40% of total income? A) A B) B C) C D) D E) E Answer: D Diff: 3 Type: MC Topic: 14.3a. income distribution Skill: Applied Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Graphics: Graph Category: Qualitative

10)

FIGURE 14-7 Refer to Figure 14-7. Which point shows that the bottom 60% of families earn just under 40% of total income? A) A B) B C) C D) D E) E Answer: C Diff: 1 Type: MC Topic: 14.3a. income distribution Skill: Applied Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Graphics: Graph Category: Qualitative

11)

FIGURE 14-7 Refer to Figure 14-7. Which of the following is shown on the Lorenz curve shown in this diagram? A) The poorest 20% of families earn almost 90% of total income. B) Perfect equality of income distribution occurs. C) The richest 20% of families earn over 60% of total income. D) The functional distribution of income is shown. E) The richest 20% of families earn almost 40% of total income. Answer: E Diff: 2 Type: MC Topic: 14.3a. income distribution Skill: Applied Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Graphics: Graph Category: Qualitative

12) Suppose all Canadians earned equal incomes. In this case, Canada's Lorenz curve would be A) coincident with the horizontal axis. B) the diagonal line. C) above the diagonal line. D) below the diagonal line. E) non-existent. Answer: B Diff: 2 Type: MC Topic: 14.3a. income distribution Skill: Applied Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative 13) Median family income (pre-tax) in Canada in 2015 was closest to A) $45 000. B) $52 000. C) $65 000. D) $89 000. E) $105 000. Answer: D Diff: 1 Type: MC Topic: 14.3a. income distribution Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Quantitative 14) A Lorenz curve showing the current distribution of pre-tax income in Canada is not an entirely accurate depiction of Canadian income distribution because A) Statistics Canada does not actually collect data on Canadian household income. B) Canada's tax-and-transfer system reduces income inequality, which causes the Lorenz curve to be flatter and closer to the diagonal than the pre-tax curve. C) the data collected on Canadian income distribution does not allow for an accurate plotting of a Lorenz curve. D) a Lorenz curve cannot depict the distribution of income after government transfer payments have been distributed to households. E) a Lorenz curve cannot depict the distribution of after-tax income. Answer: B Diff: 2 Type: MC Topic: 14.3a. income distribution Skill: Applied Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative

15) If Canada's Lorenz curve began changing such that it bends further from the diagonal line and becomes more curved, this would be an indication that A) data collection on Canadian household incomes is improving. B) the distribution of income in Canada is becoming more unequal. C) the distribution of income in Canada is becoming more equal. D) average Canadian family income is rising. E) average Canadian family income is falling. Answer: B Diff: 2 Type: MC Topic: 14.3a. income distribution Skill: Applied Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative 16) With regard to the issue of income distribution, what phenomenon is referred to as the Great Compression? A) In the years since the financial crisis of 2008-2009, income shares of the lowest 40% of income earners were reduced. B) The declining influence of unions has reduced wage growth of manufacturing workers. C) Income between rich and poor countries has become less equal in the past two decades. D) Between 1945 and 1980, Canadian incomes were becoming more equally distributed than in previous decades. E) Per capita incomes across industries have become more equal in Canada. Answer: D Diff: 2 Type: MC Topic: 14.3b. income inequality Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative

17) With regard to labour markets, to what are economists referring when speaking of "hollowing out"? A) The increasing size of the area between the Lorenz curve and the diagonal line, signalling a hollowing out of income. B) Income between rich and poor countries has become less equal in the past two decades. C) The declining influence of unions has hollowed out union membership in industrialized economies. D) Increasing levels of youth unemployment in economies that were severely affected by the financial crisis of 2008-2009. E) Technological change is displacing workers from the middle of the income distribution, and those workers are now competing for the economy's lowest-paid jobs. Answer: E Diff: 2 Type: MC Topic: 14.3b. income inequality Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative 18) Much attention is being paid to the issue of rising income inequality. A serious aspect of this issue, especially in the United States and the United Kingdom , is that even though average per capita income has been growing, A) a larger proportion of households fall below the poverty line. B) high-income earners are paying much higher rates of income tax. C) the vast majority of the economy's total income growth has accrued to the highest income earners. D) low- and middle-class households are not earning enough income to pay income tax. E) incomes in these countries are not growing as fast as in other OECD countries. Answer: C Diff: 2 Type: MC Topic: 14.3b. income inequality Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative

19) Researchers are trying to identify the causes of rising income inequality in various economies. Important forces that are almost certainly contributing are: 1) globalization 2) rising rates of personal income tax 3) skill-biased technological change A) 1 and 2 only B) 2 and 3 only C) 1 on D) 2 only E) 1 and 3 only Answer: E Diff: 1 Type: MC Topic: 14.3b. income inequality Skill: Recall Learning Obj.: 14-4 Understand some possible explanations for the recent trend toward rising income inequality. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 15 Interest Rates and the Capital Market 15.1 A Brief Overview of the Capital Market 1) The concepts of stock and flow are involved in firms' demand for labour and for capital. Which of the following statements is correct? A) A firm hires a stock of labour services; and purchases a stock of physical capital, which provides a flow of services. B) Labour and capital are both flow variables because their values change over time. C) A firm hires a flow of labour services; and purchases a stock of physical capital, which provides a flow of services. D) Labour and capital are both stock variables because they are providing service at any given moment in time. E) A firm's demand for both labour and capital is determined by the marginal value each provides to the stock of labour and capital, respectively. Answer: C Diff: 2 Type: MC Topic: 15.1. overview of the capital market Skill: Recall Learning Obj.: 15-1 Describe how the capital market brings together the borrowing decisions of firms with the lending decisions of households. Category: Qualitative 2) Consider the physical equipment that a printing company would purchase in order to print glossy magazines. The equipment itself is considered a(n) ________, while the printing services the equipment provides is considered a(n) ________. A) asset; liability B) flow; opportunity cost

C) stock; flow D) retained asset; spent asset E) flow; stock Answer: C Diff: 1 Type: MC Topic: 15.1. overview of the capital market Skill: Applied Learning Obj.: 15-1 Describe how the capital market brings together the borrowing decisions of firms with the lending decisions of households. Category: Qualitative

3) Financial intermediaries are often the "middlemen" between households and firms. As the middlemen, A) they reduce the amount of trade by charging high fees for their services. B) they are not essential for the workings of an economy. C) they specialize in assessing the risk of various borrowers. D) are the fundamental determinant of the supply of capital. E) are the fundamental determinant of the demand for capital. Answer: C Diff: 2 Type: MC Topic: 15.1. overview of the capital market Skill: Recall Learning Obj.: 15-1 Describe how the capital market brings together the borrowing decisions of firms with the lending decisions of households. Category: Qualitative 4) What is the most fundamental purpose of the "capital market"? A) to connect the savings decisions of households with the borrowing decisions of firms B) to provide the means by which firms can acquire physical capital C) to provide the means by which households and firms can invest financial capital D) to connect firms and households who wish to borrow with financial institutions E) to connect households who wish to borrow with banks who wish to lend Answer: A Diff: 2 Type: MC Topic: 15.1. overview of the capital market Skill: Recall Learning Obj.: 15-1 Describe how the capital market brings together the borrowing decisions of firms with the lending decisions of households. Category: Qualitative 5) When we discuss household saving as the supply of capital to financial markets, the term includes which of the following? A) households' savings accounts B) education and retirement savings C) private-sector pension plans D) Canada Pension Plan and Quebec Pension Plan E) all of the above Answer: E Diff: 2 Type: MC Topic: 15.1. overview of the capital market Skill: Applied Learning Obj.: 15-1 Describe how the capital market brings together the borrowing decisions of firms with the lending decisions of households. Category: Qualitative

15.2 Present Value 1) When a firm is making a decision about whether to purchase a new piece of physical capital, it is necessary to evaluate the ________ of services it delivers. The concept of ________ allows the firm to determine how much it would be willing to pay for the new piece of physical capital. A) stock; present value B) flow; future value C) flow; present value D) stock; future value Answer: C Diff: 1 Type: MC Topic: 15.2. present value Skill: Recall Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Qualitative 2) A firm must evaluate the value of the services that a piece of capital equipment can deliver to the firm over its lifetime. The firm does this by estimating its A) rate of depreciation. B) marginal product. C) marginal revenue product. D) future value. E) present value. Answer: E Diff: 1 Type: MC Topic: 15.2. present value Skill: Recall Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Qualitative 3) The term "present value" refers to the A) value that a capital good will have in the future. B) current interest rate. C) current purchase price of a capital good. D) value today of a payment or receipt to occur in the future. E) value in the future of a payment made today. Answer: D Diff: 1 Type: MC Topic: 15.2. present value Skill: Recall Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Qualitative

4) When we consider any future stream of benefits, and we seek to determine its value today, we ________ that steam of benefits using the market interest rate. A) capitalize B) collateralize C) depreciate D) discount E) appreciate Answer: D Diff: 1 Type: MC Topic: 15.2. present value Skill: Recall Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Qualitative 5) The present value of a given future stream of benefits will be lower when the benefits are ________ and the interest rate is ________. A) nearer in time; lower B) accruing in the first time period only; lower C) more distant in time; higher D) equalized over a ten-year period; zero E) more distant in time; lower Answer: C Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Qualitative 6) The textbook presentation of present value involves an important simplification of reality in order to analyze the concept. That simplification is in assuming that A) the future stream of MRPs lasts for one period only. B) the future stream of MRPs of a unit of capital is known with certainty. C) all units of capital generate an identical stream of MRPs. D) the future stream of MRPs is constant over time. E) the interest rate is constant over time. Answer: B Diff: 2 Type: MC Topic: 15.2. present value Skill: Recall Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Qualitative

7) The formula to calculate the present value of a future payment of $X received t years from now when the annual percentage interest rate is i is A) PV = $X/(1 + i)t. B) PV = $X/i. C) PV = $X/(1 + i). D) PV = $X(1 + i)t. E) PV = $X(1 + i). Answer: A Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Qualitative 8) The present value of a given future payment is higher the ________ the rate of interest and the ________ distant the payment date. A) higher; more B) higher; less C) lower; more D) lower; less Answer: D Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 9) Economists use the concept of present value to determine A) the amount someone would be willing to pay in the future for a discounted value today. B) the amount someone would be willing to pay today to get a payment or stream of payments in the future. C) the value in the future of a given stock of physical capital. D) the marginal revenue product of a unit of capital. E) the price of a unit of physical capital in the future. Answer: B Diff: 2 Type: MC Topic: 15.2. present value Skill: Recall Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Qualitative

10) Present value is computed by A) evaluating a stream of future sums resulting from a piece of capital. B) summing all future payments. C) multiplying a stream of future sums by the interest rate. D) discounting a stream of future payments by today's purchase price. E) discounting a stream of future sums by the interest rate. Answer: E Diff: 1 Type: MC Topic: 15.2. present value Skill: Recall Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Qualitative 11) The present value of $100 to be received one year from now, with an annual interest rate of 6%, is A) $94.00. B) $94.34. C) $95.27. D) $102.13. E) $106.00. Answer: B Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 12) If the annual interest rate is 5%, the present value of $100 to be received two years from now is A) $87.70. B) $90.70. C) $95.23. D) $97.00. E) $110.00. Answer: B Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative

13) If the annual interest rate is 10%, the present value of $100 to be received two years from now is A) $75.25. B) $82.64. C) $90.90. D) $94.73. E) $110.00. Answer: B Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 14) If the annual rate of interest is 6%, the present value of $100 to be paid every year for three years (beginning one year from now) is A) $83.90. B) $251.88. C) $267.30. D) $283.02. E) $300.00. Answer: C Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 15) If the annual interest rate is 6%, the present value of $100 paid 3 years from now is A) $15.15. B) $40.00. C) $56.45. D) $83.96. E) $94.34. Answer: D Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative

16) A lottery winner receives a $100 000 cheque now, and a second one in two years. If the annual interest rate is 9%, the present value of his total winnings is A) $184 168. B) $200 000. C) $215 832. D) $300 000. E) Not able to determine from the information provided. Answer: A Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 17) How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200 one year from now? A) $185.19. B) $216.00. C) $160.00. D) $385.19. E) $200.00. Answer: A Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 18) How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200 one year from now and still have $200 remaining in the bank? A) $185.19. B) $216.00. C) $370.37. D) $385.19. E) none of the above. Answer: C Diff: 3 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative

19) The present value of $100 to be received one year from now, with an annual interest rate of 8%, is A) $85.73. B) $94.34. C) $92.59. D) $102.13. E) $108.00. Answer: C Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 20) If the annual interest rate is 7%, the present value of $100 to be received at the end of two years is A) $87.34. B) $90.70. C) $93.46. D) $97.00. E) $107.00. Answer: A Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 21) If the annual interest rate is 10%, the present value of $200 paid 3 years from now is A) $20.00. B) $40.00. C) $56.45. D) $150.26. E) $165.28. Answer: D Diff: 2 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative

22) How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200 each year for the next 2 years, beginning one year from today? A) $171.47 B) $185.19 C) $356.66 D) $368.00 E) $400.00 Answer: C Diff: 3 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 23) Suppose a new piece of capital equipment will deliver a stream of MRPs of $1000 each year for 3 years (beginning one year from today). What is the present value of this stream of benefits, assuming that the annual rate of interest is 5%? A) $863.86 B) $952.38 C) $1000.00 D) $2591.58 E) $2723.25 Answer: E Diff: 3 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 24) How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200, 5 years from now? A) $136.12 B) $142.57 C) $184.17 D) $185.19 E) $293.80 Answer: A Diff: 3 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative

25) Carol can borrow $13 000 from her friend Eric to buy a car. He is willing to lend her the money at 7% annual interest for a period of five years. If Carol accepts Eric's offer, he can expect a lump-sum repayment in five years of approximately A) $13 544. B) $15 239. C) $17 837. D) $18 233. E) $19 097. Answer: D Diff: 3 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Category: Quantitative 26) The table below shows the payments at the end of each year from three different physical assets. Asset A B C Interest Rate

Year 1 $1000 $0 $0 5%

Year 2 $1000 $1000 $0 5%

Year 3 $1000 $2000 $3000 5%

TABLE 15-1 Refer to Table 15-1. A, B, and C represent possible purchases of physical capital, each offering a stream of payments as indicated in the table. There are no payments beyond Year 3. The interest rates in each year are also specified in the table. Which asset is the most valuable to a firm contemplating them at the beginning of Year 1? A) A B) B C) C D) They are equivalent. E) It cannot be determined with the available data. Answer: A Diff: 3 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Graphics: Table Category: Quantitative

27) The table below shows the payments at the end of each year from three different physical assets. Asset A B C Interest Rate

Year 1 $1000 $0 $0 5%

Year 2 $1000 $1000 $0 5%

Year 3 $1000 $2000 $3000 5%

TABLE 15-1 Refer to Table 15-1. A, B, and C represent possible purchases of physical capital, each offering a stream of payments as indicated in the table. There are no payments beyond Year 3. The interest rates in each year are also specified in the table. What is the present value (at the beginning of Year 1) of asset A? A) $3000 B) $3150 C) $2590.68 D) $2723.24 E) $2857.14 Answer: D Diff: 3 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Graphics: Table Category: Quantitative

28) The table below shows the payments at the end of each year from three different physical assets. Asset A B C Interest Rate

Year 1 $1000 $0 $0 5%

Year 2 $1000 $1000 $0 5%

Year 3 $1000 $2000 $3000 5%

TABLE 15-1 Refer to Table 15-1. A, B, and C represent possible purchases of physical capital, each offering a stream of payments as indicated in the table. There are no payments beyond Year 3. The interest rates in each year are also specified in the table. What is the present value (at the beginning of Year 1) of asset B? A) $3000 B) $3150 C) $2634.70 D) $2590.67 E) $2722.97 Answer: C Diff: 3 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Graphics: Table Category: Quantitative

29) The table below shows the payments at the end of each year from three different physical assets. Asset A B C Interest Rate

Year 1 $1000 $0 $0 5%

Year 2 $1000 $1000 $0 5%

Year 3 $1000 $2000 $3000 5%

TABLE 15-1 Refer to Table 15-1. A, B, and C represent possible purchases of physical capital, each offering a stream of payments as indicated in the table. There are no payments beyond Year 3. The interest rates in each year are also specified in the table. What is the present value (at the beginning of Year 1) of asset C? A) 2590.67 B) $3000 C) $3150 D) $2722.97 E) $2634.70 Answer: A Diff: 3 Type: MC Topic: 15.2. present value Skill: Applied Learning Obj.: 15-2 Compute the present value of an asset that delivers a stream of future benefits. Graphics: Table Category: Quantitative 15.3 The Demand for Capital 1) To determine an individual profit-maximizing firm's maximum purchase price for a unit of capital it is necessary to A) know what competing firms are prepared to pay. B) compute the present value of the stream of benefits produced by the unit of capital. C) compute the future value of the stream of benefits produced by the unit of capital. D) compute the rental price of the unit of capital and the interest rate. E) know how the interest rate is related to the cost of capital. Answer: B Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative

2) In a competitive market for capital equipment, the purchase price of a piece of capital equipment is predicted to be A) its current-period MRP. B) its current-period MRP divided by the interest rate. C) its last-period MRP divided by the interest rate. D) the present value of its stream of MRPs. E) the future value of its stream of MRPs. Answer: D Diff: 1 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 3) In general, a profit-maximizing firm will purchase a piece of capital equipment if the A) present value of the stream of future MRPs exceeds the purchase price. B) present value of the stream of future MRPs falls below the purchase price. C) simple sum of the future MRPs exceeds the purchase price. D) simple sum of the future MRPs falls below the purchase price. E) future value of the stream of MRPs exceeds the purchase price. Answer: A Diff: 1 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 4) Why do we think about the interest rate as the "price" of capital? A) Because the interest rate determines the MRP of the capital, which determines its price. B) Because the interest rate determines the equilibrium level of investment demand. C) Because the interest rate represents the value the firm avoids paying to lenders by purchasing the capital instead. D) Because firms use financial capital to purchase physical capital and the interest rate is the "price" of financial capital. E) Because the interest rate is the amount the firm earns by purchasing the capital. Answer: D Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative

5) Consider a firm making a decision to purchase a unit of capital - let's say, a forklift. In terms of capital markets, which of the following would we consider to be the opportunity cost of the forklift? A) the future stream of MRPs from the forklift B) the resale value of the forklift after one year C) the additional revenue to the firm that the forklift would generate in the future D) the purchase price of the forklift E) the interest the firm could earn by purchasing a bond instead Answer: E Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 6) In general, a profit-maximizing firm will purchase a unit of capital as long as its purchase price is A) non-negative. B) equal to the present value of the stream of marginal revenue product generated by the capital. C) no less than the present value of the stream of marginal revenue product generated by the capital. D) no more than the present value of the stream of marginal revenue product generated by the capital. E) less than its present marginal revenue product. Answer: D Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative

7) Suppose a piece of capital equipment offers its last MRP of $40 000 in one year, after which it is valueless. At an annual interest rate of 8%, a profit-maximizing firm would be willing to buy this unit of capital if its purchase price is A) below $37 037. B) above $37 037. C) below $40 000. D) above $40 000. E) above $40 000, but only at a higher interest rate. Answer: A Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Quantitative 8) Suppose a piece of capital equipment will produce an MRP of $1000 per year for the next three years (beginning one year from now). What is the maximum price a firm will pay to purchase it today if the annual interest rate is 7%? A) $816.37 B) $1649.81 C) $2624.32 D) $3210.00 E) $3000 Answer: C Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Quantitative 9) Suppose a piece of capital equipment will produce an MRP of $100 000 per year for the next three years (beginning one year from now). What is the maximum price a profitmaximizing firm will pay to purchase it if the annual interest rate is 4%? A) $96 154 B) $88 888 C) $277 509 D) $266 664 E) $288 462 Answer: C Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate.

Category: Quantitative 10) Consider a manufacturing firm that contemplates buying a lathe with an annual MRP of $1000 (beginning one year from now). Suppose the interest rate is 5% per year. If the lathe is obsolete after the fourth MRP is generated, the maximum the firm is prepared to pay now for the lathe is A) $3019.52. B) $3546.40. C) $3723.24. D) $3910.51. E) $4000. Answer: B Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Quantitative 11) The law of diminishing marginal returns tells us that, generally, the more capital the firm uses, the A) lower is the firm's interest rate. B) lower is the MRP of the firm's capital. C) higher is the MRP of the firm's capital. D) higher is capital's purchase price. E) lower is capital's rental price. Answer: B Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 12) Consider the firm's demand for capital. A decrease in market interest rates will A) increase the amount a firm is willing to pay for a machine that generates future returns. B) decrease the amount a firm is willing to pay for a machine that generates future returns. C) not affect the price a firm is willing to pay for a machine that generates future returns. D) be good for all firms. E) be bad for all firms. Answer: A Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall

Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 13) Consider the firm's demand for capital. An increase in market interest rates will A) increase the amount a firm is willing to pay for a machine that generates future returns. B) decrease the amount a firm is willing to pay for a machine that generates future returns. C) not affect the price a firm is willing to pay for a machine that generates future returns. D) be good for all firms. E) be bad for all firms. Answer: B Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 14) The present value of a piece of capital equipment that generates future MRPs will increase if A) the interest rate increases. B) the interest rate decreases. C) the MRP values are received farther in the future. D) the purchase price of the capital asset decreases. E) the productivity of the capital asset falls. Answer: B Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 15) A firm's downward-sloping investment demand curve is usually plotted with ________ on the vertical axis. A) the price of capital equipment B) MRP C) the interest rate D) the capital stock E) the general price level Answer: C Diff: 1 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall

Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative

16) Under which of the following circumstances will a competitive firm choose to own more capital, assuming that the purchase price of the capital and the interest rate remain unchanged? A) The stock of capital in the entire economy increases. B) Other firms are increasing their stock of capital. C) The life span of the capital is reduced. D) Technological improvement has made the capital more productive. E) The price of the product the firm produces declines. Answer: D Diff: 1 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 17) In any given period, which of the following is most likely to determine a firm's flow of investment demand? A) a change in the firm's optimal flow of investment B) a change in the firm's optimal capital stock C) the rate of change of the firm's investment demand D) the rate of change of the capital stock in the entire economy E) Any of the above, as they are all the same. Answer: B Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 18) Suppose a dairy farmer is considering the purchase of an additional milking machine at a price of $4000. She expects the discounted MRP of the machine in Year 1 to be $1700, in Year 2 to be $1500 and in Year 3 to be $1200, after which the machine has no value. The farmer should A) buy the machine because its present value is $400 more than its purchase price. B) buy the machine because its marginal revenue is $400 more than its marginal cost. C) be indifferent about the purchase because its present value is approximately equal to its purchase price. D) not buy the machine because its marginal revenue is $400 less than its marginal cost. E) not buy the machine because its present value is $400 less than its purchase price. Answer: A Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the

interest rate. Category: Quantitative 19) Suppose a dairy farmer is considering the purchase of an additional milking machine at a price of $5000. She expects the discounted MRP of the machine in Year 1 to be $1700, in Year 2 to be $1500 and in Year 3 to be $1200, after which the machine has no value. The farmer should A) buy the machine because its present value is $600 more than its purchase price. B) buy the machine because its marginal revenue is $600 more than its marginal cost. C) be indifferent about the purchase because its present value is approximately equal to its purchase price. D) not buy the machine because its purchase price is $600 less than its present value. E) not buy the machine because its present value is $600 less than its purchase price. Answer: E Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Quantitative 20) Suppose a roofing contractor is considering the purchase of an additional truck at a price of $35 000. He expects the discounted MRP of the truck in Year 1 to be $7000, in Year 2 to be $6000, in Year 3 to be $5000, after which he can sell the truck at a present value of $14 000. This contractor should A) not buy the truck because its marginal cost is greater than its marginal revenue. B) be indifferent about the purchase because its present value is approximately equal to its purchase price. C) buy the truck because its present value is more than its purchase price. D) not buy the truck because its present value is less than its purchase price. E) buy the truck because its marginal cost is less than its marginal revenue. Answer: D Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Quantitative

21) Suppose a firm producing aircraft engines is considering the purchase of a robotic assembly machine at a price of $4 million. The firm expects the discounted MRP of the machine to be $1 million over each of the first 3 years, and $0.5 million each in years 4 and 5, after which the machine has no value. This firm should A) not buy the machine because its present value is less than its purchase price. B) buy the machine because its present value is more than its purchase price. C) be indifferent about the purchase because its present value is equal to its purchase price. D) not buy the machine because its marginal cost is greater than its marginal revenue. E) buy the machine because its marginal cost is less than its marginal revenue. Answer: C Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Quantitative 22) Consider a firm that places coin-operated coffee machines in university buildings. On January 1, 2015 the firm has 1500 machines in operation, and on January 1, 2016 the firm has 2250 machines in operation. A possible explanation for this increase in the firm's capital stock is that 1) there was an increase in productivity of coin-operated coffee machines that reduced the cost per cup of coffee produced; 2) an increase in demand for coffee led to an increase in the price per cup; 3) there was an increase in interest rates. A) 1 only B) 2 only C) 3 only D) 1 or 2 E) 2 or 3 Answer: D Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative

23) The diagram below shows a firm's demand for its units of capital—coin-operated coffee machines. The firm places its machines in universities and colleges across Canada.

FIGURE 15-1 Refer to Figure 15-1. The downward slope of the firm's investment demand curve can be explained by A) the negative relationship between the interest rate and the present value of a future stream of MRPs generated by each coffee machine. B) the negative relationship between the interest rate and the purchase price of the coffee machines. C) the downward slope of the demand curve for the firm's product—cups of coffee. D) the relationship between the MRP of the coffee machine and technology improvements to the coffee machines. E) the downward slope of the marginal cost of capital curve. Answer: A Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Graph Category: Qualitative

24) The diagram below shows a firm's demand for its units of capital—coin-operated coffee machines. The firm places its machines in universities and colleges across Canada.

FIGURE 15-1 Refer to Figure 15-1. One possible explanation for a shift of the firm's investment demand curve from I0 to I2 is A) an increase in the interest rate. B) a technological improvement that reduces the cost per cup of coffee. C) a decrease in the interest rate. D) an increase in the expected MRP of the coffee machines. E) demographic changes that lead to a reduction in the growth rate of the student population at universities. Answer: E Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Graph Category: Qualitative

25) The diagram below shows a firm's demand for its units of capital—coin-operated coffee machines. The firm places its machines in universities and colleges across Canada.

FIGURE 15-1 Refer to Figure 15-1. One possible explanation for a shift of the firm's investment demand curve from I0 to I1 is A) an increase in the interest rate. B) a technological change that increases the cost per cup of coffee. C) a decrease in the interest rate. D) an increase in the expected MRP of the coffee machines. E) demographic changes that lead to a reduction in the growth rate of the student population at universities. Answer: D Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Graph Category: Qualitative

26) The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Assume that after 2 years each sewing machine is worth nothing. Number of Sewing Machines Annual MRP 10 $2000 11 $1800 12 $1600 13 $1400 14 $1200 TABLE 15-2 Refer to Table 15-2. If the annual interest rate is 4%, what is the present value of the 11 th sewing machine (rounded to the nearest dollar)? Note that the stream of MRPs begins one year from now and lasts 2 years. A) $3600 B) $3531 C) $3328 D) $3395 E) $3772 Answer: D Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Table Category: Quantitative

27) The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Assume that after 2 years each sewing machine is worth nothing. Number of Sewing Machines Annual MRP 10 $2000 11 $1800 12 $1600 13 $1400 14 $1200 TABLE 15-2 Refer to Table 15-2. If the interest rate is 4%, what is the present value of the 14th sewing machine (rounded to the nearest dollar)? Note that the stream of MRPs begins one year from now and lasts for 2 years. A) $1400 B) $2800 C) $4200 D) $2641 E) $2263 Answer: E Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Table Category: Quantitative

28) The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Assume that after 2 years each sewing machine is worth nothing. Number of Sewing Machines Annual MRP 10 $2000 11 $1800 12 $1600 13 $1400 14 $1200 TABLE 15-2 Refer to Table 15-2. If the interest rate is 4%, and the purchase price of a sewing machine is $3000, what is the optimal capital stock (number of sewing machines) for this firm? A) fewer than 10 B) 10 C) 11 D) 12 E) more than 12 Answer: D Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Table Category: Quantitative

29) The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Assume that after 2 years each sewing machine is worth nothing. Number of Sewing Machines Annual MRP 10 $2000 11 $1800 12 $1600 13 $1400 14 $1200 TABLE 15-2 Refer to Table 15-2. If the interest rate is 4%, and the purchase price of a sewing machine is $4000, what is the optimal capital stock (number of sewing machines) for this firm? A) fewer than 10 B) 10 C) 11 D) 12 E) more than 12 Answer: A Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Table Category: Quantitative

30) The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Assume that after 2 years each sewing machine is worth nothing. Number of Sewing Machines 10 11 12 13 14

Annual MRP $2000 $1800 $1600 $1400 $1200

TABLE 15-2 Refer to Table 15-2. If the interest rate is 4% and the purchase price of a sewing machine is $2000, what is the optimal capital stock (number of sewing machines) for this firm? A) 11 B) 12 C) 13 D) exactly 14 E) at least 14 Answer: E Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Table Category: Quantitative

31) The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Assume that after 2 years each sewing machine is worth nothing. Number of Sewing Machines 10 11 12 13 14

Annual MRP $2000 $1800 $1600 $1400 $1200

TABLE 15-2 Refer to Table 15-2. Suppose the interest rate is 4%, the purchase price of a sewing machine is $3000, and the firm is holding its optimal capital stock. If the interest rate rises to 7%, how will this firm adjust its capital stock? A) It will reduce its number of machines from 12 to 11. B) It will reduce its number of machines from 14 to 13. C) It will not change its capital stock. D) It will increase its number of machines from 11 to 12. E) It will increase its number of machines from 13 to 14. Answer: A Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Table Category: Quantitative

32) The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Assume that after 2 years each sewing machine is worth nothing. Number of Sewing Machines 10 11 12 13 14

Annual MRP $2000 $1800 $1600 $1400 $1200

TABLE 15-2 Refer to Table 15-2. Suppose the interest rate is 4%, the purchase price of a sewing machine is $3000, and the firm is holding its optimal capital stock. If the interest falls to 2%, how will this firm adjust its capital stock? A) It will reduce its number of machines from 12 to 11. B) It will reduce its number of machines from 14 to 13. C) It will not change its capital stock. D) It will increase its number of machines from 11 to 12. E) It will increase its number of machines from 13 to 14. Answer: C Diff: 3 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Table Category: Quantitative

33) The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Assume that after 2 years each sewing machine is worth nothing. Number of Sewing Machines 10 11 12 13 14

Annual MRP $2000 $1800 $1600 $1400 $1200

TABLE 15-2 Refer to Table 15-2. What principle will this firm follow to determine the optimal number of sewing machines to own and operate? A) The marginal revenue products of all the machines should be equal. B) The present value of the future MRPs on the last unit of capital is equal to (or greater than) its purchase price. C) The annual MRP on the last unit of capital should be equal to (or greater than) its purchase price. D) The marginal products of each machine should be equal. E) The present value of the future MRPs should be increasing over time. Answer: B Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Graphics: Table Category: Qualitative 34) The amount of physical capital is a ________ variable; ________. A) flow; its usefulness lasts over a long period of time B) flow; it is usually put in place and maintained over a long period of time C) stock; any net flow of investment adds to the current capital stock D) stock; most equipment is solidly built and lasts for a long time E) stock; it generally increases its value through use Answer: C Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative

35) A technological improvement in the physical capital available to the firm has a similar impact on a firm's desired capital stock as A) an increase in the interest rate. B) a decrease in capital's MRP. C) a reduction in the price of capital goods. D) a decrease in the price of the firm's product. E) a shift to the left of the capital's MRP curve. Answer: C Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 36) Consider the market for commercial ovens as a factor of production in the commercial bread industry. Assume that all commercial ovens are identical, they have a life span of 10 years, and the purchase price is $12 000. The present value of the stream of MRPs from the last oven purchased by each commercial bakery is $16 000. We can expect that A) profit-maximizing firms will reduce their capital stock of ovens until the PV of the stream of MRPs falls to $12 000. B) investment demand by all firms will fall until the PV of the stream of MRPs falls to $12 000. C) investment demand by all firms will rise until all firms have an identical capital stock. D) the purchase price of commercial ovens will fall until the price is equated with the PV of the stream of MRPs. E) investment demand by all firms will increase and there will be a tendency for the price of commercial ovens to rise. Answer: E Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative

37) Which of the following is illustrated by the firm's investment demand curve? A) the difference between nominal and real interest rates B) the equilibrium interest rate C) how the firm's desired stock of capital varies with changes in MRP D) how the firm's MRP changes with advances in technology E) how the firm's desired purchases of new capital vary with the interest rate Answer: E Diff: 1 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 38) Consider the economy's downward-sloping demand for investment curve. An increase in the interest rate causes A) a shift of the curve to the right. B) a movement downward along the curve. C) no change. D) a shift of the curve to the left. E) a movement upward along the curve. Answer: E Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 39) Consider the economy's downward-sloping demand for investment curve. A decrease in the interest rate causes ________; an improvement in the marginal productivity of capital causes ________. A) a shift of the curve to the right; a shift of the curve further to the right B) a movement downward along the curve; a shift of the curve to the left C) a movement downward along the curve; a shift of the curve to the right D) a shift of the curve to the left; a movement downward along the curve E) a movement upward along the curve; a shift of the curve to the right Answer: C Diff: 2 Type: MC Topic: 15.3. a firm's demand for capital Skill: Applied Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative

40) Choose the best reason for a rightward shift in the economy's investment demand curve. A) diminishing marginal returns to capital B) changes in technology that improve the productivity of capital C) a decrease in the interest rate D) an increase in the interest rate E) None of the above would shift the investment demand curve. Answer: B Diff: 1 Type: MC Topic: 15.3. a firm's demand for capital Skill: Recall Learning Obj.: 15-3 Explain why the demand for investment is negatively related to the interest rate. Category: Qualitative 15.4 The Supply of Capital 1) What is illustrated by the economy's supply curve for saving? A) the difference between nominal and real interest rates B) the relationship between the flow of saving and the stock of financial assets C) how the economy's desired flow of saving varies with changes in the interest rate D) how the economy's flow of saving changes with advances in technology E) how the economy's stock of capital varies with the interest rate Answer: C Diff: 1 Type: MC Topic: 15.4. the supply of capital Skill: Recall Learning Obj.: 15-4 Explain why the supply of saving is positively related to the interest rate. Category: Qualitative 2) An economy's upward-sloping supply curve of desired saving is usually plotted with ________ on the vertical axis. A) the price of capital B) capital stock C) the market interest rate D) technology E) the general price level Answer: C Diff: 1 Type: MC Topic: 15.4. the supply of capital Skill: Recall Learning Obj.: 15-4 Explain why the supply of saving is positively related to the interest rate. Category: Qualitative

3) A firm's demand for physical capital leads to its ________ and a household's supply of saving leads to its ________. A) demand for stocks; supply of stocks B) lending behaviour; borrowing behaviour C) negative effect on the interest rate; positive effect on the interest rate D) demand for financial capital; supply of financial capital E) demand for bonds; supply of bonds Answer: D Diff: 1 Type: MC Topic: 15.4. the supply of capital Skill: Recall Learning Obj.: 15-4 Explain why the supply of saving is positively related to the interest rate. Category: Qualitative 4) If the interest rate that you could earn on your savings is 4% per year, then your decision to spend $1500 on a big screen TV today "costs" you ________ in potential forgone spending one year from now. A) $0 B) $60 C) $120 D) $1500 E) $1560 Answer: E Diff: 2 Type: MC Topic: 15.4. the supply of capital Skill: Applied Learning Obj.: 15-4 Explain why the supply of saving is positively related to the interest rate. Category: Quantitative 5) Suppose you are working as an intern at a large financial firm with an annual salary of $30 000, but you are guaranteed a salary increase to $85 000 at the end of the internship. In general, we can expect that A) your current level of saving rises in anticipation of the higher future income. B) your current level of saving falls and your supply of financial capital to the economy decreases in anticipation of the higher future income. C) your current level of saving falls and your supply of financial capital to the economy rises in anticipation of the higher future income. D) your current level of saving rises because there is a positive relationship between household saving and future income. E) your current level of saving is certain to be positive. Answer: B Diff: 2 Type: MC Topic: 15.4. the supply of capital Skill: Applied

Learning Obj.: 15-4 Explain why the supply of saving is positively related to the interest rate. Category: Qualitative 6) Consider the economy's upward-sloping supply of saving curve. An increase in the interest rate causes ________; an increase in current income causes ________. A) a movement downward along the curve; a shift of the curve to the right B) a shift of the curve to the left; a movement upward along the curve C) a movement upward along the curve; a shift of the curve to the right D) a shift of the curve to the left; a movement downward along the curve E) a movement upward along the curve; a movement downward along the curve Answer: C Diff: 2 Type: MC Topic: 15.4. the supply of capital Skill: Recall Learning Obj.: 15-4 Explain why the supply of saving is positively related to the interest rate. Category: Qualitative 7) Households' supply of financial capital is derived from A) their supply of human capital. B) their supply of physical capital. C) firms' demand for financial capital D) firms' demand for physical capital. E) their supply of saving. Answer: E Diff: 1 Type: MC Topic: 15.4. the supply of capital Skill: Recall Learning Obj.: 15-4 Explain why the supply of saving is positively related to the interest rate. Category: Qualitative 8) Which of the following best explains why there is a positive relationship between the interest rate and the amount of household savings supplied to the financial capital market? A) A decrease in the interest rate increases the opportunity cost of current spending, which leads to an increase in desired saving. B) An increase in the interest rate increases the opportunity cost of current spending, which leads to a decrease in desired saving. C) An increase in the interest rate increases the opportunity cost of current spending, which leads to an increase in desired saving. D) An increase in the interest rate causes the investment demand curve to shift up. E) An increase in the interest rate causes the savings demand curve to shift up. Answer: C Diff: 2 Type: MC

Topic: 15.4. the supply of capital Skill: Applied Learning Obj.: 15-4 Explain why the supply of saving is positively related to the interest rate. Category: Qualitative

15.5 Equilibrium in the Capital Market 1) Suppose the nominal interest rate is 10%. The rate of inflation has been 4% and is expected to continue at 4% in the future. The real interest rate, which determines the firm's decision to purchase capital, is therefore A) 4%. B) 6%. C) 10%. D) 14%. E) indeterminate. Answer: B Diff: 1 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Recall Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Quantitative 2) Suppose you lend me $100 for a year, and I agree to pay you $110 at the end of one year (principal plus interest). Over the intervening year, however, the average price of goods in the economy rises by 3%. The real rate of return that you will earn on your loan to me is therefore equal to A) 3%. B) 7%. C) 10%. D) 13%. E) greater than 13%. Answer: B Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Quantitative

3) Suppose you lend me $100 for a year, and I agree to pay you $110 at that time (principal plus interest). Over the intervening year, however, the average price of goods in the economy falls by 4%. The real rate of return that you will earn on your loan to me is therefore equal to A) 4%. B) 6%. C) 10%. D) 14%. E) greater than 14%. Answer: D Diff: 1 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Quantitative 4) For the economy as a whole, the equilibrium interest rate is determined by A) the current state of technology. B) the intersection of the aggregate investment demand curve with the aggregate saving supply curve. C) the condition that the MRP of capital equal the purchase price of capital. D) only by the purchase price of capital. E) exclusively by government policy. Answer: B Diff: 1 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Recall Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Qualitative

5)

FIGURE 15-2 Refer to Figure 15-2. The market for financial capital is initially in equilibrium at E1. A shift of the aggregate investment demand curve from I1 to I2, all other things constant, would A) shift the supply of saving curve to S2. B) change the technology of capital use. C) decrease the equilibrium interest rate. D) increase the equilibrium interest rate. E) reduce the marginal product of capital. Answer: D Diff: 1 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

6)

FIGURE 15-2 Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. A shift of the aggregate saving supply curve from S1 to S2, all other things being equal, would A) shift the investment demand curve to I2. B) change the technology of capital use. C) decrease the equilibrium interest rate. D) increase the equilibrium interest rate. E) reduce the marginal product of capital. Answer: C Diff: 1 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

7)

FIGURE 15-2 Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. If the marginal product of capital increases, all other things being equal, the A) investment demand curve will shift to I2 and the new equilibrium will be E4. B) supply of saving curve will shift to S2 and the new equilibrium will be E2. C) investment demand curve will shift to I2, the supply of saving will shift to S2, and the new equilibrium will be E3. D) the equilibrium will remain at E1. E) the supply of saving curve will shift to S2 and new equilibrium will be E2. Answer: A Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

8)

FIGURE 15-2 Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. If the government then institutes a policy that encourages individuals to increase their desired saving, A) the equilibrium interest rate falls and the amount of investment increases. B) the equilibrium interest rate falls but the amount of investment is unchanged. C) the flow of investment and saving both increase in the new equilibrium, but the interest rate is unaffected. D) the flow of investment and saving both increase, and the equilibrium interest rate increases. E) the equilibrium interest rate rises, and the amount of investment decreases. Answer: A Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

9)

FIGURE 15-2 Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. If the government then institutes a policy that encourages firms to increase their desired investment, A) the equilibrium interest rate falls and the amount of investment increases. B) the equilibrium interest rate falls but the amount of investment is unchanged. C) the flow of investment and saving both increase in the new equilibrium, but the interest rate is unaffected. D) the flow of investment and saving both increase, and the equilibrium interest rate increases. E) the equilibrium interest rate rises and the amount of investment decreases. Answer: D Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

10)

FIGURE 15-2 Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. If the government then institutes a policy that encourages individuals to decrease the fraction of their income that is spent on consumption, A) the equilibrium interest rate falls and the amount of investment increases. B) the equilibrium interest rate falls but the amount of investment is unchanged. C) the flow of investment and saving both increase in the new equilibrium, but the interest rate is unaffected. D) the flow of investment and saving both increase, and the equilibrium interest rate increases. E) the equilibrium interest rate rises and the amount of saving increases. Answer: A Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

11)

FIGURE 15-2 Refer to Figure 15-2. Suppose the economy begins at point E1. If technology changes in a way that increases the marginal product of capital, which movement best depicts the change in equilibrium in the market for financial capital? A) E1 to E2 B) E1 to E3 C) E1 to E4 D) E3 to E2 E) E4 to E2 Answer: C Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

12) The diagram below shows the market for financial capital for a closed economy.

FIGURE 15-3 Refer to Figure 15-3. Suppose the current equilibrium in the market for financial capital is at point A. Which of the following events is likely to move the equilibrium to point B? A) a reduction in the interest rate B) an increase in the interest rate C) an increase in current household income D) an increase in expected future income E) a decrease in the marginal product of capital Answer: C Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

13) The diagram below shows the market for financial capital for a closed economy.

FIGURE 15-3 Refer to Figure 15-3. Suppose the current equilibrium in the market for financial capital is at point A. Which of the following events is likely to move the equilibrium to point D? A) a technological improvement B) an increase in the interest rate C) a decrease in the interest rate D) population growth E) a reduction in the marginal product of capital Answer: E Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

14) The diagram below shows the market for financial capital for a closed economy.

FIGURE 15-3 Refer to Figure 15-3. Suppose the current equilibrium in the market for financial capital is at point D. Which of the following events is likely to move the equilibrium to point A? A) an increase in the interest rate B) a decrease in the interest rate C) a technological improvement D) the introduction of a policy that encourages saving E) growth in average household income Answer: C Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

15) The diagram below shows the market for financial capital for a closed economy.

FIGURE 15-3 Refer to Figure 15-3. Suppose the current equilibrium in the market for financial capital is at point A. Which of the following events is likely to move the equilibrium to point C? A) an increase in the interest rate and simultaneous technological improvement B) a decrease in the interest rate C) population growth and a simultaneous increase in the marginal product of capital D) population growth and a simultaneous reduction in the marginal product of capital E) population growth and a technological improvement Answer: D Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Graphics: Graph Category: Qualitative

16) The Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009, which allows Canadians to earn tax-free investment returns on a limited amount of savings each year. In theory, and all else remaining equal, what do we expect the effect of such a policy to be on the market for financial capital? A) The investment demand curve shifts right, the equilibrium interest rate rises and investment rises. B) The investment demand curve shifts left, the equilibrium interest rate falls and investment falls. C) The supply of savings curve shifts right, the equilibrium interest rate falls and investment increases. D) The supply of saving curve shifts left, the equilibrium interest rate rises and investment decreases. E) There will be no effect on the market for financial capital. Answer: C Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Qualitative 17) The Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009, which allows Canadians to earn tax-free investment returns on a limited amount of savings each year. What is the underlying goal of such a government policy? A) to decrease the supply of financial capital to the economy B) to increase government tax revenues C) to maintain upward pressure on the equilibrium interest rate D) to increase investment demand of Canadian firms E) to increase desired saving of Canadian households Answer: E Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Qualitative

18) In recent decades the economy has experienced dramatic technological improvement in many types of capital equipment. All else remaining equal, this change has the effect of shifting the investment demand curve to the ________ and causing an excess ________ capital, and thus a ________ in the equilibrium interest rate. A) right; supply of; rise B) right; demand for; rise C) left; demand for; rise D) left; supply of; fall E) right; demand; fall Answer: B Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Qualitative 19) Consider the flow of investment and saving in a small economy. Suppose the equilibrium interest rate is 2.5% and the equilibrium level of saving and investment is $4 billion. Now suppose, all else remaining equal, that there is sustained population growth over several years. What will be the effect in the capital market? A) An increase in the flow of investment and saving and an indeterminate effect on the equilibrium interest rate. B) An increase in the flow of investment and saving and an increase in the equilibrium interest rate. C) An increase in the flow of investment and saving and a decrease in the equilibrium interest rate. D) An indeterminate effect on the flow of investment and saving and a decrease in the equilibrium interest rate. E) An indeterminate effect on the flow of investment and saving and an increase in the equilibrium interest rate. Answer: A Diff: 3 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Qualitative

20) Consider the flow of investment and saving in a small economy. Suppose the equilibrium interest rate is 2.5% and the equilibrium level of saving and investment is $4 billion. Now suppose, all else remaining equal, that there is an increase in per capita income. What will be the effect in the capital market? A) The interest rate will fall below 2.5% and the quantity of investment demanded will increase. B) The interest rate will rise above 2.5% and the quantity of saving supplied will increase. C) The interest rate will rise above 2.5% and the quantity of investment demanded will decrease. D) There will be an indeterminate effect on the interest rate and an increase in the equilibrium level of investment and saving. E) The interest rate will fall below 2.5% and the quantity of saving supplied will increase. Answer: D Diff: 3 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Quantitative 21) Ongoing technological improvement over the past four decades in Canada has led to continual increases in investment demand, and an increase in the flow of investment, but no clear trend in the interest rate. The reason that we have not seen continual increases in the interest rate over this time period is that A) natural forces in the economy cause the investment demand curve to shift left to eliminate the excess demand for capital. B) the supply of saving curve shifts to the left in response to the increases in investment demand. C) the government intervenes in the capital market. D) technological change has also led to rising productivity of labour and rising incomes and therefore an increase in the supply of saving. E) the annual flow of investment is large enough to offset any change in the interest rate. Answer: D Diff: 3 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Recall Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Qualitative

22) Over the past four decades, Canada's non-residential capital stock has increased at an average annual growth rate of approximately ________%. A) 2.6 B) 6.0 C) 9.5 D) 12.4 E) 15.0 Answer: A Diff: 1 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Recall Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Qualitative 23) The Canadian federal government can encourage a rightward shift of the investment demand curve with which of the following policies: 1) an increase in corporate income-tax rates; 2) providing interest-rate subsidies on loans to firms; 3) decreasing the interest rate. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: B Diff: 2 Type: MC Topic: 15.5. equilibrium in the capital market Skill: Applied Learning Obj.: 15-5 Understand how the equilibrium interest rate is determined and why it changes over time. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 16 Market Failures and Government Intervention 16.1 Basic Functions of Government 1) Which of the following roles of the government is most fundamental to a society's ability to function safely and carry on normal economic and social life? A) provider of health care B) provider of education C) provider of a justice system D) holder of a monopoly of violence E) regulator of free markets Answer: D Diff: 1 Type: MC

Topic: 16.1. basic functions of government Skill: Recall Learning Obj.: 16-1 Discuss the importance of the government's "monopoly of violence." Category: Qualitative 2) The concept of "institution building" is becoming more prominent. Which of the following best describes the aim of institution building? A) In Canada, for example, the strengthening of existing financial institutions is key to the country's economic well-being. B) Canada's aid to developing countries is being focused on creating the economic institutions, such as a central bank, that are key to a country's economic growth. C) The rich, developed countries focus their assistance to developing countries on creating stable political infrastructures. D) The rich, developed countries focus on the success of institutions that are global in nature, such as the United Nations, The World Bank and the International Monetary Fund. Answer: C Diff: 2 Type: MC Topic: 16.1. basic functions of government Skill: Recall Learning Obj.: 16-1 Discuss the importance of the government's "monopoly of violence." Category: Qualitative

3) Which of the following statements about free-market economies is FALSE? A) An efficiently functioning market economy will correct temporary shortages and surpluses. B) Markets tend to be impersonal and to decentralize economic power. C) The government has a role to play in correcting market failures. D) In a free-market economy there is no role for government intervention. E) The existence of profits and losses provides signals to other economic agents. Answer: D Diff: 1 Type: MC Topic: 16.1. basic functions of government Skill: Recall Learning Obj.: 16-1 Discuss the importance of the government's "monopoly of violence." Category: Qualitative 16.2 The Case for Free Markets 1) What is the essential coordinating mechanism of a free-market economy? A) allocative efficiency B) productive efficiency C) profit maximization D) the price system E) opportunity cost Answer: D Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 2) The "formal defence" of free markets includes the argument that competitive markets A) lead to allocative efficiency. B) provide automatic coordination of the actions of decentralized decision makers. C) provide a stimulus to innovation and economic growth because of the pursuit of profits. D) permit a decentralization of economic power. E) lead to political freedom. Answer: A Diff: 2 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative

3) The "informal defence" of free markets includes the argument that markets A) provide automatic coordination of the actions of decentralized decision makers. B) achieve the maximum feasible rate of economic growth. C) lead to allocative efficiency. D) permit a centralization of economic power. E) lead to productive efficiency. Answer: A Diff: 2 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 4) The "informal defence" of free markets includes the argument that competitive markets 1) result in a more equitable distribution of income; 2) provide automatic coordination of the actions of decentralized decision makers; 3) provide a stimulus to innovation and economic growth because of the pursuit of profits. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: E Diff: 2 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 5) Which of the following statements about market economies is true? A) Most present-day economists advocate extensive government intervention in most parts of market economies. B) Externalities make free-market outcomes socially efficient. C) An important characteristic of the market system is its ability to set in motion forces that tend to correct disequilibrium. D) Market failure means that a market economy is incapable of satisfying human wants. E) Pure market economies provide the best social outcome. Answer: C Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative

6) In a competitive market economy with no externalities, allocative efficiency would exist if A) prices equal total cost in all markets. B) prices equal marginal revenue in all markets. C) prices equal marginal costs in all markets. D) prices equal average variable cost in all markets. E) stringent government intervention exists. Answer: C Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 7) Economic losses in an industry are a signal that A) too few resources are allocated to the industry. B) all of the firms should leave the industry. C) a government subsidy is necessary. D) will lead resources to leave the industry (until the losses disappear). E) the economy is in a recession. Answer: D Diff: 2 Type: MC Topic: 16.2. the case for free markets Skill: Applied Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 8) If typical firms in a competitive industry are earning economic profits, the industry A) is in a long-run equilibrium. B) has too many resources allocated to it. C) must be experiencing an increase in monopoly power. D) can be expected to experience the entry of new firms. E) is allocatively efficient. Answer: D Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative

9) Which of the following statements about the price system is most accurate? The price system A) is automatic and functions perfectly in reallocating economic resources. B) is automatic, although it does not function perfectly. C) depends on planned coordination between firms and governments. D) operates only in a laissez-faire economy. E) is the only feasible method of allocating resources. Answer: B Diff: 2 Type: MC Topic: 16.2. the case for free markets Skill: Applied Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 10) Economists describe prices as "signals" in a market economy because A) prices are the only mechanism through which supply and demand will balance. B) changes in these signals bring about changes in economic behaviour. C) changes in these signals bring about changes in market structure. D) they tell consumers how to act to keep the market system functioning well. E) they tell government agents how to act to keep the market system functioning well. Answer: B Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Applied Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 11) One part of the "informal defence" of the market system is the argument, made forcefully by the late Milton Friedman, that free markets provide for the A) greatest equality in income distribution. B) decentralization of economic power. C) greatest security for members of society. D) government with the highest tax revenues. E) greatest scope for international trade. Answer: B Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative

12) Profit-motivated product and process innovation is primarily a characteristic of ________ systems. A) market B) centrally planned C) oligopolistic D) socialist E) monopolistic Answer: A Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 13) Which of the following is characteristic of a free-market economy? A) Temporary shortages and surpluses become permanent. B) Economic power is centralized. C) Market failures are automatically corrected. D) Government intervention is essential. E) Profits and losses provide signals to other economic agents. Answer: E Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 14) In a free-market economy that is continually adjusting toward equilibrium, a primary force driving this adjustment is A) opportunity costs. B) diminishing returns. C) the pursuit of allocative efficiency. D) the scarcity of resources. E) the pursuit of profits. Answer: E Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative

15) In a free-market system, a disequilibrium in one market A) provides evidence that the market system does not work. B) shows that government intervention is always necessary to restore the market to equilibrium. C) suggests that no seller or buyer has an incentive to alter his or her behaviour. D) produces forces that eventually bring that market back to equilibrium. E) means that the economy will fall into chaos. Answer: D Diff: 1 Type: MC Topic: 16.2. the case for free markets Skill: Recall Learning Obj.: 16-2 Describe the "informal" defence of free markets. Category: Qualitative 16.3 Market Failures 1) Economists use the term "market failure" to refer to those free-market situations where A) income is not distributed equitably. B) allocatively efficient outcomes are not achieved. C) externalities do not exist in the economy. D) the economy is not in equilibrium. E) government has intervened in the economy. Answer: B Diff: 1 Type: MC Topic: 16.3a. market failure Skill: Recall Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 2) A free-market economy with perfect allocative efficiency does not exist in reality. Why? A) Government intervention in the economy prevents the economic forces that would eventually bring the market to an allocatively efficient outcome. B) The assumption of profit-maximization is not a realistic assumption about the behaviour of firms. C) The assumption of utility maximization is not a realistic assumption about the behaviour of consumers. D) Firms in many industries have some degree of market power and face negatively sloped demand curves, and produce a level of output where P > MC. E) The decentralization of economic power in a free-market economy does not allow for allocative efficiency. Answer: D Diff: 2 Type: MC Topic: 16.3a. market failure Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency.

Category: Qualitative

3) What is meant by the term "market failure"? A) that a small group in society is affected B) that allocative efficiency has not been achieved C) that the market economy is a failure D) that one or more markets are not in equilibrium E) that the free market has failed to achieve desirable social goals Answer: B Diff: 1 Type: MC Topic: 16.3a. market failure Skill: Recall Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 4) The existence of imperfectly competitive firms implies a market failure because A) they do not produce a productively efficient level of output. B) their market power allows them to deceive consumers. C) they lead to a socially undesirable distribution of income. D) there is no way to prevent these firms from abusing their market power. E) those firms will maximize profits by setting price above marginal cost. Answer: E Diff: 2 Type: MC Topic: 16.3a. market failure Skill: Recall Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 5) Government intervention in an effort to promote allocative efficiency in all industries would likely impose a cost in terms of economic growth. One explanation for this is that A) some policies to promote allocative efficiency will lead to increased income inequality. B) some policies to promote allocative efficiency will lead to decreased income inequality. C) correcting externalities inevitably reduces the economy's growth rate. D) firms in perfectly competitive industries that are already allocatively efficient would also be affected by the intervention and become inefficient. E) much of the innovation and productivity growth that leads to economic growth comes from oligopolistic firms. Answer: E Diff: 3 Type: MC Topic: 16.3a. market failure Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative

6) Which of the following phenomena is NOT an example of market failure? A) moral hazard B) a positive externality C) asymmetric information D) diminishing marginal returns E) public goods Answer: D Diff: 1 Type: MC Topic: 16.3a. market failure Skill: Recall Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 7) Government intervention in a particular industry is unnecessary if each of the industry's firms is operating where A) there are no positive externalities. B) there are no negative externalities. C) price is equal to private marginal cost. D) marginal social benefit is equal to marginal social cost. E) the demand curve is perfectly elastic. Answer: D Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 8) The problem with externalities is essentially one of A) a discrepancy between private and social costs. B) asymmetric information. C) the inability of a firm in an industry characterized by increasing returns to scale to make positive profits if it sets price equal to marginal cost. D) a failure of the market to generate socially valued outcomes. E) the failure of the market to solve social problems. Answer: A Diff: 1 Type: MC Topic: 16.3b. externalities Skill: Recall Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative

9) A plausible example of market failure due to an externality is A) the cost of building new highways outside of major cities. B) the despoiling of rivers and lakes by nitrogen run-off from agricultural fertilizers. C) the high salaries enjoyed by professional athletes. D) the line-ups at the theatre when a good movie is playing. E) a farmer with an apple orchard who also keeps bees. Answer: B Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 10) A homeowner decides to buy three large dogs that sleep outdoors and howl at the moon. An externality associated with this decision is A) the increased work for the homeowner in yard cleanup. B) the cost of purchasing the dogs. C) the neighbours' lost sleep. D) the homeowner's lost sleep. E) the veterinary costs of keeping the dogs healthy. Answer: C Diff: 1 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 11) Consider an industry producing good X. The quantity of good X produced in a competitive free market will be greater than the socially optimal level if A) the production of good X generates a positive externality. B) the consumption of good X generates a positive externality. C) the production of good X generates a negative externality. D) the government has imposed a tax on the production of good X. E) good X is a public good. Answer: C Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Recall Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative

12) Consider an industry producing good X. The quantity of good X produced in a competitive free market will be less than the socially optimal level if A) the consumption of good X generates a negative externality. B) the consumption of good X generates a positive externality. C) the production of good X generates a negative externality. D) the government is subsidizing the production of good X. E) good X has negative third party effects associated with its consumption. Answer: B Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Recall Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative

13)

FIGURE 16-1 Refer to Figure 16-1. Suppose a perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC1 and MB0, respectively, then there exists A) an external benefit, but no external cost. B) an external cost, but no external benefit. C) an external cost and an external benefit. D) no externalities at all. Answer: B Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

14)

FIGURE 16-1 Refer to Figure 16-1. Suppose a perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC0 and MB0, respectively, then there exists A) a negative external benefit. B) a negative external cost. C) a positive external benefit. D) a positive external cost. E) no externality whatsoever. Answer: E Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

15)

FIGURE 16-1 Refer to Figure 16-1. Suppose a perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC0 and MB1, respectively, then there exists A) an external benefit. B) an external cost. C) an external benefit and an external cost. D) a social cost that exceeds the private cost. E) no external benefits or costs. Answer: A Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

16)

FIGURE 16-1 Refer to Figure 16-1. Suppose a perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC0 and MB0, respectively, then A) the competitive price is too high. B) the competitive price is too low. C) the competitive quantity is too high. D) the competitive quantity is too low. E) the competitive price and quantity are consistent with allocative efficiency. Answer: E Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

17)

FIGURE 16-1 Refer to Figure 16-1. Suppose a perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC2 and MB0, respectively, then the competitive equilibrium quantity is A) too low for allocative efficiency. B) too high for allocative efficiency. C) consistent with allocative efficiency. D) not enough information to determine allocative efficiency. Answer: A Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

18)

FIGURE 16-1 Refer to Figure 16-1. Suppose a perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC0 and MB1, respectively, then the competitive equilibrium quantity is A) too low for allocative efficiency. B) too high for allocative efficiency. C) consistent with allocative efficiency. D) not enough information to determine allocative efficiency. Answer: A Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

19)

FIGURE 16-1 Refer to Figure 16-1. Suppose a perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC1 and MB0, respectively, then the competitive equilibrium quantity is A) too low for allocative efficiency. B) too high for allocative efficiency. C) consistent with allocative efficiency. D) not enough information to determine allocative efficiency. Answer: B Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

20) Suppose a production process confers benefits to third parties not involved in the transaction. In this case, A) a per unit tax could be imposed on the producer to achieve the socially optimal level of production. B) marginal social benefit is less than marginal private benefit. C) marginal social cost is more than marginal private cost. D) without government intervention the market will produce too much of this good. E) a subsidy to producers could increase production to the socially optimal level. Answer: E Diff: 3 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 21) If a firm produces a good and the consumption of that good generates external benefits, then at the competitive market equilibrium, A) the government could subsidize the production of this good to improve efficiency. B) the marginal private benefit is greater than the marginal cost of producing the last unit. C) the output would be more than the socially optimal amount. D) the firm will not produce an additional amount if it can internalize the external benefits. E) the marginal social benefit is less than the marginal cost of producing the last unit. Answer: A Diff: 3 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative

22) The diagram below shows demand and supply curves for some perfectly competitive market.

FIGURE 16-2 Refer to Figure 16-2. Suppose the marginal benefit curve (MB) includes all social benefits and there are no externalities in production. In this case, ________ for allocative efficiency. A) P1 and Q1 are appropriate B) the price P1 is appropriate but the quantity Q1 is too low C) the price P1 is appropriate but the quantity Q1 is too high D) the price P1 is too low but the quantity Q1 is appropriate E) the price P1 is too high but the quantity Q1 is appropriate Answer: A Diff: 1 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

23) The diagram below shows demand and supply curves for some perfectly competitive market.

FIGURE 16-2 Refer to Figure 16-2. Suppose the marginal benefit curve (MB) includes all social benefits and there is a negative externality in production. In this case, ________ for allocative efficiency. A) P1 and Q1 are appropriate B) the price P1 is appropriate but the quantity Q1 is too low C) the price P1 is appropriate but the quantity Q1 is too high D) the price P1 is too low and the quantity Q1 is too high E) the price P1 is too high and the quantity Q1 is too low Answer: D Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

24) Consider a product (say, tulip bulbs) that generates positive externalities when it is consumed (other people enjoy looking at the tulips). In this case, A) the government could tax the production of this good to improve efficiency. B) at market equilibrium, the marginal social benefit is less than the marginal cost of producing the last unit. C) at the market equilibrium, the output would be greater than the socially optimal amount. D) too few tulips will be produced and consumed unless external benefits are internalized. E) at the market equilibrium, the price is too high to be allocatively efficient. Answer: D Diff: 3 Type: MC Topic: 16.3b. externalities Skill: Recall Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 25) If a homeowner uses wood to heat his house, A) he may generate an external cost if the smoke bothers his neighbours. B) the price of the wood represents an external cost to the homeowner. C) the price of the wood represents an external cost to the homeowner, unless he harvests the wood himself. D) he may generate an external benefit if the smoke bothers his neighbours. E) he may generate an external benefit if the price of heating oil goes down in his region. Answer: A Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative 26) A flu vaccine has an associated ________ externality. In the absence of government intervention, the quantity of flu vaccines purchased will be ________ the socially optimal quantity. A) positive; the same as B) negative; the same as C) negative; less than D) positive; less than E) positive; more than Answer: D Diff: 2 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Category: Qualitative

27) The diagram below shows the supply and demand diagrams for the competitive market for honey in one region. MC0 represents private marginal cost and MB0 represents private marginal benefit.

FIGURE 16-3 Refer to Figure 16-3. Assume there are two types of firms in this region—beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. In the absence of any government intervention, the equilibrium price and quantity in the honey market are A) $5 and 60 kg. B) $5 and 100 kg. C) $7 and 80 kg. D) $9 and 60 kg. E) $11 and 80 kg. Answer: C Diff: 1 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Quantitative

28) The diagram below shows the supply and demand diagrams for the competitive market for honey in one region. MC0 represents private marginal cost and MB0 represents private marginal benefit.

FIGURE 16-3 Refer to Figure 16-3. Assume there are two types of firms in this region—beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. We can say that there is a ________ externality in the production of honey. The curve ________ represents the ________ marginal benefit of honey. A) positive; MB1; social B) negative; MB1; private C) negative; MB2; social D) positive; MB2; social E) positive; MB2; private Answer: D Diff: 3 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Qualitative

29) The diagram below shows the supply and demand diagrams for the competitive market for honey in one region. MC0 represents private marginal cost and MB0 represents private marginal benefit.

FIGURE 16-3 Refer to Figure 16-3. Assume there are two types of firms in this region—beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. If the government subsidizes the beekeepers so as to fully internalize the externality, the equilibrium price of honey would be ________ and the allocatively efficient output would be ________. A) 3; 80 B) 5; 100 C) 7; 100 D) 9; 60 E) 11; 80 Answer: B Diff: 3 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Quantitative

30) The diagram below shows the supply and demand diagrams for the competitive market for honey in one region. MC0 represents private marginal cost and MB0 represents private marginal benefit.

FIGURE 16-3 Refer to Figure 16-3. Assume there are two types of firms in this region—beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. If MB2 represents the social marginal benefit of honey, the external benefit associated with producing one unit of honey is A) $1. B) $2. C) $3. D) $4. E) $5. Answer: D Diff: 3 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Quantitative

31) The diagram below shows the supply and demand diagrams for the competitive market for honey in one region. MC0 represents private marginal cost and MB0 represents private marginal benefit.

FIGURE 16-3 Refer to Figure 16-3. Assume there are two types of firms in this region—beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. If the external marginal benefit is $4 per unit of honey, then what is the allocatively efficient output? A) 40 kg B) 60 kg C) 80 kg D) 100 kg E) 120 kg Answer: D Diff: 3 Type: MC Topic: 16.3b. externalities Skill: Applied Learning Obj.: 16-3 Explain why externalities lead to allocative inefficiency. Graphics: Graph Category: Quantitative

32) Which of the following is an example of a common-property resource? A) a congested toll highway B) a national park with an entrance fee C) privately owned ranch land D) an unregulated sport-fishing river in BC E) privately owned cattle grazing land in Alberta Answer: D Diff: 1 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 33) Which of the following best describes the reason for overfishing in Canadian offshore fisheries? A) Fishing has depleted fish stocks leading to smaller catches. B) The private marginal cost incurred by current fishermen is less than the social marginal cost. C) The private marginal cost incurred by future generations of fishermen is greater than the private marginal cost incurred by current fishermen. D) The Canadian government encourages foreign fishing within the Canadian offshore boundary. E) None of the above can explain overfishing. Answer: B Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 34) Which of the following is an example of a rivalrous good? A) toxic emissions from a factory smokestack B) an empty toll highway C) an uncrowded beach D) a visit to the dentist E) the weather forecast Answer: D Diff: 1 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

35) Consider an ordinary rivalrous good, provided in a competitive market. At the socially optimal level of provision of this good, the marginal A) cost of production of this good is zero. B) cost of production of the last unit of the good is equal to the consumers' marginal willingness to pay. C) sacrifice society needs to make to supply the last unit of the good is more than each consumer's marginal willingness to pay. D) cost of production of the last unit of the good is more than all consumers' combined marginal willingness to pay. E) cost of production of the last unit of the good is equal to all consumers' combined marginal willingness to pay. Answer: B Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 36) Consider a non-rivalrous good, like national defence, provided by the government. At the socially optimal level of provision of this good, the marginal A) cost of production of this good is zero. B) cost of production of the last unit of the good is less than the consumers' marginal willingness to pay. C) sacrifice society needs to make to supply the last unit of the good is equal to each consumer's marginal willingness to pay. D) cost of production of the last unit of the good is more than all consumers' combined marginal willingness to pay. E) marginal cost of production of the last unit of the good is equal to all consumers' combined marginal willingness to pay. Answer: E Diff: 3 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

37) The price charged for access to an uncongested, excludable, non-rivalrous good should be ________ because ________. A) positive; consumers receive a positive marginal benefit from consuming the good B) positive; marginal cost and marginal benefit for this good are both positive C) positive; more than one person can consume this good at the same time D) zero; it is inefficient to exclude people from consuming this good once it has been supplied E) zero; the marginal benefit of the last unit consumed is zero Answer: D Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 38) Which of the following best explains why it is sometimes efficient to charge a positive price for the use of some products such as museums, beaches, and roads? A) Since these products are non-excludable, it is sometimes efficient to charge a positive price. B) Once these products become congested they become rivalrous, marginal cost is positive, and a positive price is then efficient. C) Each person consuming the product has a positive marginal benefit and should therefore pay a positive price. D) Since these products are excludable, marginal cost is always positive, and a positive price is appropriate. E) Since these products are excludable and non-rivalrous, it is always efficient to charge a positive price. Answer: B Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

39) Why might it be economically efficient to offer access to an uncongested art gallery or museum at a price of zero? A) because they are non-rivalrous and non-excludable and therefore should be provided at a price of zero B) because the marginal benefit received by the visitor is zero, and marginal benefits and marginal cost should be equal C) because the marginal cost of providing access to one more visitor is zero, while the visitor has a positive marginal benefit D) because it is good for society if more people visit art galleries and museums E) because they are public goods, which would not be provided by the free market Answer: C Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 40) Economists consider a product such as a university education to be ________, whereas a product such as your local art gallery is generally considered to be ________. A) non-rivalrous and non-excludable; rivalrous and non-excludable B) rivalrous and non-excludable; rivalrous and excludable C) rivalrous and excludable; non-rivalrous and excludable D) rivalrous and excludable; rivalrous and non-excludable E) non-rivalrous and excludable; non-rivalrous and excludable Answer: C Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 41) Common-property fishing grounds are A) often underexploited because non-excludability means there is little investment in the resource. B) always efficiently exploited because fishermen now understand the dangers of overfishing. C) often overexploited because individual fishermen have no incentive to leave fish for the "next" fisherman. D) often overexploited because fishing grounds are rivalrous and excludable. E) often overexploited because fishermen are concerned with preserving fish stocks for future fishermen. Answer: C Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets.

Category: Qualitative 42) Consider a remote village with a limited, freely available water supply and no government intervention in the allocation of water. In this case, each individual has an incentive to use water until their A) private marginal benefit is zero. B) private marginal cost is zero. C) social marginal benefit is maximized. D) social marginal cost is minimized. E) private and social marginal costs are equal. Answer: A Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 43) Consider a remote village with a limited, freely available water supply and no government intervention in the allocation of water. Economic theory predicts that the water will be A) allocated efficiently because users will tend to use the water until marginal cost and marginal benefit are both equal to zero. B) overexploited because users will tend to use the water until the marginal cost of providing the water is zero. C) allocated efficiently because users will tend to use the water until the supply and demand are in equilibrium. D) overexploited because users will tend to use the water until their marginal benefit is zero. E) allocated efficiently because users will tend to use the water as though it were a public good. Answer: D Diff: 3 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 44) Consider a remote village with a limited, freely available water supply and no government intervention in the allocation of water. In economics, the resulting outcome of a situation such as this is often referred to as A) the Coase theorem. B) the tragedy of the commons. C) moral hazard. D) adverse selection. E) asymmetric information. Answer: B

Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 45) Which of the following are characteristics of a common-property resource? A) rivalrous and excludable B) non-rivalrous and non-excludable C) non-rivalrous and excludable D) rivalrous and non-excludable Answer: D Diff: 1 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 46) If you consume some good, and by doing so you diminish other people's possible use of that good, we say that the good is A) rivalrous. B) excludable. C) a common resource. D) not productively efficient. E) a public good. Answer: A Diff: 2 Type: MC Topic: 16.3c. rivalry and excludability of goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 47) In economics, the term "public good" refers to a product A) that only private producers will provide. B) which consumers cannot be excluded from using. C) that is produced by a publicly owned corporation. D) that is widely advertised. E) that has a very low marginal cost of production. Answer: B Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

48) A public good is ________. A) one that is produced by the government B) excludable but non-rivalrous C) non-excludable and non-rivalrous D) rivalrous but non-excludable E) excludable and rivalrous Answer: C Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 49) A good example of a product that is both non-excludable and non-rivalrous is A) grazing land. B) public information. C) electricity. D) food. E) natural gas. Answer: B Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 50) How might a government intervene in a market to prevent the overuse of a commonproperty resource, such as an ocean fishery? A) subsidies to the consumers of fish B) reducing the marginal social cost such that marginal social cost equals marginal social benefit, thereby establishing allocative efficiency C) subsidies to the firms catching the fish D) a system of licences and quotas for fishers E) encouraging the use of larger, more efficient trawlers to reduce the marginal private cost to fishers Answer: D Diff: 2 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

51) Under what circumstances would it be efficient to charge a positive price for drivers to cross the Champlain Bridge in Montreal or the Lion's Gate Bridge in Vancouver? A) when it is possible to exclude drivers from the bridge B) when it is not possible to exclude drivers from the bridge C) when the sum of marginal benefits to all drivers is positive D) when the marginal private benefit to the last driver is greater than the marginal private cost to that driver E) when congestion on the bridge means that the marginal cost of providing access to one more driver is positive Answer: E Diff: 2 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 52) Why are goods that are non-rivalrous and excludable (such as an uncrowded library or art gallery) often provided by the government? A) Because when these goods are used beyond capacity, they would not be provided by private firms. B) The marginal cost to society of providing access to one more user is zero, so it is allocatively efficient to provide this good at a price of zero. C) Because the government can provide these goods with fewer resources, it is productively efficient. D) The marginal private benefit to the last user is greater than the marginal private cost. E) The marginal benefit to society of providing access to one more user is zero, so it is allocatively efficient to provide this good at a price of zero. Answer: B Diff: 2 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 53) Which of the following statements about public goods is true? A) They cannot be publicly provided. B) They are unlikely to be provided by private, profit-seeking firms. C) They are essentially negative externalities. D) They respond to market signals. E) The firms producing them must be listed on a public stock exchange. Answer: B Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

54) Which of the following is the best example of a public good? A) a municipal swimming pool B) a seat on an airplane flight C) light from a lighthouse D) a school bus E) a publicly owned subway system Answer: C Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 55) Which of the following is the best example of a public good? A) apples on a tree in a public park B) insurance C) street lighting D) air travel E) municipal transit service Answer: C Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 56) One reason that national defence is a classic example of a public good is that A) all citizens want national defence. B) society deems it to be too important to be provided by the private sector. C) the benefits of national defence cannot be kept from those who do not pay. D) military technology is too expensive for private firms to provide. E) it would be immoral for private firms to provide this essential commodity. Answer: C Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

57) One reason that national defence is a classic example of a public good is that A) all citizens want national defence. B) society deems it to be too important to be provided by the private sector. C) the benefits that accrue to one person do not diminish the benefits available to others. D) military technology is too expensive for private firms to provide. E) it would be immoral for private firms to provide this essential commodity. Answer: C Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 58) An efficient amount of a public good is unlikely to be produced in a free market because A) there is no way to prevent a person who is not willing to pay for the good from receiving benefits from the good. B) of the high cost of producing the public good. C) social benefits exceed social costs. D) of the existence of moral hazard. E) of the existence of adverse selection. Answer: A Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 59) Private markets will always provide too few public goods. Why? A) Because the private marginal cost of such goods is less than the social marginal cost. B) Because it is unlawful for private firms to provide public goods. C) Because of the negative externalities associated with these goods. D) Because private markets will never provide goods at a price of zero, which is the efficient price. E) Because private markets will never provide goods that they know the government could provide. Answer: D Diff: 2 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

60) An efficient level of provision of a public good is achieved when A) the cost of providing an extra unit of the good is equal to the valuation of each consumer of the extra unit. B) the cost of providing an extra unit of the good is equal to the sum of the valuations of all consumers for that unit. C) the cost of providing an extra unit of the good is equal to the price of the good. D) the valuation of each consumer for the last unit of the good produced is zero. E) voters are satisfied that an adequate amount of the good is being produced. Answer: B Diff: 2 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 61) The fact that it is difficult to prevent people from using public goods once they are produced, even if they have not paid, is known as A) the easy-rider problem. B) the over-consumption problem. C) moral hazard. D) the free-rider problem. E) adverse selection. Answer: D Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 62) Consider a childhood vaccination program that is fully effective if all children are vaccinated. Now suppose that all children except one are vaccinated — and as a result that one child will not contract the disease. In economics, we can compare this situation to A) moral hazard. B) adverse selection. C) the free-rider problem. D) asymmetric information. E) common property problem. Answer: C Diff: 3 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

63) Which of the following is the best description of a "free rider"? Someone who A) pays for a good but does not receive any benefit from the good. B) receives the benefit of a good without having to pay for it. C) does not produce any goods but is able to consume them. D) consumes a good until the marginal benefit received from the last unit is zero. E) consumes a good until the marginal benefit received from the last unit is equal to the marginal cost of producing the good. Answer: B Diff: 2 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 64) Which of the following will occur as a result of the free-rider problem? A) The private market will generally produce the efficient amount of a public good. B) Too many people will over-consume a public good. C) Government will not be able to produce an efficient amount of a public good. D) Private markets will tend not to produce a public good. E) Consumers will need to pay a government user fee to pay for the good's production. Answer: D Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative 65) Why is it inefficient for the government to charge a price for consuming public health information? A) Too much of the information will be produced. B) The price cannot be set to cover all research costs. C) No one will be willing to pay to use this information. D) The cost of providing this information to an additional person is essentially zero. E) The marginal costs of producing the information exceed the marginal benefits of using it. Answer: D Diff: 1 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

66) The efficient price to charge consumers for their use of a public good is A) equal to the average per-person cost of providing this good. B) equal to the cost of providing the good to one additional consumer. C) equal to the highest individual marginal benefit from consuming a unit of the good. D) that price that prevents free riding by some consumers. E) equal to the price that the free market would achieve. Answer: B Diff: 3 Type: MC Topic: 16.3d. public goods Skill: Recall Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Category: Qualitative

67) The diagram below shows the marginal benefit of consuming, and marginal cost of providing, a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.

FIGURE 16-4 Refer to Figure 16-4. What is the optimal quantity of this public good to provide? A) Q B) Q1 C) Q2 D) Q3 E) Q4 Answer: E Diff: 2 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Graphics: Graph Category: Qualitative

68) The diagram below shows the marginal benefit of consuming, and marginal cost of providing, a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.

FIGURE 16-4 Refer to Figure 16-4. The curve MBABC is derived by A) a vertical summation of the marginal benefits of all individuals at each level of output. B) observation of the consumption of public goods at a price of zero. C) observation of the consumption of public goods at the optimal price. D) a horizontal summation of the marginal benefits of all individuals at each given price level. E) determining the private marginal cost of the public good. Answer: A Diff: 2 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Graphics: Graph Category: Qualitative

69) The diagram below shows the marginal benefit of consuming, and marginal cost of providing, a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.

FIGURE 16-4 Refer to Figure 16-4. Suppose the optimal amount of this good is provided, but that Individual B was only consuming Q2 units of the good. What would be the marginal cost of Individual B consuming an extra unit of this good? A) P2 B) P4 C) P4-P2 D) MB E) zero Answer: E Diff: 3 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Graphics: Graph Category: Qualitative

70) The diagram below shows the marginal benefit of consuming, and marginal cost of providing, a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.

FIGURE 16-4 Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If the government was able to require consumers to pay a price of P 4, then A) the market would clear, although not enough would be produced. B) the inefficient quantity would be being produced. C) the appropriate price would be achieved, although not enough would be consumed. D) consumers would not use the public good at all, and this would be socially optimal. E) consumers would use too little of the public good, and this would be inefficient for society. Answer: E Diff: 3 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Graphics: Graph Category: Qualitative

71) The diagram below shows the marginal benefit of consuming, and marginal cost of providing, a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.

FIGURE 16-4 Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If the government was able to require consumers to pay a price of P 1, then A) the market would clear, although not enough would be produced. B) an inefficient quantity would be being produced. C) consumers would use too little of the public good, and the outcome would be inefficient for society. D) consumers would not use the public good at all, and this would be socially optimal. E) the appropriate price would be achieved, although not enough would be consumed. Answer: C Diff: 3 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Graphics: Graph Category: Qualitative

72) The diagram below shows the marginal benefit of consuming, and marginal cost of providing, a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.

FIGURE 16-4 Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If consumers were then required to pay a price of zero for the good, A) the market would clear, although not enough would be produced. B) the inefficient quantity would be being produced. C) consumers would use too little of the public good, and the outcome would be inefficient for society. D) consumers would use the public good until their marginal benefit was zero, and this would be socially optimal. E) the appropriate price would be achieved, although not enough would be consumed. Answer: D Diff: 3 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Graphics: Graph Category: Qualitative

73) The diagram below shows the marginal benefit of consuming, and marginal cost of providing, a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.

FIGURE 16-4 Refer to Figure 16-4. Once some quantity of this public good is provided, the efficient price to charge for its use is A) approximately zero. B) P1. C) P2. D) P3. E) P4. Answer: A Diff: 3 Type: MC Topic: 16.3d. public goods Skill: Applied Learning Obj.: 16-4 Explain why public goods are underprovided by private markets. Graphics: Graph Category: Qualitative

74) Moral hazard is said to exist when one party to a transaction A) is not able to take advantage of the other party. B) has the incentive to, and is able to, shift costs to another party in the transaction. C) is subject to a hostile corporate takeover. D) purchases insurance because they know they are involved in risky activities. E) has no morals. Answer: B Diff: 2 Type: MC Topic: 16.3e. adverse selection and moral hazard Skill: Recall Learning Obj.: 16-5 Describe how information asymmetries can lead to market failures. Category: Qualitative 75) Why does moral hazard often arise in the case of insurance? Because A) people generally underestimate the amount of insurance coverage needed. B) insured people will not take sufficient care to reduce risks because the private benefit of reducing risks exceeds the private cost of reducing risks. C) insured people will not take sufficient care to reduce risks because the private cost of reducing risks exceeds the private benefit of reducing risks. D) insurance companies have no incentive to investigate fraudulent claims. E) people who are in the most need of insurance have the most trouble obtaining insurance coverage. Answer: C Diff: 3 Type: MC Topic: 16.3e. adverse selection and moral hazard Skill: Recall Learning Obj.: 16-5 Describe how information asymmetries can lead to market failures. Category: Qualitative 76) The concept of moral hazard was publicly discussed in the context of the 2007-2008 financial crisis because A) it was claimed that moral hazard was necessary to prevent large U.S. financial institutions from going bankrupt. B) it was argued that the U.S. government should invoke moral hazard to sustain the financial sector. C) it was feared that government bailouts of financial institutions would encourage the institutions to continue their risky behaviour. D) it was feared that government bailouts of financial institutions would reduce competition in financial markets. E) it was feared that the U.S. government was taking advantage of its special knowledge in the financial markets. Answer: C Diff: 3 Type: MC Topic: 16.3e. adverse selection and moral hazard Skill: Applied Learning Obj.: 16-5 Describe how information asymmetries can lead to market failures.

Category: Qualitative 77) Which of the following describes a situation where adverse selection exists? When an individual A) is not able to take advantage of another individual. B) has the incentive to, and is able to, shift costs to another individual. C) selects a product which has adverse externalities. D) purchases a lot of insurance because he/she knows that he/she is at high risk. E) is averse to certain products. Answer: D Diff: 2 Type: MC Topic: 16.3e. adverse selection and moral hazard Skill: Recall Learning Obj.: 16-5 Describe how information asymmetries can lead to market failures. Category: Qualitative 78) Which of the following is the best example of adverse selection? A) asking a private pilot about the safety of his plane B) asking a doctor if you are sick C) purchasing more dental insurance when you know your teeth are especially bad D) asking your lawyer if you should sue your doctor for malpractice E) purchasing the required homeowner's insurance when you buy a condo Answer: C Diff: 1 Type: MC Topic: 16.3e. adverse selection and moral hazard Skill: Applied Learning Obj.: 16-5 Describe how information asymmetries can lead to market failures. Category: Qualitative 79) Suppose an advertising firm purchases additional insurance against theft, and as a result, the partners are not very careful about locking their office doors when they leave. This is an example of A) the free-rider problem. B) adverse selection. C) a public good. D) a common property resource. E) moral hazard. Answer: E Diff: 2 Type: MC Topic: 16.3e. adverse selection and moral hazard Skill: Applied Learning Obj.: 16-5 Describe how information asymmetries can lead to market failures. Category: Qualitative

80) Export Development Canada (EDC) provides insurance to Canadian exporters for their accounts receivable from foreign buyers. If EDC charges an insurance premium that reflects the average level of risk of the exporting firms, it is only the most risky firms that will tend to purchase insurance. This is an example of A) the free-rider problem. B) adverse selection. C) a public good. D) a common property resource. E) moral hazard. Answer: B Diff: 2 Type: MC Topic: 16.3e. adverse selection and moral hazard Skill: Applied Learning Obj.: 16-5 Describe how information asymmetries can lead to market failures. Category: Qualitative 81) Which of the following proposals could be an example of an effort to correct for an adverse selection problem? A) The government imposes a tax on factory-emissions of a toxic substance. B) The government subsidizes the consumption of fitness activities. C) An employer requires all employees to submit to drug testing. D) The government subsidizes the development of eco-friendly production methods. E) An employer that requires all employees to purchase the employer-sponsored dental insurance program. Answer: E Diff: 2 Type: MC Topic: 16.3e. adverse selection and moral hazard Skill: Applied Learning Obj.: 16-5 Describe how information asymmetries can lead to market failures. Category: Qualitative 16.4 Broader Social Goals 1) Services such as those within the justice system are usually provided by the government. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) regulation of an imperfectly competitive economic activity Answer: B Diff: 1 Type: MC Topic: 16.4. social goals of government Skill: Applied Learning Obj.: 16-6 Understand why free markets may not achieve some desirable social goals.

Category: Qualitative 2) Governments usually provide a system of unemployment insurance. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) regulation of an imperfectly competitive economic activity Answer: A Diff: 1 Type: MC Topic: 16.4. social goals of government Skill: Applied Learning Obj.: 16-6 Understand why free markets may not achieve some desirable social goals. Category: Qualitative 3) The Canadian government operates a progressive personal income-tax system. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) regulation of an imperfectly competitive economic activity Answer: A Diff: 1 Type: MC Topic: 16.4. social goals of government Skill: Applied Learning Obj.: 16-6 Understand why free markets may not achieve some desirable social goals. Category: Qualitative 4) All Canadian provincial governments have legislated minimum wages. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) regulation of an imperfectly competitive economic activity Answer: A Diff: 1 Type: MC Topic: 16.4. social goals of government Skill: Applied Learning Obj.: 16-6 Understand why free markets may not achieve some desirable social goals. Category: Qualitative

5) The government has seatbelt and airbag requirements in cars, and laws requiring individual drivers to use them. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) regulation of an imperfectly competitive economic activity Answer: C Diff: 1 Type: MC Topic: 16.4. social goals of government Skill: Applied Learning Obj.: 16-6 Understand why free markets may not achieve some desirable social goals. Category: Qualitative 6) In the context of government intervention in the economy, an example of paternalism is A) taxation law. B) regulation to reduce pollution. C) economic regulation of monopolies. D) the provision of public goods. E) laws requiring the use of bicycle helmets. Answer: E Diff: 1 Type: MC Topic: 16.4. social goals of government Skill: Applied Learning Obj.: 16-6 Understand why free markets may not achieve some desirable social goals. Category: Qualitative 7) The government prohibits individuals from paying someone else to replace them when they are selected to perform jury duty. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) regulation of an imperfectly competitive economic activity Answer: D Diff: 1 Type: MC Topic: 16.4. social goals of government Skill: Applied Learning Obj.: 16-6 Understand why free markets may not achieve some desirable social goals. Category: Qualitative

16.5 Government Intervention 1) The construction of the TransCanada highway is an example of government intervention through A) public provision. B) redistribution. C) regulation. D) restructuring of economic incentives. E) subsidization. Answer: A Diff: 1 Type: MC Topic: 16.5. government intervention Skill: Applied Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative 2) Providing subsidies to for-profit firms that offer day-care services represents government intervention through A) public provision. B) the influencing of economic incentives. C) regulation. D) merit-goods allowances. E) progressive taxation. Answer: B Diff: 1 Type: MC Topic: 16.5. government intervention Skill: Applied Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative 3) Provincial laws that mandate a minimum drinking age for alcohol are an example of government intervention through A) public provision and price control. B) redistribution and reorganization. C) regulation. D) communism. E) merit-goods control. Answer: C Diff: 1 Type: MC Topic: 16.5. government intervention Skill: Applied Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative

4) Which of the following statements concerning cost-benefit analysis is true? A) Large potential benefits, regardless of their time horizon, always justify government intervention. B) Large potential costs, regardless of their time horizon, always preclude government intervention. C) Though benefits from a government policy can be accurately measured, costs are usually impossible to quantify. D) Cost-benefit analysis can be used effectively by private firms but should not be used in the public sector. E) Though it is often difficult to estimate costs and benefits with precision, cost-benefit analysis can be useful in determining whether to implement a given government policy. Answer: E Diff: 2 Type: MC Topic: 16.5. government intervention Skill: Recall Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative 5) Which of the following is considered a direct resource cost of government intervention? A) the increased costs of production arising from compliance with regulations B) the loss of productivity in the private sector due to government intervention C) opportunity costs of forgone investment D) the salaries of government regulators E) rent seeking Answer: D Diff: 1 Type: MC Topic: 16.5. government intervention Skill: Recall Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative

6) The total costs of government intervention in the market economy include 1. compliance costs; 2. the costs of rent seeking; 3. extra costs from regulation. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 3 only E) 1, 2, and 3 Answer: E Diff: 1 Type: MC Topic: 16.5. government intervention Skill: Recall Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative 7) Which of the following is the best example of a direct cost of government intervention? A) the production cost of meeting new emission standards on new cars B) the regulatory affairs departments of many Canadian corporations C) the time spent by Canadians completing their income-tax forms D) the government's administrative costs of conducting the Census E) costs of complying with provincial sales taxes Answer: D Diff: 2 Type: MC Topic: 16.5. government intervention Skill: Recall Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative 8) Where does the issue of "rent-seeking" present a problem? A) in pure free-market economies B) in centrally planned economies C) in all economies, given the existence of government D) in private organizations in which ownership is not identical to management E) in the rental market between landlords and tenants Answer: C Diff: 1 Type: MC Topic: 16.5. government intervention Skill: Recall Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative

9) Attempts by professional lobbyists in Ottawa to influence the government's subsidy to the shipbuilding industry, for example, even when such a subsidy is not in the national interest, represents A) an inefficient public choice. B) the government acting like a monopolist. C) rent seeking. D) an externality. E) asymmetric information. Answer: C Diff: 2 Type: MC Topic: 16.5. government intervention Skill: Applied Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative 10) Which of the following is the best example of "rent seeking"? A) The government imposes a pollution tax on firms to eliminate a negative externality. B) A municipal government chooses the lowest bid for construction of a new water system. C) Owners of aerospace firms receive government subsidies to make the firms more competitive in world markets. D) Costly renovations are made to the roof of the Parliament Buildings in Ottawa. E) Taxpayer funds are used for snow removal on public streets. Answer: C Diff: 2 Type: MC Topic: 16.5. government intervention Skill: Applied Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative 11) Most economists who study "public choice theory" now agree that an important possible source of "government failure" is A) that it is not possible for civil servants to determine the allocatively efficient provision of government services. B) that most civil servants are incompetent. C) that politicians and civil servants have their own objectives that may conflict with the national interest. D) governments govern undemocratically. E) politicians are incompetent or corrupt. Answer: C Diff: 1 Type: MC Topic: 16.5. government intervention Skill: Recall Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and

some of the important causes of government failure. Category: Qualitative 12) Economists generally agree that government intervention in the economy is appropriate A) whenever there is a market failure. B) whenever the costs of market failure are greater than the benefits of the existence of markets. C) whenever the benefits of the correction of the market failure through intervention are greater than the costs of the intervention itself. D) only when the market fails to provide a socially useful good. E) whenever the costs of the intervention are greater than the value of the correction of the market failure. Answer: C Diff: 2 Type: MC Topic: 16.5. government intervention Skill: Applied Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative 13) Governments continue to provide public support to some farmers, even in the absence of market failures. Choose the best explanation for this practice according to public choice theory. A) The marginal social cost of providing support is equal to the marginal social benefit. B) Government support goes to consumers in the form of price controls, which balances the support given to farmers. C) All consumers are willing to pay higher prices in order to provide financial support to some farmers. D) Vote-maximizing governments are not rational in their response to powerful lobbying. E) The benefits of the support are concentrated among a small and vocal group of farmers and the costs are widely dispersed among millions of consumers. Answer: E Diff: 2 Type: MC Topic: 16.5. government intervention Skill: Applied Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative

14) The main point about public choice theory is that A) most politicians are corrupt. B) most civil servants act solely in the public interest. C) there is adverse selection in the selection of elected officials. D) elected officials never compromise the public interest in order to gain votes. E) the choices of public officials may be influenced more by their own self-interest than the public interest. Answer: E Diff: 1 Type: MC Topic: 16.5. government intervention Skill: Recall Learning Obj.: 16-7 Identify the direct and indirect costs of government intervention, and some of the important causes of government failure. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 17 The Economics of Environmental Protection 17.1 The Economic Rationale for Reducing Pollution 1) Which of the following best describes how economists generally view pollution? A) as an economic "bad" that must be eliminated entirely B) as a negative economy C) as a negative externality D) as a positive externality E) as a non-excludable good Answer: C Diff: 1 Type: MC Topic: 17.1a. pollution as an externality Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 2) When firms in an industry have fully internalized a production externality, A) they produce at less than the optimal level of output. B) they produce at more than the optimal level of output. C) it is not possible to achieve allocative efficiency. D) the marginal social cost is zero. E) they bear the entire social marginal cost of production. Answer: E Diff: 1 Type: MC Topic: 17.1a. pollution as an externality Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative

3) If pollution is associated with the production of some good, then A) the marginal social cost is less than the marginal social benefit. B) the price of the good is equal to firms' marginal private cost. C) marginal social cost minus marginal private cost is negative. D) marginal social cost minus marginal private cost is positive. E) too little of the good is being produced by the firm. Answer: D Diff: 2 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 4) The figure below shows the marginal benefit to consumers, MB, the marginal cost to private firms, MCP, and the marginal cost to society, MCS, at each level of output of some good.

FIGURE 17-1 Refer to Figure 17-1. How is a negative externality depicted in this diagram? A) Marginal social cost is greater than the marginal social benefit. B) Marginal social cost is greater than the marginal private cost. C) Marginal social benefit to consumers is diminishing with greater output. D) Optimal level of output occurs where marginal private cost is positive. E) Optimal level of output occurs where marginal private benefit is positive. Answer: B

Diff: 2 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

5) The figure below shows the marginal benefit to consumers, MB, the marginal cost to private firms, MCP, and the marginal cost to society, MCS, at each level of output of some good.

FIGURE 17-1 Refer to Figure 17-1. How is a negative externality depicted in this diagram?Refer to Figure 17-1. The price that would occur in a competitive market in the absence of government intervention is A) P1. B) P2. C) P3. D) P4. E) not possible to know from the information given. Answer: B Diff: 1 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

6) The figure below shows the marginal benefit to consumers, MB, the marginal cost to private firms, MCP, and the marginal cost to society, MCS, at each level of output of some good.

FIGURE 17-1 Refer to Figure 17-1. How is a negative externality depicted in this diagram?Refer to Figure 17-1. The equilibrium output that would occur in a competitive market in the absence of government intervention is A) zero. B) Q1. C) Q2. D) Q3. E) none of the above; there is no equilibrium output level. Answer: D Diff: 1 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

7) The figure below shows the marginal benefit to consumers, MB, the marginal cost to private firms, MCP, and the marginal cost to society, MCS, at each level of output of some good.

FIGURE 17-1 Refer to Figure 17-1. How is a negative externality depicted in this diagram?Refer to Figure 17-1. The price that leads consumers to demand the socially optimal quantity of output is A) zero. B) P1. C) P2. D) P3. E) not possible to know from the information given. Answer: D Diff: 1 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

8) The figure below shows the marginal benefit to consumers, MB, the marginal cost to private firms, MCP, and the marginal cost to society, MCS, at each level of output of some good.

FIGURE 17-1 Refer to Figure 17-1. How is a negative externality depicted in this diagram?Refer to Figure 17-1. The socially optimal level of output is A) zero. B) Q1. C) Q2. D) Q3. E) none of the above; there is no optimal output level. Answer: C Diff: 1 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

9) The figure below shows the marginal benefit to consumers, MB, the marginal cost to private firms, MCP, and the marginal cost to society, MCS, at each level of output of some good.

FIGURE 17-1 Refer to Figure 17-1. How is a negative externality depicted in this diagram?Refer to Figure 17-1. What is the marginal external cost at output level ? A) B) C) D) E)

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Answer: D Diff: 2 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

10) When an external cost associated with the production of some good has been internalized, it means that A) the opportunity cost of production is passed on to the consumer. B) the private cost of production is borne by the producer. C) the external costs are incorporated into private decision making. D) the consumer is bearing the net social benefits imposed by the producer. E) the firm is ignoring social costs. Answer: C Diff: 2 Type: MC Topic: 17.1a. pollution as an externality Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 11) Consider the social marginal cost of the production of snowmobiles. We can say that the MCS A) is less than the marginal external cost of production. B) is greater than the sum of the private marginal cost and external cost. C) includes only the cost of the labour input. D) includes the noise pollution imposed on those living near snowmobile trails. E) includes only the opportunity cost of all capital equipment. Answer: D Diff: 2 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 12) Consider a farmer in Manitoba who produces fertilizer run-off that pollutes the local water system. We can say that A) the amount of farm output will not be profitable. B) the amount of farm output produced will not be cost-effective. C) the amount of farm output produced will be less than the efficient level. D) the farm should stop producing agricultural products altogether. E) the amount of farm output produced will exceed the efficient level. Answer: E Diff: 2 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative

13) If the government wants to ensure that producers fully internalize the marginal external cost associated with the pollution they emit, then it is necessary to A) accurately measure that external cost. B) first ensure that firms are operating at their profit-maximizing level of output. C) determine the long-run average cost structure for the firms. D) determine the short-run average cost structure for the firms. E) eliminate all the pollution the firm emits. Answer: A Diff: 2 Type: MC Topic: 17.1a. pollution as an externality Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 14) A paper mill discharges chemicals into a river which pollutes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q MCS= 10 + 2Q MB = 35 - 0.5Q. A competitive free market will produce output of ________ units, and this amount is ________ than the allocatively efficient level of output. A) 5; less B) 10; less C) 15; more D) 20; more E) 25; more Answer: D Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

15) A paper mill discharges chemicals into a river which pollutes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q MCS = 10 + 2Q MB = 35 - 0.5Q The marginal social cost at the competitive free-market equilibrium is A) 5. B) 10. C) 20. D) 25. E) 50. Answer: E Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative 16) A paper mill discharges chemicals into a river which pollutes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q MCS = 10 + 2Q MB = 35 - 0.5Q. The marginal external cost at the competitive free-market equilibrium is A) 5. B) 10. C) 15. D) 20 E) 25. Answer: E Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

17) A paper mill discharges chemicals into a river which pollutes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q MCS = 10 + 2Q MB = 35 - 0.5Q. The allocatively efficient level of output is ________ units. A) 0 B) 10 C) 15 D) 25 E) 30 Answer: B Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative 18) A paper mill discharges chemicals into a river which pollutes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q MCS = 10 + 2Q MB = 35 - 0.5Q. The marginal external cost at the allocatively efficient level of output is A) 0. B) 5. C) 10. D) 15. E) 20. Answer: D Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

19) A paper mill discharges chemicals into a river which pollutes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q MCS = 10 + 2Q MB = 35 - 0.5Q. The marginal external cost is ________ throughout the output range. A) zero B) constant C) increasing D) decreasing E) negative Answer: C Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative 20) Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant. The private marginal cost, social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: MCP = 5 + 2Q MCS = 10 + 3Q MB = 50 - Q A competitive free market will produce ________ units, at a price of ________ per unit. A) 20; $25 B) 20; $40 C) 15; $40 D) 15; $35 E) 10; $35 Answer: D Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

21) Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant. The private marginal cost, social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: MCP = 5 + 2Q MCS = 10 + 3Q MB = 50 - Q The social marginal cost at the competitive equilibrium is ________ per unit. A) $5 B) $13 C) $50 D) $55 E) $25 Answer: D Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative 22) Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant. The private marginal cost, social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: MCP = 5 + 2Q MCS = 10 + 3Q MB = 50 - Q The marginal external cost at the competitive equilibrium is ________ per unit. A) $5 B) $10 C) $15 D) $20 E) $25 Answer: D Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

23) Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant. The private marginal cost, social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: MCP = 5 + 2Q MCS = 10 + 3Q MB = 50 - Q The allocatively efficient level of output is ________ units. A) 0 B) 5 C) 10 D) 15 E) 20 Answer: C Diff: 3 Type: MC Topic: 17.1a. pollution as an externality Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative 24) Economic analysis of the optimal amount of pollution is typically done in terms of the amount of pollution abated, as opposed to the amount of pollution produced. Why? A) Because it is more practical to measure the marginal costs of pollution abated than of pollution produced. B) Because governments and environmental authorities can produce more reliable data on pollution abated than pollution produced, which facilitates the economic analysis. C) Because the abatement of pollution is a "good" to which we can more easily apply the concepts of supply and demand. D) Because there are no marginal benefits of pollution produced, so it is necessary to study pollution abated in order to equate marginal benefits and marginal costs. E) All of the above are correct. Answer: C Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative

25) What is the "marginal cost of pollution abatement"? A) the private cost of producing one additional unit of pollution B) the social cost of producing one additional unit of pollution C) the cost of the last unit of pollution produced D) the cost of reducing pollution by one additional unit E) the external cost of pollution abatement Answer: D Diff: 1 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 26) Which of the following is the best analogy for the marginal cost of pollution abatement curve? A) a demand curve for pollution abatement B) a supply curve for pollution abatement C) the private marginal cost of abatement curve D) the external cost of abatement curve E) the net social cost of abatement curve Answer: B Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 27) Suppose that for all firms in an industry the marginal costs of pollution abatement equal the marginal benefits of pollution abatement. In this situation, A) any further reductions in pollution will lower net social benefits. B) pollution has been entirely eliminated. C) any further reductions in pollution will continue to increase net social benefits. D) firms are likely to increase output. E) firms are likely to decrease output. Answer: A Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative

28) Zero pollution is almost surely NOT a desirable social goal because A) the marginal benefit is equal to zero. B) the marginal cost is equal to zero. C) the totals costs of complete pollution elimination will be far greater than the total benefits. D) the total benefits of complete pollution elimination will be far greater than the total costs. E) society benefits by employing people in the "pollution fighting" industry. Answer: C Diff: 1 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 29) What is demonstrated by the downward slope of a marginal benefit curve for pollution abatement? A) The costs of pollution decrease as further amounts are abated. B) The marginal cost of pollution reduction will always exceed the marginal benefit. C) It is impossible to know the benefits from additional increments of pollution abatement. D) Society views additional increments of pollution abatement as unnecessary. E) There are decreasing incremental benefits to be realized from additional increments of pollution abatement. Answer: E Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 30) What is demonstrated by the positive slope of a marginal cost curve for pollution abatement? A) It is impossible to know the benefits from additional increments of pollution reduction. B) Additional increments of pollution abatement will yield decreasing benefits. C) Society views additional increments of pollution reduction as absolutely necessary. D) The cost of an extra unit of pollution abatement will increase as the total amount of abatement rises. E) The marginal benefit of pollution reduction will increase with additional increments of pollution reduction. Answer: D Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement

Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative

31) The marginal benefit of reducing pollution in some industry may be expected to A) rise as the level of pollution gets closer to zero. B) remain constant for all levels of pollution control. C) exceed the marginal cost of pollution reduction for all positive levels of pollution. D) fall as the amount of pollution abatement undertaken rises. E) be always greater than the marginal cost of pollution reduction. Answer: D Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 32) The optimal amount of pollution abatement is generally less than 100%. In what situation would complete (100%) abatement be optimal? A) The marginal cost of abatement is positive but less than the marginal benefit of abatement. B) The marginal cost of abatement is always zero. C) The marginal cost of abatement exceeds the marginal benefit of abatement at all levels of abatement. D) The marginal benefit of abatement is zero. E) None of the above — we cannot even imagine a situation in which complete abatement would be optimal. Answer: B Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative

33) Suppose a meat packing company dumps waste into a river, causing a firm located downstream that uses the water to incur costs to restore the water quality. A solution to this problem that would improve efficiency might involve: 1) the meat-packing company relocating near a different river; 2) the meat-packing company buying the downstream firm; 3) permitting the downstream firm to impose a fee on the meat-packing company. A) 1 only B) 2 only C) 3 only D) 2 or 3 only E) 1 or 3 only Answer: D Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 34) In general, the economist's view on allocating resources to reduce pollution is that A) all forms of water and air pollution should be eliminated. B) government policies to reduce pollution have zero opportunity cost. C) the reduction of pollution should proceed up to the point where the marginal cost of pollution reduction equals the marginal benefit to society. D) the extent of pollution reduction should be based only on a comparison of total costs and total benefits to the environment. E) it is not allocatively efficient to reduce pollution. Answer: C Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative

35) The socially optimal level of output of any good is the quantity where all marginal costs of production, private plus external, equal the A) marginal cost of production. B) marginal benefit to society. C) average benefit to society. D) total benefit to society. E) marginal benefit to the firm. Answer: B Diff: 1 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 36) Which of the following statements best characterizes the possibility of achieving a state of zero environmental damage? Achieving such a state is A) technologically possible and economically efficient. B) technologically possible but not economically efficient. C) economically efficient but not technologically possible. D) neither technologically possible nor economically efficient. E) necessary if the human race is to survive. Answer: D Diff: 1 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 37) What is the optimal amount of pollution abatement? It is the amount of abatement such that A) the total benefit of reducing pollution is equal to the total cost of reducing pollution. B) the marginal social cost of reducing pollution is just equal to the marginal social benefits from doing so. C) the marginal private cost of reducing pollution is just equal to the profit of the polluting firms. D) there is no remaining pollution. E) None of the above; there is no optimal amount of pollution abatement. Answer: B Diff: 1 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative

38) When considering an entire industry, the marginal benefit of reducing pollution is expected to A) rise as the level of pollution gets closer to zero. B) remain constant for all levels of pollution control. C) exceed the marginal cost of pollution abatement for all positive levels of pollution. D) fall as the amount of pollution abatement rises. E) be always greater than the marginal cost of pollution reduction. Answer: D Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Recall Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative 39) Consider an oil company extracting oil from the Oil Sands in Northern Alberta. The production process generates greenhouse-gas emissions. At the socially optimal level of oil extraction, A) the level of emissions will be zero. B) the marginal cost of the emissions will be equal to the social marginal benefit derived from the extracted oil. C) the marginal cost of the emissions will be more than the social marginal benefit derived from the extracted oil. D) the social marginal cost of the oil extraction will be equal to its social marginal benefit. E) the social marginal cost of the oil extraction will exceed its social marginal benefit. Answer: D Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Qualitative

40) The diagram below shows the private and social marginal costs (MCP and MCS) and the social marginal benefits (MBS) of producing disposable diapers.

FIGURE 17-2 Refer to Figure 17-2. The allocatively efficient level of production and use of disposable diapers is A) Q0, because that is where MCS exceeds MCP. B) Q0, because that is where MCS equals MBS. C) Q1, because that is where MCP equals MBS. D) Q1, because that is where MCS equals MBS. E) Q2, because that is where the externality is internalized. Answer: B Diff: 1 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

41) The diagram below shows the private and social marginal costs (MCP and MCS) and the social marginal benefits (MBS) of producing disposable diapers.

FIGURE 17-2 Refer to Figure 17-2. The net social benefit derived from the production and use of disposable diapers is A) at a minimum at Q0, because MCS exceeds MCP. B) at a maximum at Q0, because that is where MCS equals MBS. C) at a maximum at Q1, because that is where MCS equals MBS. D) zero at Q0, because that is where MCS equals MBS. E) zero at Q2, because that is where the externality is internalized. Answer: B Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

42) The diagram below shows the private and social marginal costs (MCP and MCS) and the social marginal benefits (MBS) of producing disposable diapers.

FIGURE 17-2 Refer to Figure 17-2. The net social benefit derived from the production and use of the last unit of disposable diapers is A) at a minimum at Q0, because MCS exceeds MCP. B) at a maximum at Q0, because that is where MCS equals MBS. C) at a maximum at Q1, because that is where MCS equals MBS. D) zero at Q0, because that is where MCS equals MBS. E) zero at Q2, because that is where the externality is fully maximized. Answer: D Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

43) The figure below shows the demand and supply curves for pollution abatement for a firm.

FIGURE 17-3 Refer to Figure 17-3. The MB curve in this diagram is downward sloping because A) the marginal benefit from a given amount of abatement will be lower, the lower the level of pollution. B) the marginal cost of additional units of pollution abatement is decreasing. C) the marginal damage generated by additional units of pollution is decreasing. D) the marginal benefit from a given amount of abatement will be higher, the higher the level of pollution abated. E) the marginal cost of additional units of pollution abatement increases as pollution abatement increases. Answer: A Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

44) The figure below shows the demand and supply curves for pollution abatement for a firm.

FIGURE 17-3 Refer to Figure 17-3. The MC curve in this diagram is upward sloping because A) the marginal benefit from a given amount of abatement will be lower, the lower the level of pollution. B) the marginal cost of additional units of pollution abatement is decreasing. C) the marginal damage generated by additional units of pollution is decreasing. D) the marginal benefit from a given amount of abatement will be higher, the higher the level of pollution abated. E) the marginal cost of additional units of pollution abatement increases as the total amount of remaining pollution declines. Answer: E Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

45) The figure below shows the demand and supply curves for pollution abatement for a firm.

FIGURE 17-3 Refer to Figure 17-3. On the horizontal axis, the label "Qt (100% abatement)" refers to A) the maximum pollution abatement that is cost effective. B) the maximum pollution abatement attainable at the lowest cost. C) the maximum pollution abatement attainable with given technology. D) zero remaining pollution. E) zero pollution abatement. Answer: D Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

46) The figure below shows the demand and supply curves for pollution abatement for a firm.

FIGURE 17-3 Refer to Figure 17-3. The socially optimal amount of pollution is A) + Qt. B) Qt - . C) . D) Qt. E) 0. Answer: B Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Qualitative

47) The figure below shows the demand and supply curves for pollution abatement for a firm.

FIGURE 17-3 Refer to Figure 17-3. What area on the diagram represents the net total benefit of abating pollution by the optimal amount? A) the area under the MB curve, and above the MC curve, to the left of Q* B) the area above the MB curve, and below the MC curve, to the right of Q* C) the area that is below both the MB and MC curves D) the area that is above both the MB and MC curves E) the total area below the MB curve, to the left of Q* Answer: A Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Graph Category: Quantitative

48) The marginal benefit of reducing pollution and the marginal cost of reducing pollution are given by the following equations: MB = -2 + 18, and MC = 2 + 2, where U is the number of units of pollution abatement. What is the optimal number of units of pollution abatement? A) 0 B) 1 C) 2 D) 3 E) 4 Answer: C Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative 49) The marginal benefit of reducing pollution and the marginal cost of reducing pollution are given by the following equations: MB = -2 + 18, and MC = 2 + 2, where U is the number of units of pollution abatement. What is the number of units of pollution abatement after which there is no further social benefit from reducing pollution? A) 0 B) 1 C) 2 D) 3 E) 4 Answer: D Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

50) The marginal benefit of reducing pollution and the marginal cost of reducing pollution are given by the following equations: MB = -2 + 18, and MC = 2 + 2, where U is the number of units of pollution abatement. What is the net marginal benefit (MB - MC) of abating the first unit of pollution (U = 1)? A) 10 B) 12 C) 14 D) 16 E) 18 Answer: B Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

51) The table below shows the marginal benefit and marginal cost of pollution abatement for an economy. Units of Pollution Abatement 1 2 3 4 5 6 7 8

MB ($) 120 115 105 90 70 45 15 0

MC ($) 5 15 30 50 70 95 125 155

TABLE 17-1 Refer to Table 17-1. Suppose a public authority has the mandate to maximize social welfare by choosing the appropriate amount of pollution abatement. The optimal amount of pollution abatement is ________ units and implies a ________ amount of pollution remaining. A) 8; 0 B) 120; negative C) 5; positive D) 70; positive E) 5; negative Answer: C Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Table Category: Quantitative

52) The table below shows the marginal benefit and marginal cost of pollution abatement for an economy. Units of Pollution Abatement 1 2 3 4 5 6 7 8

MB ($) 120 115 105 90 70 45 15 0

MC ($) 5 15 30 50 70 95 125 155

TABLE 17-1 Refer to Table 17-1. Suppose a public authority has the mandate to maximize social welfare by choosing the appropriate amount of pollution abatement. The marginal cost of reducing pollution by one unit is ________ at a(n) ________ rate. A) increasing; constant B) increasing; decreasing C) increasing; increasing D) decreasing; decreasing E) decreasing; reduced Answer: C Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Table Category: Quantitative

53) The table below shows the marginal benefit and marginal cost of pollution abatement for an economy. Units of Pollution Abatement 1 2 3 4 5 6 7 8

MB ($) 120 115 105 90 70 45 15 0

MC ($) 5 15 30 50 70 95 125 155

TABLE 17-1 Refer to Table 17-1. Suppose a public authority has the mandate to maximize social welfare by choosing the appropriate amount of pollution abatement. The total net benefit from the optimal amount of pollution abatement is A) $0. B) $120. C) $155. D) $275. E) $330. Answer: E Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Table Category: Quantitative

54) The table below shows the marginal benefit and marginal cost of pollution abatement for an economy. Units of Pollution Abatement 1 2 3 4 5 6 7 8

MB ($) 120 115 105 90 70 45 15 0

MC ($) 5 15 30 50 70 95 125 155

TABLE 17-1 Refer to Table 17-1. Suppose a public authority has the mandate to maximize social welfare by choosing the appropriate amount of pollution abatement. Compared to the optimal level of abatement, pollution abatement of 7 units would ________ total social welfare by ________. A) increase; $15 B) increase; $110 C) decrease; $110 D) decrease; $125 E) decrease; $160 Answer: E Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Table Category: Quantitative

55) Suppose a farm that is polluting an underground water supply faces the following marginal costs for abating units of pollution: 1st unit abated, MC = $250 2nd unit abated, MC = $400 3rd unit abated, MC = $650 4th unit abated, MC = $950 The marginal benefit to society from this farm abating units of pollution are as follows: 1st unit abated, MB = $1000 2nd unit abated, MB = $800 3rd unit abated, MB = $650 4th unit abated, MB = $300 What is the socially optimal amount of pollution abatement for this farm? A) 0 units B) 1 units C) 2 units D) 3 units E) 4 units Answer: D Diff: 1 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

56) Suppose a farm that is polluting an underground water supply faces the following marginal costs for abating units of pollution: 1st unit abated, MC = $250 2nd unit abated, MC = $400 3rd unit abated, MC = $650 4th unit abated, MC = $950 The marginal benefit to society from this farm abating units of pollution are as follows: 1st unit abated, MB = $1000 2nd unit abated, MB = $800 3rd unit abated, MB = $650 4th unit abated, MB = $300 What is the total net benefit to society if this farm engages in the socially optimal amount of pollution abatement? A) $0 B) $650 C) $1150 D) $1300 E) $2250 Answer: C Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

57) Suppose a farm that is polluting an underground water supply faces the following marginal costs for abating units of pollution: 1st unit abated, MC = $250 2nd unit abated, MC = $400 3rd unit abated, MC = $650 4th unit abated, MC = $950 The marginal benefit to society from this farm abating units of pollution are as follows: 1st unit abated, MB = $1000 2nd unit abated, MB = $800 3rd unit abated, MB = $650 4th unit abated, MB = $300 If this farm abates 4 units of pollution, what is the net benefit to society of the final unit of pollution abated? A) $0 B) -$650 C) $1150 D) $650 E) -$1150 Answer: B Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

58) Suppose a farm that is polluting an underground water supply faces the following marginal costs for abating units of pollution: 1st unit abated, MC = $250 2nd unit abated, MC = $400 3rd unit abated, MC = $650 4th unit abated, MC = $950 The marginal benefit to society from this farm abating units of pollution are as follows: 1st unit abated, MB = $1000 2nd unit abated, MB = $800 3rd unit abated, MB = $650 4th unit abated, MB = $300 Why would it not be optimal for this farmer to abate four units of pollution? A) because abating the 4th unit adds more to social costs than to social benefits B) because the total net benefit of abating the 4th unit is greater than the total cost C) because the total cost of abating 4 units is greater than the total benefits D) because it is not productively efficient E) because the farmer has no way to charge a price for the units of pollution abated Answer: A Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Category: Quantitative

59) The table below shows the marginal costs and marginal benefits associated with cleaning up a polluted landfill site.

Cleanliness of Land (%) 0 20 40 60 80 100

Marginal Cost ($ millions) 1.25 1.5 2.0 3.0 4.5 20.0

Marginal Benefit ($ millions) 12.0 9.0 7.0 5.5 4.5 4.0

TABLE 17-2 Refer to Table 17-2. Would it be socially optimal to achieve 100% cleanliness of this landfill site? A) Yes, because 100% cleanliness of the land is the only socially optimal outcome. B) No, because the technology for 100% cleanliness is not available. C) No, because the net benefit to society at that level is not maximized. D) Yes, because the net benefit to society at that level is positive. E) Yes, because there is a $4.0 million marginal benefit of achieving 100% cleanliness. Answer: C Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Table Category: Qualitative

60) The table below shows the marginal costs and marginal benefits associated with cleaning up a polluted landfill site.

Cleanliness of Land (%) 0 20 40 60 80 100

Marginal Cost ($ millions) 1.25 1.5 2.0 3.0 4.5 20.0

Marginal Benefit ($ millions) 12.0 9.0 7.0 5.5 4.5 4.0

TABLE 17-2 Refer to Table 17-2. What is the net benefit to society of achieving the 20th percentage point of cleanliness of this land? A) $17.75 million B) $9.0 million C) $18.25 million D) $7.5 million E) -$7.5 million Answer: D Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Table Category: Quantitative

61) The table below shows the marginal costs and marginal benefits associated with cleaning up a polluted landfill site.

Cleanliness of Land (%) 0 20 40 60 80 100

Marginal Cost ($ millions) 1.25 1.5 2.0 3.0 4.5 20.0

Marginal Benefit ($ millions) 12.0 9.0 7.0 5.5 4.5 4.0

TABLE 17-2 Refer to Table 17-2. What is the maximum total net benefit to society that can be attained by cleaning this landfill site? A) $41.25 million B) $25.25 million C) $4.5 million D) $0 E) It is not possible to determine without knowing the precise MB and MC curves. Answer: E Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Table Category: Quantitative

62) The table below shows the marginal costs and marginal benefits associated with cleaning up a polluted landfill site.

Cleanliness of Land (%) 0 20 40 60 80 100

Marginal Cost ($ millions) 1.25 1.5 2.0 3.0 4.5 20.0

Marginal Benefit ($ millions) 12.0 9.0 7.0 5.5 4.5 4.0

TABLE 17-2 Refer to Table 17-2. What is the net benefit to society of achieving the 100th percentage point of cleanliness of this land? A) $42 million B) $4 million C) -$4 million D) $0 E) -$16 million Answer: E Diff: 3 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Table Category: Quantitative

63) The table below shows the marginal costs and marginal benefits associated with cleaning up a polluted landfill site.

Cleanliness of Land (%) 0 20 40 60 80 100

Marginal Cost ($ millions) 1.25 1.5 2.0 3.0 4.5 20.0

Marginal Benefit ($ millions) 12.0 9.0 7.0 5.5 4.5 4.0

TABLE 17-2 Refer to Table 17-2. What is a practical problem that is likely to face a government that is making decisions about cleaning up a landfill site such as this one? 1) The science and technology of land cleanup is constantly changing, making it difficult to accurately estimate marginal costs. 2) The benefits to human and animal health are difficult to measure, making it difficult to accurately estimate marginal benefits. 3) Governments cannot legally intervene to impose cleanup on privately owned land. A) 1 and 2 only B) 2 and 3 only C) 1 and 3 only D) 1, 2 and 3 E) 3 only Answer: A Diff: 2 Type: MC Topic: 17.1b. optimal amount of pollution abatement Skill: Applied Learning Obj.: 17-1 Explain how an externality can be internalized, and how this can lead to allocative efficiency. Graphics: Table Category: Qualitative

17.2 Pollution-Reduction Policies 1) Direct regulatory pollution controls can be inefficient because, for any given amount of pollution reduction, they A) create new pollution as they eliminate existing pollution. B) take into account differing marginal costs among firms. C) do not minimize the total cost of pollution abatement. D) cost too much to enforce. E) are not complied with by firms. Answer: C Diff: 1 Type: MC Topic: 17.2a. direct pollution controls Skill: Recall Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative 2) An important reason that direct regulatory controls are usually inefficient in reducing pollution is that A) they create new pollution as they eliminate existing pollution. B) different firms have different marginal costs of pollution abatement. C) it costs too much to make sure that firms comply with the regulations. D) they generally garner little political support and thus eventually fail. E) firms have little incentive to comply with them. Answer: B Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Recall Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative 3) All of the following are examples of direct regulatory pollution controls EXCEPT A) auto emissions standards. B) legislation requiring scrubbers on coal-fired power stations. C) legislation imposing per-unit taxes on harmful emissions from a pulp and paper plant. D) a ban on wood stoves in some communities. E) a monetary fine in some communities for littering. Answer: C Diff: 1 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative

4) Suppose federal regulation aimed at reducing greenhouse-gas emissions sets a maximum level of emissions from each firm. This policy A) is the best approach because the costs of reducing emissions are different for each firm. B) is the best approach because firms will quickly reduce air pollution. C) will usually not produce the desired reduction in emissions at the lowest possible cost. D) will achieve the largest but not the most efficient reduction in emissions. E) will achieve the least reduction in emissions but be the most efficient. Answer: C Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative 5) Direct regulatory controls for reducing pollution can be criticized from an economic viewpoint as A) being ultimately unsuccessful in reducing pollution. B) not being efficient in allocating the costs of pollution reduction among various firms and plants. C) being inequitable in their application. D) being easy to circumvent. E) still allowing firms to pollute when a policy of "zero tolerance" is more appropriate. Answer: B Diff: 1 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative 6) Why are direct regulatory controls for reducing pollution likely to be inefficient? A) The cost of reducing pollution is greater than the benefit. B) Direct controls are impossible to monitor. C) Firms with different pollution abatement costs are facing identical regulations. D) Firms are not likely to comply with this method of government intervention. E) Firms' output will rise above the socially optimal amount. Answer: C Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Recall Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative

7) Automobile emissions standards are an example of A) direct regulatory pollution controls. B) emissions taxes. C) tradable emissions standards. D) market power. E) a market-based environmental policy. Answer: A Diff: 1 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative 8) The banning of wood-burning stoves and fireplaces is an example of A) safety regulations. B) emissions taxes. C) tradable emissions standards. D) direct regulatory pollution controls. E) a market-based environmental policy. Answer: D Diff: 1 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative 9) Which of the following environmental problems would be best addressed through the use of direct regulatory controls? A) emissions from coal-fired electric generating stations that cause acid rain B) emissions from ocean-going cruise ships C) sulfur dioxide discharged from pulp and paper mills D) the greenhouse gas emissions associated with residential home heating E) a chemical additive in animal feed that pollutes groundwater and is toxic to humans Answer: E Diff: 3 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative

10) Consider two firms, A and B, that must engage in pollution abatement. If Firm A has a lower marginal cost of pollution abatement than Firm B, then A) regardless of costs, it is equitable for both firms to face the same direct controls on their pollution. B) reallocating all abatement activity to Firm A will reduce pollution and reduce the total cost of abatement. C) reallocating some of Firm A's abatement activity to Firm B will keep total abatement constant but will reduce the total cost of abatement. D) reallocating some of Firm B's abatement activity to Firm A can keep total abatement constant but reduce the total cost of abatement. E) Firm B should lower its costs. Answer: D Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative

11) The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-4 Refer to Figure 17-4. Suppose the government requires each firm to reduce pollution by the same amount, QR. The result will be A) fair and just because both firms are facing the same requirements. B) economically inefficient because Firm X is not producing as much pollution as Firm Y and therefore should not be faced with the same requirements. C) economically efficient because even though their marginal costs of abatement differ, the marginal cost for the last unit of abatement is equal. D) economically inefficient because Firm Y is then abating pollution at a higher marginal cost than Firm X. E) economically efficient because the maximum amount of pollution will be abated. Answer: D Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Graphics: Graph Category: Qualitative

12) The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-4 Refer to Figure 17-4. Suppose Firms X and Y are each abating QR units of pollution. From this point, if Firm X reduces pollution by one unit and Firm Y increases pollution by one unit, then A) total pollution remains the same, but the total cost of abatement falls. B) total pollution remains the same, but the total cost of abatement increases. C) the total cost of abatement remains the same, but pollution falls. D) the total cost of abatement remains the same, but pollution increases. E) the total costs of abatement and the amount of pollution do not change. Answer: A Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Graphics: Graph Category: Qualitative

13) The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-4 Refer to Figure 17-4. The optimal amount of pollution abatement for these two firms together is A) QR for X + QR for Y. B) QR for X + Qy for Y. C) Qx for X + QR for Y. D) Qx + Qy. E) impossible to tell without the marginal benefit of abatement curve. Answer: E Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Graphics: Graph Category: Qualitative

14) The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2.

FIGURE 17-5 Refer to Figure 17-5. If the government requires each firm to abate Q3 units of pollution, the social costs of this abatement A) would be minimized. B) could be reduced further if each firm was required to abate more. C) could be reduced further if Firm 1 increased its abatement and Firm 2 reduced its abatement by the same amount. D) could be reduced further if Firm 2 increased abatement and Firm 1 reduced its abatement by the same amount. E) could be reduced further if each firm was allowed to pollute more. Answer: C Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Graphics: Graph Category: Qualitative

15) The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2.

FIGURE 17-5 Refer to Figure 17-5. Suppose the government requires that each firm abate pollution to the level Q3. The outcome would be efficient because A) the marginal costs of abatement are equated for the two firms. B) the maximum amount of pollution is being abated at the lowest cost. C) the marginal cost and marginal benefit of pollution abatement are equated. D) all of the above. E) none of the above; the outcome would be inefficient. Answer: E Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Graphics: Graph Category: Qualitative

16) The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2.

FIGURE 17-5 Refer to Figure 17-5. Suppose each firm is currently abating pollution to the level . Which of the following statements is true? A) This outcome is efficient because both firms are abating the same amount. B) This outcome is not allocatively efficient because the marginal benefits and marginal costs of abatement are not equated. C) This outcome is not allocatively efficient because less than 100% abatement is being achieved. D) This outcome is not productively efficient because one firm is abating more pollution than the other. E) This outcome is not productively efficient because the total cost of achieving this level of abatement is not minimized. Answer: E Diff: 3 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Graphics: Graph Category: Qualitative

17) Two firms, A and B, are legally required to reduce their toxic emissions. If Firm A's marginal cost of abatement is $5 and Firm B's marginal cost of abatement is $3, A) their joint total cost of abatement is at a minimum. B) their joint total cost of abatement is at a maximum. C) the socially optimal joint level of abatement is not being achieved. D) Firm A should abate more and Firm B should abate less in order to reduce total abatement costs. E) Firm B should abate more and Firm A should abate less in order to reduce total abatement costs. Answer: E Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative 18) Two firms, A and B, are legally required to reduce their toxic emissions. If Firm A's marginal cost of abatement is $5 and Firm B's marginal cost of abatement is $5, A) their joint total cost of abatement is at a minimum. B) their joint total cost of abatement is at a maximum. C) the socially optimal joint level of abatement is not being achieved. D) Firm A should abate more and Firm B should abate less. E) Firm B should abate more and Firm A should abate less. Answer: A Diff: 2 Type: MC Topic: 17.2a. direct pollution controls Skill: Applied Learning Obj.: 17-2 Describe why direct pollution controls are often inefficient. Category: Qualitative

19) The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-6 Refer to Figure 17-6. (For this question, ignore the horizontal line at t.) Suppose the government wants to impose an emissions tax. For this tax to be efficient, the government must A) levy a tax at the same rate to both firms. B) choose a different tax rate for each firm so that each firm abates QR units of pollution. C) impose the same tax on both firms and also fix the amount of pollution abatement at QR for each firm. D) tax only the high-cost firm (Firm Y) and fix the amount of pollution abatement for the low-cost firm (Firm X). E) tax only the low-cost firm (Firm X) and fix the amount of pollution abatement for the high-cost firm (Firm Y). Answer: A Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

20) The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-6 Refer to Figure 17-6. Firms X and Y have an emissions tax of $t imposed on each unit of pollution they produce. Firm X will choose to abate pollution of ________ units and Firm Y will choose to abate pollution of ________ units. A) QR; QR B) QX; QR C) QX; QY D) 0; 0 E) QR; QY Answer: C Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

21) The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-6 Refer to Figure 17-6. Firms X and Y have an emissions tax of $t imposed on each unit of pollution they produce. If Firm X chooses to abate QX units of pollution, the total cost of its abatement is A) tax amount t multiplied by the maximum possible level of pollution abatement. B) area beneath the marginal cost of pollution abatement curve. C) area below the horizontal line at t and above the MC of pollution abatement curve. D) tax amount t multiplied by the level of pollution abatement, QX. E) area beneath the marginal cost of pollution abatement curve up to QX. Answer: E Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

22) The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-6 Refer to Figure 17-6. There is an emissions tax of $t per unit of pollution. Which of the following statements regarding the pollution abatement activities by the two firms is correct? A) It is not socially optimal to have Firm X doing pollution abatement of QX while Firm Y does the lesser amount, QY. B) It is efficient for Firm Y to do less pollution abatement than Firm X because Firm Y faces higher costs of abatement. C) The emissions tax causes no change in the firms' polluting activity. D) The shaded areas in the two graphs depict the social costs of pollution caused by Firms X and Y. E) The emissions tax causes an optimal level of pollution. Answer: B Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

23) The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-6 Refer to Figure 17-6. There is an emissions tax of $t per unit of pollution. The resulting amount of pollution abatement is socially optimal if A) Firm X abates QX and Firm Y abates QY. B) each firm abates at QR. C) the emissions tax causes no change in firms' polluting activity. D) the emissions tax is equal to the marginal social cost of pollution. E) each firm pays the maximum amount of tax. Answer: D Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

24) A pollution-control policy that, in principle, can perfectly internalize pollution externalities is A) emission limits. B) fines for firms that pollute over a certain amount. C) an emissions tax. D) moral suasion. E) None of the above can internalize the externality. Answer: C Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 25) Suppose the government imposes a tax for each unit of pollution that a firm produces. The firm will A) stop producing altogether. B) reduce emissions until the marginal cost of any further reduction in pollution is equal to or greater than the tax. C) reduce emissions until the marginal cost of any further reduction in pollution is equal to the price of the firm's product. D) increase output such that the additional revenue can offset this additional tax payment. E) ignore the tax and continue to produce the same amount of output. Answer: B Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 26) The use of emissions taxes as a method of reducing pollution 1) is more efficient than direct controls; 2) allows firms to select the most efficient abatement techniques; 3) forces firms to internalize the pollution externality. A) 1 only B) 1 and 2 only C) 1 and 3 only D) 2 and 3 only E) 1, 2, and 3 Answer: E Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and

cap-and trade systems, can improve economic efficiency. Category: Qualitative 27) Suppose a per-unit tax is imposed on a firm's output which makes the marginal private cost of production equal to the marginal social cost. In this case, we can then say that A) the externality has been fully internalized for that firm. B) the firm will make losses as its costs have increased. C) the internality has been externalized for that firm. D) the firm will be forced by the extra cost burden to leave the industry. E) the firm will not make any changes to its output decision. Answer: A Diff: 1 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 28) If residential garbage collection were financed by charging households a fee per unit of garbage collected, rather than through general property taxation or a flat fee, you would expect A) less concern about recycling and more concern about the high cost of garbage collection. B) more recycling as households seek to minimize their garbage-collection bill. C) higher costs for the municipality providing the garbage-collection service. D) the administration cost to always outweigh any other savings, thus rendering this idea inefficient. E) inadequate revenue to pay for the garbage collection. Answer: B Diff: 1 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 29) What is a potential disadvantage of emissions taxes versus direct pollution controls? A) Emissions taxes do not specify how the pollution is to be controlled, which leads to economic inefficiency in the implementation of the pollution restraint. B) Pollution becomes a part of each firm's profit-maximizing calculations, encouraging firms to find more efficient ways to pollute. C) The authorities might have a better idea of the socially optimal level of pollution than of the optimal tax rate that would achieve it. D) Emissions taxes introduce distortions to the price system, whereas direct controls do not. E) Emissions taxes are more expensive to administer.

Answer: C Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 30) Private and competitive markets could produce efficient levels of pollution if A) left alone by government regulators. B) regulated by government through direct controls. C) the appropriate tax per unit of pollution were administered and enforced. D) the producers were made aware of the pollution externality. E) the worst polluting firms were closed down. Answer: C Diff: 1 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative

31) The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2.

FIGURE 17-5 Refer to Figure 17-5. Suppose Firm 1 and Firm 2 are each abating Q3 units of pollution. If the government imposed an emissions tax of $40 per unit of emissions, A) each firm would abate to Q3. B) each firm would abate to the same level. C) Firm 1 would increase abatement beyond Q3 and Firm 2 would abate less than Q3. D) Firm 2 would increase abatement beyond Q3 and Firm 1 would abate less than Q3. E) the level of pollution would be optimal. Answer: C Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

32) The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2.

FIGURE 17-5 Refer to Figure 17-5. Suppose Firm 1 and Firm 2 are each abating Q3 units of pollution. If the government imposed an emissions tax of $40 per unit of emissions, and this tax rate was known to equal the social marginal cost of pollution, then we can predict with confidence that A) each firm would abate to Q3. B) each firm would abate to the same level. C) the resulting level of pollution would be socially optimal. D) Firm 2 would increase abatement beyond Q3 and Firm 1 would abate less than Q3. E) Firm 2 would increase its emissions and this would not be socially optimal. Answer: C Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

33) The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2.

FIGURE 17-5 Refer to Figure 17-5. Suppose Firm 1 and Firm 2 are each abating Q3 units of pollution. If the government imposes an emissions tax of $20 per unit of emissions, A) Firm 1 will abate less than Q3, and Firm 2 will not abate any pollution at all. B) neither firm will abate any pollution. C) the level of pollution abatement will be optimal. D) Firm 1 will increase abatement beyond Q3 and Firm 2 will abate less than Q3. E) Firm 1 and Firm 2 will each increase abatement beyond Q3. Answer: A Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

34) The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2.

FIGURE 17-5 Refer to Figure 17-5. How much pollution abatement would Firm 2 undertake if faced with an emissions tax of $20 per unit of emissions? A) 0 B) C) D) E) more than Answer: A Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Quantitative

35) Suppose the government imposes an emissions tax of $t on each unit of pollution produced by a firm. Under which of the following circumstances would the tax rate be set too high to achieve allocative efficiency? A) The firm could not afford to pay the tax. B) The tax rate causes the firm's ATC curve to shift up. C) The tax rate is less than the marginal external cost of the pollution. D) The tax rate is greater than the firm's private marginal cost of production. E) The tax rate is greater than the marginal external cost of the pollution. Answer: E Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 36) An emissions tax (imposed on each unit of pollution produced) that is set too high to achieve allocative efficiency will cause A) too few resources to be devoted to pollution abatement and too little of the product to be produced. B) too few resources to be devoted to pollution abatement and too much of the product to be produced. C) no change in the polluting firm's behaviour. D) too many resources to be devoted to pollution abatement and too little of the product to be produced. E) new firms to enter the industry. Answer: D Diff: 2 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative

37) The diagram below shows the marginal cost of abatement of greenhouse-gas emissions (GHGs) for each of two firms, A, and B.

FIGURE 17-7 Refer to Figure 17-7. Suppose the government has imposed a direct regulatory control requiring each firm to abate 20 tonnes of GHG emissions. Under this system, what is the total cost of abating 40 tonnes of emissions for the two firms? A) $100 B) $150 C) $175 D) $200 E) $250 Answer: D Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Quantitative

38) The diagram below shows the marginal cost of abatement of greenhouse-gas emissions (GHGs) for each of two firms, A, and B.

FIGURE 17-7 Refer to Figure 17-7. Suppose the government imposes an emissions tax of $7.50 per tonne of GHGs emitted. Under this system, what is the total cost of abating 40 tonnes of emissions for the two firms? A) $100 B) $150 C) $175 D) $200 E) $250 Answer: C Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Quantitative

39) The diagram below shows the marginal cost of abatement of greenhouse-gas emissions (GHGs) for each of two firms, A, and B.

FIGURE 17-7 Refer to Figure 17-7. Suppose the government objective is to abate a total of 40 tonnes of GHG emissions between the two firms. The total cost of achieving this goal by requiring each firm to abate 20 tonnes is ________. The total cost of achieving this goal by imposing an emissions tax of $7.50 per tonne of GHGs emitted is ________. A) $200; $200 B) $200; $175 C) $175; $200 D) $100; $150 E) $175; $175 Answer: B Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Quantitative

40) The diagram below shows the marginal cost of abatement of greenhouse-gas emissions (GHGs) for each of two firms, A, and B.

FIGURE 17-7 Refer to Figure 17-7. Suppose the government objective is to abate a total of 40 tonnes of GHG emissions between the two firms. The lowest-cost approach is to impose an emissions tax of $7.50 per tonne emitted. Why is this the lowest-cost approach? A) Because direct controls are always lower-cost than an emissions tax. B) Because the MC curves for the two firms are parallel. C) Because at any other level of emissions tax, the total abatement costs would be higher. D) Because the average costs of emissions are equalized across the two firms. E) Because marginal abatement costs are equalized across the two firms. Answer: E Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Quantitative

41) A paper mill discharges chemicals into a river which affect the shores of a downstream resort area. The private cost, social cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q, MCS= 10 + 2Q MB = 35 - 0.5Q. What level of emissions tax (dollars per unit of output produced) would provide the paper mill with the incentive to produce at the allocatively efficient level of output? A) $5 B) $10 C) $15 D) $20 E) $25 Answer: C Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Quantitative 42) Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant. The private marginal cost, social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: = 5 + 2Q = 10 + 3Q MB = 50 - Q What level of emissions tax (dollars per unit of output produced) would provide this firm with the incentive to produce at the allocatively efficient level of output? A) $15 B) $25 C) $10 D) $40 E) $30 Answer: A Diff: 3 Type: MC Topic: 17.2b. emissions taxes Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Quantitative

43) Which of the following is a possible strategy for efficiently addressing the market failure that leads to environmental pollution? A) widespread direct pollution controls B) the introduction by government of tradable pollution permits C) forcing polluters to clean up polluted water, earth, and air D) government legislation banning pollution E) the elimination of government involvement Answer: B Diff: 2 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 44) As a method of pollution control, tradable emissions permits, or "cap and trade," A) are an example of paternalistic social regulation. B) allow pollution to continue unabated, but only at a huge price to polluting firms. C) are more effective than emissions taxes when pollution is hard to measure. D) have the advantage of decentralized decision making (like emissions taxes) while also setting the maximum permissible level of pollution (like direct controls). E) are not a morally acceptable method of pollution control. Answer: D Diff: 2 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 45) Suppose emissions permits are traded freely between profit-maximizing firms in the private market. In this case, A) there will be more than the optimal amount of pollution. B) the amount of pollution abatement will be identical to that which the firms would have willingly undertaken on their own. C) each firm will face identical costs of pollution abatement. D) all firms will use identical pollution abatement technologies. E) marginal abatement costs will be equalized across firms. Answer: E Diff: 2 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative

46) Economists often argue that a system of tradable pollution permits is cost-effective because firms A) facing a high marginal cost of abatement will not abate at all. B) facing a low marginal cost of abatement will not abate at all. C) facing a marginal cost of abatement lower than the permit price will not abate at all. D) with a marginal cost of abatement lower than the permit price will buy permits and abate less. E) will choose their abatement so that their marginal cost of abatement equals the price of a permit, which is the same for all firms. Answer: E Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 47) Consider a coal-fired electric-power plant that is operating under a cap-and tradesystem. If its marginal cost of pollution abatement is $5 per unit and the price of the permit is $3 per unit, this firm will A) not abate at all. B) not buy any permits, since that would push up its costs. C) buy permits and abate more pollution. D) buy permits and abate less pollution. E) sell permits and abate more pollution. Answer: D Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Quantitative 48) Consider a coal-fired electric-power plant that is operating under a system of tradable pollution permits (and the firm currently owns permits). If its marginal cost of pollution abatement is $100 per unit and the price of the permit is $150 per unit, this firm will A) not abate at all. B) not buy any permits, since that would push up its costs. C) buy more permits and abate more pollution. D) buy more permits and abate less pollution. E) sell permits and abate more pollution. Answer: E Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and

cap-and trade systems, can improve economic efficiency. Category: Quantitative 49) The diagram below shows the marginal cost of abatement for each of two firms, A and B. Each firm is initially abating Q0 units of pollution.

FIGURE 17-8 Refer to Figure 17-8. Suppose a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*. We can expect that A) there will be no change in the quantity of abatement by each firm. B) Firm A will abate less pollution—the amount Q2, and Firm B will abate more pollution—the amount Q1. C) Firm B will abate less pollution—the amount Q2, and Firm A will abate more pollution—the amount Q1. D) Firms A and B will each abate Q2 units of pollution. E) Firms A and B will each abate Q0 units of pollution. Answer: C Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

50) The diagram below shows the marginal cost of abatement for each of two firms, A and B. Each firm is initially abating Q0 units of pollution.

FIGURE 17-8 Refer to Figure 17-8. Suppose a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*. We can expect that A) Firm B will sell permits to Firm A, pollute less, and reduce its costs by the area 1; Firm A will buy permits from Firm B, pollute more, and increase its costs by the area 4. B) Firm B will sell permits to Firm A, pollute more, and reduce its costs by the area 1; Firm A will buy permits from Firm B, pollute less, and increase its earnings by area 4. C) Firm B will buy permits from Firm A, pollute less, and increase its costs by the areas 2 + 3; Firm A will sell permits to Firm B, pollute more, and reduce its earnings by areas 4 + 5. D) Firm B will buy permits from Firm A, pollute more, and reduce its costs by the area 1; Firm A will sell permits to Firm B, pollute less, and increase its earnings by area 5. Answer: D Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

51) The diagram below shows the marginal cost of abatement for each of two firms, A and B. Each firm is initially abating Q0 units of pollution.

FIGURE 17-8 Refer to Figure 17-8. Suppose a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*. Firm B will buy permits from Firm A because A) its total cost of abating less (areas 1 + 2 + 3) exceeds the cost of buying the permits (areas 2 + 3). B) its total savings from abating less (areas 1 + 2 + 3) exceed the cost of buying the permits (areas 2 + 3). C) Firm B has lower costs of pollution abatement than Firm A. D) its total savings from abating less (areas 1 + 2 + 3) exceed the total costs of Firm A abating more (area 6). E) Firm B can buy the permits at a lower price than Firm A. Answer: B Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

52) The diagram below shows the marginal cost of abatement for each of two firms, A and B. Each firm is initially abating Q0 units of pollution.

FIGURE 17-8 Refer to Figure 17-8. Suppose a system of tradable pollution permits is introduced into this market and the equilibrium permit price is . Firm A will sell permits to Firm B because A) Firm A's total cost of abating more pollution (areas 5 + 6) is less than the revenue it earns from selling the permits (areas 4 + 5 + 6). B) Firm B has lower costs of pollution abatement than Firm A. C) Firm A can buy the permits at a lower price than Firm B. D) the revenue Firm A earns from selling permits (areas 5 + 6) is greater than the cost it incurs from abating more pollution (area 6). E) Firm A's total cost of abating more pollution (area 6) is less than the revenue it earns from selling the permits (area 4 + 5). Answer: D Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

53) The diagram below shows the marginal cost of abatement of greenhouse-gas emissions (GHGs) for each of two firms, A, and B.

FIGURE 17-7 Refer to Figure 17-7. Suppose the government puts in place a cap-and-trade system which leads to an equilibrium permit price of $7.50 per tonne of emissions. Which of the following statements describes the response of Firm B? A) Firm B abates 20 tonnes of emissions and avoids paying for permits at a cost of $7.50 per tonne. B) Firm B abates 20 tonnes of emissions and buys permits allowing it to emit 10 tonnes of emissions. C) Firm B abates 10 tonnes of emissions and buys permits from Firm A. D) Firm B abates 10 tonnes of emissions and sells permits to Firm A. E) Firm B abates 20 tonnes of emissions and sells permits to Firm A allowing Firm A to emit 10 tonnes of emissions. Answer: C Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph

Category: Quantitative 54) The diagram below shows the marginal cost of abatement of greenhouse-gas emissions (GHGs) for each of two firms, A, and B.

FIGURE 17-7 Refer to Figure 17-7. Suppose the government puts in place a cap-and-trade system which leads to an equilibrium permit price of $7.50 per tonne of emissions. Which of the following statements describes the response of Firm A? A) Firm A abates 30 tonnes of emissions and sells permits to Firm B. B) Firm A abates 20 tonnes of emissions and avoids paying for permits at a cost of $7.50 per tonne. C) Firm A abates 30 tonnes of emissions and buys permits from Firm B. D) Firm A abates 20 tonnes of emissions and sells permits to Firm B allowing Firm B. E) Firm A abates 30 tonnes of emissions and sells permits to Firm B allowing Firm B to emit 20 tonnes of emissions. Answer: A Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency.

Graphics: Graph Category: Quantitative 55) The diagram below shows the marginal cost of abatement of greenhouse-gas emissions (GHGs) for each of two firms, A, and B.

FIGURE 17-7 Refer to Figure 17-7. Suppose the government puts in place a cap-and-trade system which leads to an equilibrium permit price of $7.50 per tonne of emissions. With this policy in place, what is the marginal benefit and marginal cost to each firm of abating one extra tonne of GHG emissions? A) MB and MC to each firm is $5.00. B) MB and MC to each firm is $7.50. C) MB and MC to each firm is $10.00. D) MC to each firm is $7.50. MB for Firm A is $5.00; MB for Firm B is $10.00. E) MB to each firm is $7.50. MC for Firm A is $5.00; MC for Firm B is $10.00. Answer: B Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency.

Graphics: Graph Category: Quantitative

56) The diagram below shows the marginal cost of abatement of greenhouse-gas emissions (GHGs) for each of two firms, A, and B.

FIGURE 17-7 Refer to Figure 17-7. Suppose the government objective is to abate a total of 40 tonnes of emissions between the two firms. The total cost of achieving this goal by requiring each firm to abate 20 tonnes is ________. The total cost of achieving this goal when a market price of $7.50 per tonne is established in a cap-and-trade system is ________. A) $200; $200 B) $200; $175 C) $175: $200 D) $100; $150 E) $175; $175 Answer: B Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Quantitative

57) In a competitive market for tradable pollution permits, the quantity of permits (for a given amount of pollution) is set by ________, and the equilibrium price is determined by ________. A) market forces; government policy B) government policy; the average cost of pollution abatement C) government policy; market forces D) market forces; market forces E) government policy; government policy Answer: C Diff: 2 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 58) Suppose a competitive market for tradable pollution permits is in equilibrium at , with the quantity of permits being set by government policy at . If technological advances reduce the marginal cost of pollution abatement, then A) the equilibrium price of permits will fall below . B) the equilibrium price of permits will rise above . C) the equilibrium quantity of permits will fall below . D) the equilibrium quantity of permits will fall above . E) there will be no change in or . Answer: A Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative

59) The diagram below shows a market for tradable pollution permits in a cap-and-trade system.

FIGURE 17-9 Refer to Figure 17-9, which depicts a market for tradable pollution permits. Improvements in firms' abatement technology will be expected to A) shift the supply curve to the right. B) shift the supply curve to the left. C) shift the demand curve to the right. D) shift the demand curve to the left. E) not have any impact on the equilibrium. Answer: D Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

60) The diagram below shows a market for tradable pollution permits in a cap-and-trade system.

FIGURE 17-9 Refer to Figure 17-9, which depicts the market for tradable pollution permits. If there is an increase in firms' marginal cost of pollution abatement, A) firms decide to abate more pollution. B) the price of pollution permits will fall. C) firms will demand more pollution permits. D) firms will demand fewer pollution permits. E) firms require exactly Q* permits. Answer: C Diff: 2 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

61) The diagram below shows a market for tradable pollution permits in a cap-and-trade system.

FIGURE 17-9 Refer to Figure 17-9, which depicts the market for tradable pollution permits. If the environmental organization called "Friends of the Earth" buys a large quantity of pollution permits and decides to lock them in a vault and never sell them, then A) the demand curve shifts to the left, and the equilibrium price falls. B) the supply curve shifts to the right, and the equilibrium price falls. C) the supply curve shifts to the left, and the equilibrium price rises. D) allocative efficiency is lost. E) there is no impact on the equilibrium. Answer: C Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Applied Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

62) The diagram below shows a market for tradable pollution permits in a cap-and-trade system.

FIGURE 17-9 Refer to Figure 17-9, which depicts the market for tradable pollution permits. The amount of permits Q* is determined by A) market forces. B) large corporations. C) the level of abatement technology. D) the World Environmental Organization. E) the relevant government. Answer: E Diff: 1 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

63) The diagram below shows a market for tradable pollution permits in a cap-and-trade system.

FIGURE 17-9 Refer to Figure 17-9, which depicts the market for tradable pollution permits. The equilibrium price p* A) equals the average abatement cost for firms. B) equals the marginal abatement cost for each profit-maximizing firm. C) is imposed by the government. D) is not a function of the abatement technology. E) is always equal to the subsidy provided by the government. Answer: B Diff: 2 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Graphics: Graph Category: Qualitative

64) What is the main advantage of using market-based schemes for reducing pollution over direct regulatory controls? Using the market-based policies A) leads to greater fairness in the distribution of resources. B) improves the moral fibre of producers and consumers. C) leads to a more efficient use of scarce resources. D) maximizes the difference between marginal cost and marginal benefit. E) minimizes the difference between total cost and total benefit. Answer: C Diff: 2 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 65) When comparing a system of emission taxes to a cap-and-trade system, the same amount of pollution could be abated in each as long as A) the marginal cost of abatement was equal across all firms. B) the marginal benefit of abatement curve was horizontal. C) the emission tax rate, t, was applied equally to all firms. D) the cap on emissions was chosen such that the equilibrium price of the permits, , could rise over time. E) the cap on emissions was chosen such that the equilibrium price of the permits, , was equal to the emissions tax rate, t. Answer: E Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative

66) When designing a policy to reduce polluting emissions, policymakers are unlikely to know with certainty what the marginal cost of abatement is for each firm. If an emissions tax ($t per unit of emissions) is imposed, then policymakers A) know what the reduction in emissions will be but do not know at what cost. B) know with certainty what the reduction in emissions will be and at what cost. C) know the per-unit cost imposed on firms but do not know what the reduction in emissions will be. D) are uncertain about both the amount of emission reduction and the cost. E) know with certainty what their tax revenues will be from the emissions tax. Answer: C Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative 67) When designing a policy to reduce polluting emissions, policymakers are unlikely to know with certainty what the marginal cost of abatement is for each firm. If policymakers set an emissions cap of X units, and issue tradable permits for this amount, then they A) know what the reduction in emissions will be but not the per-unit cost to firms. B) know with certainty what the reduction in emissions will be and at what cost. C) know the per-unit cost imposed on firms but do not know what the reduction in emissions will be. D) are uncertain about both the amount of emission reduction and the cost. E) know with certainty what the equilibrium permit price will be. Answer: A Diff: 3 Type: MC Topic: 17.2c. tradable emissions permits Skill: Recall Learning Obj.: 17-3 Describe how market-based policies, such as emissions taxes and cap-and trade systems, can improve economic efficiency. Category: Qualitative

17.3 The Challenge of Global Climate Change 1) In 2006, Professor Nicholas Stern of the United Kingdom stated "Climate change is the greatest market failure the world has ever seen." Which of the following statements describes the biggest challenge to efforts to begin correcting this market failure? A) We do not have precise estimates of the costs of reducing greenhouse gas emissions. B) We do not have precise estimates of the costs of increased levels of in the atmosphere. C) Policy design must be coordinated among all major governments of the world, as the problem is truly a global one. D) Each government around the world must choose its own level of emissions. E) Climate change is too large a problem to be compared to a market failure. Answer: C Diff: 2 Type: MC Topic: 17.3. global climate change Skill: Recall Learning Obj.: 17-4 Discuss the technical and economic challenges of addressing global climate change. Category: Qualitative 2) Between 1995 and 2014, Canada's greenhouse gas emissions ________ by ________%. A) decreased; 6 B) decreased; 1 C) increased; 6 D) increased; close to 50 E) increased; about 25 Answer: E Diff: 1 Type: MC Topic: 17.3. global climate change Skill: Recall Learning Obj.: 17-4 Discuss the technical and economic challenges of addressing global climate change. Category: Qualitative

3) Consider the following equation: GHG =

×

× GDP,

where GHG = world annual emissions of greenhouse gases Energy = world annual amount of energy consumed GDP = world's annual gross domestic product The ratio GHG/Energy describes A) the units of greenhouse gases emitted per unit of energy consumed. B) greenhouse gas emissions expressed as a percentage of carbon-based energy consumed. C) the total units of greenhouse gases emitted annually. D) the units of energy consumed per unit of greenhouse gases emitted. E) the energy efficiency of greenhouse gas emissions. Answer: A Diff: 2 Type: MC Topic: 17.3. global climate change Skill: Recall Learning Obj.: 17-4 Discuss the technical and economic challenges of addressing global climate change. Category: Qualitative 4) Consider the following equation: GHG =

×

× GDP,

where GHG = world annual emissions of greenhouse gases Energy = world annual amount of energy consumed GDP = world's annual gross domestic product The ratio Energy/GDP describes A) the energy efficiency of greenhouse gas emissions. B) the number of units of carbon-based energy produced as a fraction of GDP. C) the amount of energy per unit of GDP required to stabilize greenhouse gas emissions. D) the number of units of energy used per dollar of GDP produced. E) the amount of energy used per unit of output in the energy-intensive sector of the economy. Answer: D Diff: 2 Type: MC Topic: 17.3. global climate change Skill: Recall Learning Obj.: 17-4 Discuss the technical and economic challenges of addressing global climate change. Category: Qualitative

5) Consider the following equation: GHG =

×

× GDP,

where GHG = world annual emissions of greenhouse gases Energy = world annual amount of energy consumed GDP = world's annual gross domestic product Suppose GHG emissions increased by 10% between 2014 and 2018, a period when GDP increased by 5% and Energy/GDP was constant. We can conclude that GHG/Energy over the same period A) increased by 5%. B) decreased by 5%. C) was unchanged. D) increased by 10%. E) decreased by 10%. Answer: A Diff: 3 Type: MC Topic: 17.3. global climate change Skill: Applied Learning Obj.: 17-4 Discuss the technical and economic challenges of addressing global climate change. Category: Qualitative

6) Consider the following equation: GHG =

×

× GDP,

where GHG = world annual emissions of greenhouse gases Energy = world annual amount of energy consumed GDP = world's annual gross domestic product Suppose GHG emissions decreased by 6% between 2016 and 2018, a period when GDP increased by 4% and Energy/GDP decreased by 2%. We can conclude that over the same period A) remains unchanged. B) decreased by 4%. C) increased by 4%. D) decreased by 8%. E) decreased by 6%. Answer: D Diff: 3 Type: MC Topic: 17.3. global climate change Skill: Applied Learning Obj.: 17-4 Discuss the technical and economic challenges of addressing global climate change. Category: Quantitative 7) A policy that puts a price on greenhouse-gas (GHG) emissions will help to reduce emissions because A) it will shift firms' marginal cost of abatement curves upward. B) it will shift firms' marginal cost of abatement curves downward. C) world energy intensity will increase. D) it provides incentives for firms and consumers to switch to cleaner energy sources. E) energy intensity of GDP will increase. Answer: D Diff: 2 Type: MC Topic: 17.3. global climate change Skill: Recall Learning Obj.: 17-4 Discuss the technical and economic challenges of addressing global climate change. Category: Qualitative

8) Global greenhouse-gas (GHG) emission reductions are unlikely to be achieved through GDP reductions because A) GDP cannot be reduced. B) the rise in GDP in rich countries will be greater than the reductions in GDP in poor countries. C) ongoing population growth and per capita income growth are likely to drive GDP upward. D) the rise in GDP in poor countries will be greater than the reductions in GDP in rich countries. E) the growth rate of world GDP is negative. Answer: C Diff: 2 Type: MC Topic: 17.3. global climate change Skill: Recall Learning Obj.: 17-4 Discuss the technical and economic challenges of addressing global climate change. Category: Qualitative 9) Consider global greenhouse-gas emissions. Suppose that in 2018, greenhouse gases emitted per unit of energy consumed decreased by 2%, energy use per unit of GDP decreased by 2%, and world GDP increased by 4%. What will be the approximate change in global greenhouse gas emissions in 2012? A) increase by 4% B) increase by 16% C) decrease by 4% D) decrease by 16% E) no change Answer: E Diff: 3 Type: MC Topic: 17.3. global climate change Skill: Applied Learning Obj.: 17-4 Discuss the technical and economic challenges of addressing global climate change. Category: Quantitative Economics - Canadian Edition, 16e (Ragan) Chapter 18 Taxation and Public Expenditure 18.1 Taxation in Canada 1) A tax that takes a higher percentage of income as income rises is called a(n) A) proportional tax. B) regressive tax. C) progressive tax. D) excise tax. E) value-added tax. Answer: C

Diff: 1 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 2) The sometimes proposed "flat tax," such as one that takes 15% of income at all levels of income, is an example of a(n) A) proportional tax. B) regressive tax. C) progressive tax. D) excise tax. E) value-added tax. Answer: A Diff: 1 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 3) Which of the following statements suggests that property taxes might be progressive? A) The proportion of income spent on housing tends to decline as income rises. B) Higher-income people live in more expensive houses than do low-income people. C) A large part of the property tax is shifted to renters, who typically have lower incomes than owners. D) Inner city neighbourhoods often have higher property taxes than do the more affluent suburbs. E) Elderly pensioners often live in their family homes after children have left. Answer: B Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 4) A mandatory health-insurance premium of a given amount payable by all residents is an example of a(n) A) proportional tax. B) regressive tax. C) progressive tax. D) value-added tax. E) invisible tax. Answer: B Diff: 1 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied

Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 5) An income tax is progressive if, as income increases, A) its average tax rate is increasing. B) its marginal tax rate is falling. C) its average tax rate is falling, but total taxes are increasing. D) its average tax rate and marginal tax rate are constant while income is increasing. E) its average tax rate is falling, but the marginal tax rate is increasing. Answer: A Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 6) A tax that takes a smaller percentage of income as the income increases is an example of a(n) A) regressive tax. B) progressive tax. C) proportional tax. D) efficient tax. E) excise tax. Answer: A Diff: 1 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative

7) Which of the following is required to achieve progressivity for a particular tax? A) a marginal tax rate equal to the average tax rate (implying that the average tax rate is rising with income) B) a marginal tax rate equal to the average tax rate (implying that the average tax rate is falling with income) C) an average tax rate above the marginal tax rate (implying that the average tax rate is falling with income) D) a marginal tax rate above the average tax rate (implying that the average tax rate is rising with income) E) a constant tax rate for all incomes Answer: D Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 8) Consider an income-tax system that requires all individuals to pay exactly 3% of their income. This income-tax system is A) proportional. B) progressive, because the higher the individual's income, the greater the amount of tax paid. C) regressive, since 3% is harder to pay for a low-income taxpayer. D) fair, since everyone pays the same amount. E) a lump-sum system. Answer: A Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 9) Suppose taxes are levied in the following way: No individual pays any taxes on the first $10 000 of their income; for every dollar earned above this amount, all individuals pay 20% in taxes. This income-tax system is A) regressive, because the average tax rate declines as income rises. B) progressive, because the average tax rate rises as income rises. C) indexed. D) proportional, because the average tax rate is constant for all income levels. E) an accurate description of the Canadian system. Answer: B Diff: 3 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Quantitative

10) Suppose taxes are levied in the following way: All individuals pay a tax equal to $2000 no matter what income they earn; in addition, all individuals pay 20% of all their earned income in taxes. This income-tax system is A) regressive. B) progressive. C) indexed. D) proportional. E) an accurate description of the Canadian system. Answer: A Diff: 3 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Quantitative 11) Suppose an income tax is levied in the following way: All individuals pay 10% of their income up to an income of $30 000; on all income above $30 000, individuals pay 20% of their income. Such a tax is A) regressive. B) progressive. C) indexed. D) proportional. E) unrealistic. Answer: B Diff: 3 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Quantitative 12) If a tax system contains some important taxes that are regressive, substantial progressivity in other taxes would be required in order to achieve A) proportionality in the overall tax system. B) a negative income tax. C) a flat-rate tax. D) equity in the overall tax system. E) efficiency in the overall tax system. Answer: A Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative

13) A marginal tax rate of 47% on taxable income over $150 000 implies that A) an individual with this taxable income would pay $70 000 in income tax. B) the average tax rate is also 47%. C) the income tax payable on any dollar earned above $150 000 is 47 cents. D) the tax system is progressive. E) the tax system is horizontally equitable. Answer: C Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Quantitative 14) An example of a regressive tax in Canada is A) any one of the provincial sales taxes. B) the federal income tax. C) the corporate income tax. D) the provincial income taxes. E) the typical property taxes in Canadian cities and towns. Answer: A Diff: 1 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 15) Some important taxes are regressive, such as provincial sales taxes. In an effort to achieve proportionality in the overall tax system it is therefore necessary to impose A) substantial progressivity in income taxes. B) a negative income tax. C) a flat-rate tax. D) consumption taxation. E) efficiency in the tax system. Answer: A Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative

16) The Canadian federal income tax is progressive because it has A) marginal and average rates that rise and are equal at most levels of income. B) marginal rates that are higher than average rates at most levels of income. C) average rates that rise but marginal rates that are constant at most levels of income. D) marginal rates that are lower than average rates at most levels of income. E) average and marginal rates that are constant at most levels of income. Answer: B Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 17)

FIGURE 18-1 Refer to Figure 18-1. A regressive tax is illustrated by curve(s) A) A and B. B) B and C. C) C and D. D) A only. E) C only. Answer: C Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Graph Category: Qualitative

18)

FIGURE 18-1 Refer to Figure 18-1. A progressive tax is illustrated by curve(s) A) A and B. B) B and C. C) C and D. D) A only. E) C only. Answer: D Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Graph Category: Qualitative

19)

FIGURE 18-1 Refer to Figure 18-1. A proportional tax is illustrated by curve(s) A) A and B. B) B and C. C) C and D. D) B only. E) D only. Answer: D Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Graph Category: Qualitative

20)

FIGURE 18-1 Refer to Figure 18-1. A lump-sum tax is illustrated by curve(s) A) A and B. B) B and C. C) C and D. D) B only. E) D only. Answer: E Diff: 2 Type: MC Topic: 18.1a. progressive/regressive/proportional/lump-sum taxes Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Graph Category: Qualitative 21) Tax and other revenues collected by all levels of government amounted to approximately what proportion of Canada's Gross Domestic Product (GDP) in 2017? A) 9% B) 19% C) 29% D) 39% E) 49% Answer: D Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative

22) As a proportion of Gross Domestic Product (GDP), Canadian governments' tax revenues, as compared to other industrialized countries, are A) the very lowest. B) among the lowest. C) roughly in the middle of the group. D) among the highest. E) the very highest. Answer: C Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 23) In Canada, taxes are levied and collected by A) the federal government only. B) the provincial governments only. C) local governments only. D) federal and provincial governments only. E) all levels of government. Answer: E Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 24) The tax that generates the greatest proportion of government revenue in Canada is A) the income tax. B) the goods and services tax. C) the property tax. D) the provincial sales tax. E) the payroll tax. Answer: A Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative

25) In 2018, the federal income-tax rate was graduated in ________ brackets, with the top rate applying to incomes above approximately ________. A) eight; $40 000 B) eight; $200 000 C) three; $145 000 D) four; $145 000 E) five; $205 000 Answer: E Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 26) The table below shows 2018 federal income-tax rates in Canada. Taxable Income $0 - $46 605 $46 606 - $93 208 $93 209 - $144 489 $144 490 - $205 842 $205 843 and over

Marginal Tax Rate 15% 20.5% 26% 29% 33%

TABLE 18-1 Refer to Table 18-1. If an individual had a taxable income of $70 000, how much federal tax would be due? A) $3509 B) $4796 C) $10 500 D) $11 787 E) $14 350 Answer: D Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Table Category: Quantitative

27) The table below shows 2018 federal income-tax rates in Canada. Taxable Income $0 - $46 605 $46 606 - $93 208 $93 209 - $144 489 $144 490 - $205 842 $205 843 and over

Marginal Tax Rate 15% 20.5% 26% 29% 33%

TABLE 18-1 Refer to Table 18-1. If an individual had a taxable income of $175 000, how much federal tax would be due from the portion of earnings taxed at the maximum rate of 33%? A) $0 B) $1817 C) $8848 D) $38 725 E) $57 750 Answer: A Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Table Category: Quantitative

28) The table below shows 2018 federal income-tax rates in Canada. Taxable Income $0 - $46 605 $46 606 - $93 208 $93 209 - $144 489 $144 490 - $205 842 $205 843 and over

Marginal Tax Rate 15% 20.5% 26% 29% 33%

TABLE 18-1 Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the earnings taxed at the minimum rate of 15%? A) $0 B) $6991 C) $8003 D) $18 000 E) $31 200 Answer: B Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Table Category: Quantitative

29) The table below shows 2018 federal income-tax rates in Canada. Taxable Income $0 - $46 605 $46 606 - $93 208 $93 209 - $144 489 $144 490 - $205 842 $205 843 and over

Marginal Tax Rate 15% 20.5% 26% 29% 33%

TABLE 18-1 Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the earnings taxed at the rate of 20.5%? A) $1629 B) $17 004 C) $9553 D) $6966 E) $24 600 Answer: C Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Table Category: Quantitative

30) The table below shows 2018 federal income-tax rates in Canada. Taxable Income $0 - $46 605 $46 606 - $93 208 $93 209 - $144 489 $144 490 - $205 842 $205 843 and over

Marginal Tax Rate 15% 20.5% 26% 29% 33%

TABLE 18-1 Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the earnings taxed at the rate of 26%? A) $497 B) $5639 C) $8960 D) $6966 E) $31 200 Answer: D Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Table Category: Quantitative

31) The table below shows 2018 federal income-tax rates in Canada. Taxable Income $0 - $46 605 $46 606 - $93 208 $93 209 - $144 489 $144 490 - $205 842 $205 843 and over

Marginal Tax Rate 15% 20.5% 26% 29% 33%

TABLE 18-1 Refer to Table 18-1. If an individual had a taxable income of $120 000, how much total federal tax would be due? A) $6991 B) $9553 C) $31 200 D) $23 510 E) $39 600 Answer: D Diff: 3 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Table Category: Quantitative

32) The table below shows 2018 federal income-tax rates in Canada. Taxable Income $0 - $46 605 $46 606 - $93 208 $93 209 - $144 489 $144 490 - $205 842 $205 843 and over

Marginal Tax Rate 15% 20.5% 26% 29% 33%

TABLE 18-1 Refer to Table 18-1. If an individual had a taxable income of $200 000, how much total federal tax would be due? A) $30 000 B) $31 200 C) $47 669 D) $45 974 E) $58 000 Answer: D Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Table Category: Quantitative 33) From the perspective of individuals, the goods and services tax (GST) applies to A) additional income earned. B) expenditure rather than income. C) profits for self-employed individuals. D) saving rather than expenditure. E) total taxable income. Answer: B Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative

34) The goods and services tax (GST) in Canada is an example of a(n) A) proportional tax. B) invisible tax. C) progressive tax. D) excise tax. E) value-added tax. Answer: E Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 35) The most important source of revenue for the Canadian federal government is ________ taxes; the most important source of revenue for Canadian municipal governments is ________ taxes. A) income; excise B) property; payroll C) corporate; sales D) sales; property E) income; property Answer: E Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 36) Suppose a firm buys $1000 worth of inputs from other firms, hires $1000 worth of labour services, and has sales revenue of $2500. The firm's resulting profit is $500. According to a value-added tax such as the GST, this firm would pay taxes on A) $500. B) $1000. C) $1500. D) $2500. E) $4500. Answer: C Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Quantitative

37) Suppose a firm buys $3000 worth of inputs from other firms, hires $2000 worth of labour services, and has sales revenue of $7500. The firm's resulting profit is $2500. If the GST (a value-added tax) rate is 5%, this firm will pay ________ in GST. A) $0 B) $125 C) $225 D) $375 E) $2500 Answer: C Diff: 3 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Quantitative 38) In Canada, the corporate income tax is integrated with the ________, so that ________ are not taxed twice on the firm's earnings. A) sales tax; consumers B) property tax; corporations C) personal income tax; corporations D) sales tax; shareholders E) income tax; shareholders Answer: E Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 39) The federal corporate income tax in Canada is A) a proportional tax on profits. B) a progressive tax on revenues. C) a proportional tax on revenues. D) a flat tax on revenues. E) a progressive tax on profits. Answer: A Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative

40) The various provincial sales taxes are mildly regressive because A) richer households spend more in total and therefore pay more sales tax. B) poorer households tend to spend a larger proportion of their incomes than richer households. C) they are indirect taxes. D) they are value added taxes. E) richer households can avoid paying sales taxes while poorer households cannot. Answer: B Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 41) Interest earnings from accumulated savings are subject to personal income tax in Canada. As a result, A) total national saving is higher than it otherwise would be. B) there will be more capital accumulated for the economy. C) the interest paid on savings accounts increases. D) individuals have a reduced incentive to save. E) taxes applied to this income are regressive. Answer: D Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative 42) To which of the following is the Goods and Service Tax (GST) applied? A) the retail value of all goods B) the value of a firm's inputs in its production process C) each firm's contribution to the value of final output D) the total value of a firm's output E) the total value of a good at each step of the production process Answer: C Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Category: Qualitative

43) The figure below show a simplified version of the current (2018) Canadian federal income-tax system. The marginal income-tax rates for the five ranges of income are 15%, 20.5%, 26%, 29%, and 33% respectively.

FIGURE 18-2 Refer to Figure 18-2. An individual with a taxable income of $39 500 will pay ________ in income taxes. A) $0 B) $6122 C) $5925 D) $6109 E) $8690 Answer: C Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Graph Category: Quantitative

44) The figure below show a simplified version of the current (2018) Canadian federal income-tax system. The marginal income-tax rates for the five ranges of income are 15%, 20.5%, 26%, 29%, and 33% respectively.

FIGURE 18-2 Refer to Figure 18-2. An individual with a taxable income of $98 125 will pay $________ in income taxes. A) 15 209 B) 17 822 C) 22 513 D) 25 513 E) 29 877 Answer: B Diff: 3 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Graph Category: Quantitative

45) The figure below show a simplified version of the current (2018) Canadian federal income-tax system. The marginal income-tax rates for the five ranges of income are 15%, 20.5%, 26%, 29%, and 33% respectively.

FIGURE 18-2 Refer to Figure 18-2. This income-tax system can be characterized as A) cumbersome. B) fair. C) progressive. D) regressive. E) proportional. Answer: C Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Graph Category: Qualitative

46) The figure below show a simplified version of the current (2018) Canadian federal income-tax system. The marginal income-tax rates for the five ranges of income are 15%, 20.5%, 26%, 29%, and 33% respectively.

FIGURE 18-2 Refer to Figure 18-2. What must be true of the five marginal income-tax rates in order for the tax to be considered a "flat" tax? A) they need to be zero B) they need to be the same C) they need to be constant D) they need to gradually level out E) they need to be smaller Answer: B Diff: 2 Type: MC Topic: 18.1b. the Canadian tax system Skill: Applied Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Graph Category: Qualitative

47) The figure below show a simplified version of the current (2018) Canadian federal income-tax system. The marginal income-tax rates for the five ranges of income are 15%, 20.5%, 26%, 29%, and 33% respectively.

FIGURE 18-2 Refer to Figure 18-2. What needs to be true about the five marginal income-tax rates in order for this tax system to be considered regressive? A) They need to be smaller than they are now. B) They need to be larger than they are now. C) They need to be constant. D) They need to decrease as income increases. E) They need to increase as income increases. Answer: D Diff: 1 Type: MC Topic: 18.1b. the Canadian tax system Skill: Recall Learning Obj.: 18-1 Describe the main taxes in use in Canada. Graphics: Graph Category: Qualitative

18.2 Evaluating the Tax System 1) When assessing a tax system, "vertical equity" refers to A) equity within a given income group. B) equity across income groups. C) equity between corporate entities. D) unequal treatment of persons with unequal incomes. E) equity across different periods of time. Answer: B Diff: 1 Type: MC Topic: 18.2a. taxation and equity Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 2) The concept of vertical equity is derived from A) the benefit principle. B) the ability-to-pay principle. C) fiscal federalism. D) the proportionality of the income-tax system. E) the understanding that taxes generate distortions in the economy. Answer: B Diff: 1 Type: MC Topic: 18.2a. taxation and equity Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 3) If there were "horizontal equity" between all households in Canada, then A) households of the same size would share the same tax burden. B) individuals in the same age group would share the same tax burden. C) households with identical abilities to pay would bear the same tax burden. D) there would be equity between different income classes. E) all households would pay the same percentage of income as tax. Answer: C Diff: 1 Type: MC Topic: 18.2a. taxation and equity Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative

4) Consider the concept of equity in taxation. What is the "benefit principle"? A) the main principle on which all tax systems are based B) the main principle on which the Canadian tax system is based C) the principle that users of public goods are taxed in proportion to their use of them D) the principle that users of public goods are taxed in proportion to their ability to pay E) the main principle on which horizontal equity is based Answer: C Diff: 1 Type: MC Topic: 18.2a. taxation and equity Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 5) If one was concerned only with satisfying the "benefit principle," the ideal tax would be a(n) A) income tax. B) surcharge tax. C) sales tax. D) user charge. E) proportional income tax. Answer: D Diff: 1 Type: MC Topic: 18.2a. taxation and equity Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 6) Which of the following is an example of a tax that is designed according to the "benefit principle"? A) a metered water tax B) school tax (based on property value) C) a provincial sales tax D) value-added tax E) federal income tax Answer: A Diff: 2 Type: MC Topic: 18.2a. taxation and equity Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative

7) Suppose a Canadian Member of Parliament suggests that people with higher incomes should pay more in taxes. This refers to the concept of A) equality of outcomes. B) horizontal equity. C) vertical equity. D) proportionality. E) the benefit principle. Answer: C Diff: 1 Type: MC Topic: 18.2a. taxation and equity Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 8) Suppose a Canadian Member of Parliament suggests that people with the same total income and ability to pay should pay the same taxes, no matter the source of their income. This refers to the concept of A) equality of outcomes. B) horizontal equity. C) vertical equity. D) proportionality. E) the benefit principle. Answer: B Diff: 1 Type: MC Topic: 18.2a. taxation and equity Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 9) Consider two families, each of whom earn total income of $80 000, but that are different in many other respects, such as the number of individuals to support. If each family is assessed income tax payable of $14 749, then it is very likely that the principle of ________ is being violated. A) progressivity B) horizontal equity C) vertical equity D) ability to pay E) proportionality Answer: B Diff: 2 Type: MC Topic: 18.2a. taxation and equity Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative

10) Which of the following is considered to be the "direct burden" of a tax? A) the income tax that is deducted directly from salary income B) the administrative costs associated with paying the tax C) the administrative costs associated with collecting the tax D) the tax-deductible expenses for the person who pays the tax E) the total revenue collected by the tax Answer: E Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 11) Which of the following is considered to be the "excess burden" of a tax? A) the income tax that is deducted directly from salary income B) the deadweight loss created by the tax C) the administrative costs associated with paying the tax D) the administrative costs associated with collecting the tax E) the total revenue collected by the tax Answer: B Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 12) The two main competing goals in the design of a tax system are A) efficiency and productivity. B) efficiency and equity. C) efficiency and the elimination of distortions. D) applying the direct and excess burden of taxes evenly. E) growth and productivity. Answer: B Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative

13) An important objective in designing a tax system is to A) design a system that minimizes inefficiency for a given amount of revenue raised. B) design a system that raises the revenue required for the government's debt-service obligations. C) raise the maximum possible revenue. D) not intervene in the market economy because this only causes inefficiencies. E) eliminate all deadweight loss. Answer: A Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative

14)

FIGURE 18-3 Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially in equilibrium at P1. If an excise tax raises the price from P1 to P4, the excess burden of the tax is A) the area P3AP4. B) the area P1Cq10. C) the area P1CP4. D) the area BFC. E) impossible to calculate from the given information. Answer: C Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Qualitative

15)

FIGURE 18-3 Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially in equilibrium at P1. If an excise tax raises the price from P1 to P2, the excess burden of the tax is area A) P3AP4. B) P2BP3. C) P1CBP2. D) BFC. E) P1FBP2. Answer: D Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Qualitative

16)

FIGURE 18-3 Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially in equilibrium at P3. If an excise tax raises the price from P3 to P4, the direct burden of the tax is A) the area P3AP4. B) the area P2BP3. C) the area P1CP4. D) the area BFC. E) zero. Answer: E Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Qualitative

17)

FIGURE 18-3 Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially in equilibrium at P3. If an excise tax raises the price from P3 to P4, the excess burden of the tax is A) the area P3AP4. B) the area P2BP3. C) the area P1CP4. D) the area BFC. E) zero. Answer: A Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Qualitative

18)

FIGURE 18-3 Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially in equilibrium at P1. If an excise tax raises the price from P1 to P2, the direct burden of the tax is A) the area DEFB. B) the area P1FBP2. C) the area P1CBP4. D) the area BFC. E) zero. Answer: B Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Qualitative

19) The diagram below shows supply and demand diagrams (S and D) for some product. The government then imposes an excise tax. The new supply curve is .

FIGURE 18-4 Refer to Figure 18-4. What is the producers' revenue before the imposition of the tax? A) $450 B) $500 C) $540 D) $600 E) $630 Answer: D Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Quantitative

20) The diagram below shows supply and demand diagrams (S and D) for some product. The government then imposes an excise tax. The new supply curve is .

FIGURE 18-4 Refer to Figure 18-4. What is the producers' net revenue after the imposition of the tax? A) $450 B) $500 C) $540 D) $600 E) $630 Answer: A Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Quantitative

21) The diagram below shows supply and demand diagrams (S and D) for some product. The government then imposes an excise tax. The new supply curve is .

FIGURE 18-4 Refer to Figure 18-4. What is the value of the tax imposed on this product, in dollars per unit? A) $1 B) $2 C) $3 D) $4 E) $5 Answer: B Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Quantitative

22) The diagram below shows supply and demand diagrams (S and D) for some product. The government then imposes an excise tax. The new supply curve is .

FIGURE 18-4 Refer to Figure 18-4. What is the dollar value of the direct burden of this tax? A) -$30 B) $30 C) $90 D) $180 E) $450 Answer: D Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Quantitative

23) The diagram below shows supply and demand diagrams (S and D) for some product. The government then imposes an excise tax. The new supply curve is .

FIGURE 18-4 Refer to Figure 18-4. What is the dollar value of the excess burden of this tax? A) $1 B) $2 C) $5 D) $10 E) $40 Answer: D Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Quantitative

24) What information is conveyed by the shape of the Laffer curve ? A) the relationship between marginal and average tax rates B) the relationship between the government's total income-tax revenue and the average rate across all taxes C) the relationship between the government's sales-tax yield and the marginal tax rate D) that, for any tax, tax revenues reach a maximum at some tax rate below 100% E) that tax revenues reach a maximum when the marginal tax rate is zero Answer: D Diff: 1 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Qualitative 25) Which of the following best describes the policy implications of a Laffer curve? A) Policymakers should eliminate tax deductions and maximize revenue at any given tax rate. B) Policymakers should eliminate tax loopholes and maximize revenue at any given tax rate. C) Policymakers should carefully consider whether a given increase in tax rates would increase or decrease tax revenues. D) Policymakers should avoid imposing taxes on income as they decrease the work incentive. E) Policymakers should set the tax rate as low as possible to maximize tax revenue. Answer: C Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Graphics: Graph Category: Qualitative 26) Consider a monopolist that is earning profits in the long run. If the government imposes a lump-sum tax on this monopolist (that is less than its profits), then A) output would decrease and price to consumers would increase. B) neither output nor price would change. C) the output would remain the same while price increased. D) the monopolist would cease production. E) new firms would enter the industry. Answer: B Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative

27) In an otherwise efficient market, an excise tax causes ________ because it distorts the relationship between ________. A) allocative inefficiency; prices and marginal costs B) allocative inefficiency; pre-tax price and the tax price C) productive inefficiency; costs and output D) market inefficiencies; prices of similar goods E) voter resentment; income and ability to pay Answer: A Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 28) The direct burden of a tax is ________. The excess burden reflects the ________. A) the deadweight loss of the tax; the inefficiency of the tax B) the amount paid by taxpayers; the amount paid by taxpayers in excess of the freemarket price. C) the costs of administering the tax; the amount paid by taxpayers D) the costs of administering the tax; amount paid by taxpayers in excess of the freemarket price. E) the amount paid by taxpayers; allocative inefficiency of the tax Answer: E Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 29) The excess burden of a tax reflects a reduction of A) allocative inefficiency. B) total tax revenues. C) total economic surplus. D) both equilibrium price and quantity. E) economic profits generated in the economy. Answer: C Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative

30) Since corporate income taxes are levied on accounting profits and not economic profits, they tend to A) favour the accounting profession as it boosts demand of their services. B) introduce double taxation as individual shareholders also pay income tax on dividend income. C) be efficient since economic profits are hard to assess. D) be inefficient since they will affect the allocation of resources. E) be inefficient since they fail to contribute substantially to federal revenues. Answer: D Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 31) Possible implications of corporate income taxes being levied on accounting profits include 1) underinvestment in new machinery and equipment; 2) a lower rate of adoption of the latest technologies; 3) faster productivity growth. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: D Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Recall Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Qualitative 32) Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $9 and 850 visits per week. Now suppose the town government imposes a tax such that the new equilibrium price and quantity are $10.50 and 780 visits per week. What is the direct burden of this tax? A) $0 B) $105 C) $1170 D) $1275 E) There is not enough information to know. Answer: E Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency.

Category: Quantitative

33) Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $9 and 850 visits per week. Now suppose the town government imposes a tax of $2 per movie admission and that the new equilibrium price and quantity are $10.50 and 780 visits per week. What is the weekly direct burden of this tax? A) $0 B) $105 C) $1170 D) $1560 E) $1700 Answer: D Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Quantitative 34) Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $9 and 850 visits per week. Now suppose the town government imposes a tax of $2 per movie admission and that the new equilibrium price and quantity are $10.50 and 780 visits per week. What is the weekly excess burden of this tax? A) $0 B) $2 C) $70 D) $1560 E) $1700 Answer: C Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Quantitative 35) Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $7 and 940 visits per week. Now suppose the town government imposes a tax of $3 per movie admission, and the new equilibrium price and quantity are $8.75 and 750 visits per week. What is the direct burden of this tax? A) $937.50 B) $1312.50 C) $1645 D) $2250 E) There is not enough information to know. Answer: D Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency

Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Quantitative 36) Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $7 and 940 visits per week. Now suppose the town government imposes a tax of $3 per movie admission, and the new equilibrium price and quantity are $8.75 and 750 visits per week. What is the weekly excess burden of this tax? A) $285 B) $1312.50 C) $570 D) $2250 E) There is not enough information to know. Answer: A Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Quantitative 37) Suppose an additional "special" tax of $0.10 per litre is imposed on the sale of gasoline in one province. Prior to the tax the price was $1.30 per litre and 10 million litres of gasoline are sold per day. After imposition of the tax, the new equilibrium price and quantity are $1.38 per litre and 9.6 million litres per day. What is the direct burden of this "special" tax? A) $40 000 per day B) $768 000 per day C) $192 000 per day D) $960 000 per day E) There is not enough information to know. Answer: D Diff: 3 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Quantitative 38) Consider a 10% excise tax that is similarly applied to good X, which has a price elasticity of 2.7, and to good Y, that has a price elasticity of 0.6. We can predict that the excess burden of this tax in the market for good X will be ________ the excess burden in the market for good Y. A) no larger than B) equal to C) smaller than D) larger than E) 2.1 times the size of Answer: D

Diff: 2 Type: MC Topic: 18.2b. taxation and efficiency Skill: Applied Learning Obj.: 18-2 Explain why a tax can lead to allocative inefficiency. Category: Quantitative 18.3 Public Expenditure in Canada 1) Which of the following government expenditures is an example of a transfer payment? A) employment-insurance (EI) payments B) construction costs of a new government-owned airport C) salaries of welfare case workers D) education payments E) payments made to the Canadian International Development Agency (CIDA) Answer: A Diff: 1 Type: MC Topic: 18.3a. fiscal federalism and government transfers Skill: Applied Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Qualitative 2) Which of the following expenditures by Canada's federal government is considered a government purchase? A) employment-insurance payments B) Old Age Security payments C) equalization payments D) child tax benefit E) payment of the Prime Minister's salary Answer: E Diff: 2 Type: MC Topic: 18.3a. fiscal federalism and government transfers Skill: Recall Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Qualitative 3) One of the guiding principles in Canada's system of "fiscal federalism" is that A) only provinces that are "federalist" should receive fiscal assistance from the federal government. B) each province is an independent fiscal entity. C) the tax base should be approximately equal in each of the provinces and territories. D) the true cost of provision of public goods to the various provinces of Canada should be recovered in tax revenue from the province receiving the benefit. E) individuals should have approximately the same access to public services, at broadly comparable tax rates, no matter where they live. Answer: E Diff: 1 Type: MC

Topic: 18.3a. fiscal federalism and government transfers Skill: Recall Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Qualitative

4) Which of the following best explains the essence of Canada's system of fiscal federalism? A) the constitutional delegation of fiscal responsibilities between federal, provincial, territorial and municipal governments B) the law that determines the formula for Canada's system of equalization payments C) the coordination on taxing and spending that is necessary between the federal, provincial, territorial and municipal governments to meet the needs of all Canadian residents D) the division of powers between the federal government and the provincial governments E) the coordination necessary for joint collection of federal and provincial income taxes Answer: C Diff: 2 Type: MC Topic: 18.3a. fiscal federalism and government transfers Skill: Recall Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Qualitative 5) Which of the following best describes the Canadian federal government's system of "equalization payments"? A) Payments made out of the federal government's general revenues to provinces with below-average tax capacity. B) Payments made by provinces with above-average tax capacity to the federal government. C) Payments made to provinces with inadequate "tax room." D) Payments made by richer provinces to poorer provinces in the form of no-interest loans. E) Payments that were established in 1867 between the original provinces of Canada as a means of equalizing living standards across the country. Answer: A Diff: 1 Type: MC Topic: 18.3a. fiscal federalism and government transfers Skill: Recall Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Qualitative 6) The Canada Health Transfer (CHT) and the Canada Social Transfer (CST) refer to transfer payments made by the federal government to A) the Medicare program. B) individuals. C) specific social programs. D) municipal governments. E) provincial governments. Answer: E Diff: 1 Type: MC Topic: 18.3a. fiscal federalism and government transfers

Skill: Recall Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Qualitative

7) Which of the following areas of spending account for the largest portion of total Canadian government expenditures? (At all levels of government combined.) A) equalization payments B) defence spending C) subsidies to Canadian businesses D) social services E) interest payments on public debt Answer: D Diff: 1 Type: MC Topic: 18.3a. fiscal federalism and government transfers Skill: Recall Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Qualitative 8) Which of the following statements about the Canada Health Transfer (CHT) and the Canada Social Transfer (CST) is correct? A) The federal government makes the CHT and the CST annually to the provinces, who are legally bound to spend on the funds for their intended purposes. B) The federal government makes the CHT and CST annually to the provinces, who in turn make transfers to individuals according to need. C) The federal government makes the CHT and CST annually to the provinces for spending on health and social programs, but the provinces are free to spend the funds as they wish. D) The CHT and CST are both components of equalization payments from the federal to provincial governments. E) The CHT and CST are demogrants that are transferred annually from the federal government to individuals residing in regions of Canada that lack adequate access to health and education programs. Answer: C Diff: 3 Type: MC Topic: 18.3a. fiscal federalism and government transfers Skill: Recall Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Qualitative

9) How are the Canada Health Transfer (CHT) and the Canada Social Transfer (CST) allocated to each of the provinces? A) according to the tax base of the province B) on an equal per capita basis C) according to the tax base and age structure of the province and its population D) on an equal per capita basis after subtracting any equalization payments payable to the province E) according to the different health and social needs of each province Answer: B Diff: 2 Type: MC Topic: 18.3a. fiscal federalism and government transfers Skill: Recall Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Qualitative 10) In 2018-2019, the Canada Health Transfer (CHT) was scheduled to grow at A) the same rate as national income growth. B) 4% per year. C) a rate equal to the rate of increase of provincial health-care expenditures. D) 2% per year. E) a rate equal to the increase in health-care costs. Answer: A Diff: 2 Type: MC Topic: 18.3a. fiscal federalism and government transfers Skill: Recall Learning Obj.: 18-3 Discuss the concept of fiscal federalism in Canada. Category: Quantitative 11) How is post-secondary education funded in Canada? A) It is a provincial responsibility, and is funded by property taxes. B) It is operated by municipalities and is funded by transfer payments from the federal government. C) It is a provincial responsibility but is funded by the federal government. D) It is funded exclusively from equalization payments from the federal government. E) It is a provincial responsibility, and is funded almost completely from provincial budgets. Answer: E Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative

12) How is publicly provided health care funded in Canada? A) It is a provincial responsibility, and is funded by property taxes. B) It is a provincial responsibility and is funded solely through provincial revenues. C) It is a federal responsibility and is funded solely through federal tax revenues. D) It is funded exclusively from equalization payments from the federal government. E) It is a provincial responsibility, and is funded partially by the federal government. Answer: E Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 13) Which of the following statements about public primary and secondary education in Canada is correct? A) They are exclusive federal responsibilities. B) They are funded by provincial governments, but managed by local school boards. C) They have eliminated illiteracy in Canada. D) They are funded by government as an income redistribution plan. E) They are purely public goods. Answer: B Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 14) Suppose all university students had to pay the full cost of their education. In that case, A) the federal debt could be eliminated. B) students would probably choose less education than what is socially optimal. C) the economic efficiency of the higher education system would be greatly enhanced. D) vertical equity would be enhanced, since university students would internalize the externalities of their educations. E) horizontal equity would be worsened because university students in general come from the lowest-income families. Answer: B Diff: 2 Type: MC Topic: 18.3b. Canadian social programs Skill: Applied Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative

15) Governments provide subsidies for post-secondary education in Canada. One equitybased argument against this policy is A) the subsidy is essentially a transfer from lower-income, non-university-trained taxpayers to potentially higher-income-earning university students. B) few externalities are involved. C) relative to the federal contribution, the provincial contribution to higher education is too high. D) the subsidies would encourage people not to seek employment. E) only the individual achieves economic advantages from his or her education. Answer: A Diff: 2 Type: MC Topic: 18.3b. Canadian social programs Skill: Applied Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 16) Governments provide subsidies for post-secondary education in Canada. One efficiency-based argument in favour of this policy is that A) the subsidy is essentially a transfer from lower-income, non-university-trained taxpayers to potentially higher-income-earning university students. B) there are positive externalities involved in the consumption of education. C) relative to the federal contribution, the provincial contribution to higher education is too low. D) the subsidies would encourage people not to seek employment. E) very few benefits from an individual's education accrue to society as a whole. Answer: B Diff: 2 Type: MC Topic: 18.3b. Canadian social programs Skill: Applied Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 17) An efficiency argument for public provision of basic education is that A) many poor families could not afford to educate their children if they had to pay for it themselves. B) society as a whole benefits when all of its citizens have the basic skills and knowledge acquired from kindergarten to grade 12. C) the government is best able to assess the level of provision for which marginal cost equals marginal benefit. D) the government can best provide education up to that point where marginal benefit is zero. E) education cannot be efficiently provided by private firms. Answer: B Diff: 2 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall

Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative

18) The efficiency argument for government provision of health care is that A) many poor people could not afford health care if they had to pay for it. B) the government is best able to assess the level of provision for which marginal cost equals marginal benefit. C) the government can provide health care up to that point where marginal benefit is zero. D) a healthy population is important to the smooth functioning of a country and its economy. E) health care cannot be efficiently provided by private firms. Answer: D Diff: 2 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 19) In Canada, students' tuition fees for post-secondary education account for about A) 12% of total costs. B) 16% of total costs. C) 28% of total costs. D) 50% of total costs. E) 54% of total costs. Answer: C Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 20) Taking all federal and provincial expenditures into account. What is Canada's single most expensive social program? A) the public health-care system B) the basic education system C) employment-insurance payments D) post-secondary education programs E) social-assistance payments Answer: A Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative

21) Statistics Canada defines the poverty line as the level of income at which a household A) earns less than $14 500 during a calendar year. B) spends more than 87% of its income on the three basic necessities of food, shelter, and clothing. C) spends more than 63% of its income on the three basic necessities of food, shelter, and clothing. D) is in the bottom 10% of income groups. E) adjusted for family size earns less than the average family income in Canada. Answer: C Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 22) According to Statistics Canada's definition, the percentage of families living below the poverty line in Canada in 2016 was approximately A) 25%. B) 20%. C) 13%. D) 8%. E) 4%. Answer: D Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 23) A "poverty trap" refers to the situation where A) low-income persons whose only income for a period of 5 or more years has been welfare benefits. B) tax-generated disincentives exist for middle-income persons to increase their earned income. C) low-income persons whose only income for a period of 2 or more years has been welfare benefits. D) tax-generated disincentives exist for very-low-income persons to increase their earned income. E) the government has imposed a negative income tax. Answer: D Diff: 2 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative

24) Consider the following statement: "In Canada, there will always be some families living in poverty." Which of the following statements best explains why this statement may be true? A) If the definition of poverty is an absolute one, then a certain percentage of families will always be poor. B) Economic growth will never be high enough to lift all families above the low-income cut off. C) If the definition of poverty is an absolute one, then an absolute number of families will be defined as living in poverty. D) If the definition of poverty is a relative one, then some families will always be defined as poor relative to richer families. E) If the definition of poverty is a relative one, then a constant number of families will always be defined as living in poverty. Answer: D Diff: 2 Type: MC Topic: 18.3b. Canadian social programs Skill: Applied Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 25) The Employment Insurance (EI) system operates whereby A) Canadians contribute during their working years and then receive payments when they are retired. B) the federal government transfers funds to provincial governments. C) any unemployed worker is paid while searching for employment. D) the federal and provincial governments allow income-tax deductions for contributions made to special retirement funds. E) eligible unemployed workers are paid while searching for new employment. Answer: E Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 26) Registered Retirement Savings Plans (RRSPs) operate whereby A) Canadians contribute during their working years and then receive payments when they are retired. B) the federal government transfers funds to provincial governments. C) any unemployed worker is paid while searching for employment. D) the federal and provincial governments allow income-tax deductions for contributions made to special retirement funds. E) eligible unemployed workers are paid while searching for new employment. Answer: D Diff: 1 Type: MC Topic: 18.3b. Canadian social programs

Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 27) The Canada (and Quebec) Pension Plans (CPP and QPP) operate whereby A) Canadians contribute during their working years and then receive payments when they are retired. B) the federal government transfers funds to provincial governments. C) any unemployed worker is paid while searching for employment. D) the federal and provincial governments allow income-tax deductions for contributions made to special retirement funds. E) eligible unemployed workers are paid while searching for new employment. Answer: A Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 28) Because government benefits paid by most universal programs are taxable, their net after-tax yield depends on the income of the recipient. Hence A) gross payments may be universal, but net benefits are not. B) gross payments may not be universal, but net benefits are. C) gross payments may not be universal, and net benefits are not. D) gross payments and net benefits are universal. E) only higher-income households can benefit fully from such programs. Answer: A Diff: 2 Type: MC Topic: 18.3b. Canadian social programs Skill: Applied Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 29) Why do social and economic policies often involve a tradeoff between efficiency and equity? Because A) income redistribution increases incentives for efficient behaviour of economic units. B) economic units who are efficient completely dislike equity. C) income redistribution often reduces incentives for efficient behaviour of economic units. D) the economy can achieve efficient allocation of resources by starting with unequal allocation of resources. E) it is not possible to improve efficiency with economic policies. Answer: C Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall

Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative

30) Welfare recipients are sometimes faced with a withdrawal of welfare benefits and an increase in income tax as their earned income rises. This creates a problem because A) firms become unwilling to hire people that are currently unemployed. B) of the powerful disincentives to work for low-income individuals. C) of the incentives for workers to shirk and/or retire early. D) of the incentives for firms to lay off workers more frequently for short periods. E) it is administratively difficult to track these individuals. Answer: B Diff: 2 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 31) What is a demogrant? A) a federal transfer to individuals that is administered through the tax system B) a federal transfer to provincial governments that is adjusted annually based on demographic shifts in the province C) a social benefit that is paid to individuals according to their demographic group (race, age or income group, for example) D) a social benefit that is paid to individuals depending on their income E) a social benefit that is paid to individuals, regardless of their income Answer: E Diff: 1 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative 32) What are the five pillars of Canadian social policy? A) education, health care, foreign aid, agricultural support, and retirement benefits B) education, health care, agricultural support, research and development, and retirement benefits C) education, health care, foreign aid, employment insurance and welfare payments D) education, health care, welfare payments, foreign aid, and employment insurance E) education, health care, income support, employment insurance and retirement benefits Answer: E Diff: 3 Type: MC Topic: 18.3b. Canadian social programs Skill: Recall Learning Obj.: 18-4 Describe Canada's major social programs. Category: Qualitative

18.4 Evaluating the Role of Government 1) There is an important and ongoing debate about the appropriate balance between the public and private sectors in the economy. This debate A) has been solved in Canada. B) is largely about the marginal benefits of public spending versus the marginal benefits of private spending. C) was solved by John Kenneth Galbraith in his book The Affluent Society. D) was solved by James Buchanan, a Nobel laureate. E) is entirely subjective and cannot be objectively analyzed. Answer: B Diff: 1 Type: MC Topic: 18.4 evaluating the role of government Skill: Applied Learning Obj.: 18-5 Consider the costs and benefits of government intervention in the economy. Category: Qualitative 2) Consider the allocation of a nation's resources between additional public-sector spending versus additional private spending. John Kenneth Galbraith argued that A) the value of the marginal dollar spent by government is less than the value of that dollar left in the hands of households or firms. B) public sector spending is always subject to corruption and is therefore not as valuable as private spending. C) the marginal utility of an additional dollar's worth of spending on public goods is higher than an additional dollar's worth of spending on private goods. D) compared to public spending, private spending leads to more sustained long-run economic growth. E) compared to private spending, public spending leads to more sustained long-run economic growth. Answer: C Diff: 2 Type: MC Topic: 18.4 evaluating the role of government Skill: Recall Learning Obj.: 18-5 Consider the costs and benefits of government intervention in the economy. Category: Qualitative

3) Consider the allocation of a nation's resources between additional public-sector spending versus additional private spending. James Buchanan argued that A) given the current size of government, the value of the marginal dollar spent by government is less than the value of that dollar left in the hands of households or firms. B) public sector spending is always subject to corruption and is therefore not as valuable as private spending. C) the marginal utility of an additional dollar's worth of spending on public goods is higher than an additional dollar's worth of spending on private goods. D) compared to public spending, private spending leads to more sustained long-run economic growth. E) compared to private spending, public spending leads to more sustained long-run economic growth. Answer: A Diff: 2 Type: MC Topic: 18.4 evaluating the role of government Skill: Recall Learning Obj.: 18-5 Consider the costs and benefits of government intervention in the economy. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 19 What Macroeconomics Is All About 19.1 Key Macroeconomic Variables 1) Macroeconomics is mainly concerned with the study of A) individual households and how they deal with problems like inflation and unemployment. B) large economic units such as General Motors or Molson Breweries. C) fluctuations and trends in disaggregated data. D) fluctuations and trends in aggregated data. E) governments and their intervention in individual markets. Answer: D Diff: 1 Type: MC Topic: 19.1a. the study of macroeconomics Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 2) The economic problems studied in macroeconomics include: 1) the level of economic activity; 2) competition policy; 3) the rate of unemployment. A) 1 only B) 2 only C) 3 only

D) 1 and 2 E) 1 and 3 Answer: E Diff: 1 Type: MC Topic: 19.1a. the study of macroeconomics Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

3) An example of a topic outside the scope of macroeconomics is A) changes in the price of a particular good in a specific market. B) changes in the unemployment rate. C) the aggregate growth rate of the economy. D) the overall level of unemployment. E) the level of productivity, as compared with that in the United States. Answer: A Diff: 1 Type: MC Topic: 19.1a. the study of macroeconomics Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 4) An equivalent term for "real national income" is A) nominal national income. B) current-dollar national income. C) constant-dollar national income. D) actual national income. E) potential national income. Answer: C Diff: 1 Type: MC Topic: 19.1b. national output/national income Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 5) A nation's real national income in a given year measures the A) current-dollar national income earned in the economy. B) value of output produced by the economy, measured in constant dollars. C) level of national income that is subject to taxation by the federal government. D) market value of national output produced by the economy. E) opportunity cost of the economy's national output. Answer: B Diff: 2 Type: MC Topic: 19.1b. national output/national income Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

6) Which of the following is an accurate statement about real national income? A) It always equals nominal national income. B) It changes by the same amount and in the same direction as does nominal national income. C) It changes only when the underlying quantities of output change. D) It refers to national income with no adjustment for changes in prices. E) It refers to national wealth but is not an indicator of current production. Answer: C Diff: 2 Type: MC Topic: 19.1b. national output/national income Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 7) In macroeconomics, the term "national income" refers to A) all sales of both current production and used goods. B) only those sales of currently produced goods sold to other nations. C) the value of a nation's total wealth. D) the value of the income generated by the production of total output. E) total current spending by all households. Answer: D Diff: 1 Type: MC Topic: 19.1b. national output/national income Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 8) An upward trend in real national income over an extended period of time is called A) an inflationary boom. B) aggregate output. C) constant-dollar national income. D) potential national income. E) economic growth. Answer: E Diff: 1 Type: MC Topic: 19.1b. national output/national income Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

9) Suppose that in 2019 Canada's automobile manufacturers produced 2 million cars priced at $20 000 each; in 2020 they produced 1 million cars priced at $40 000 each. Ceteris paribus, the change in nominal national income is A) a decrease because fewer cars were produced. B) an increase because the price of each car increased. C) insufficient information to know. D) no change in nominal national income. E) an increase because of inflation. Answer: D Diff: 2 Type: MC Topic: 19.1b. national output/national income Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 10) Suppose Honest Rob's Used Cars buys a used car for $2000 and resells it for $3000. The result of Honest Rob's transactions is to A) decrease the value of national income by $3000. B) decrease the value of national income by $1000. C) leave the value of national income unchanged. D) increase the value of national income by $1000. E) increase the value of national income by $3000. Answer: D Diff: 2 Type: MC Topic: 19.1b. national output/national income Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 11) To compare the economy's aggregate output in two different time periods, economists compare the A) nominal national income for the two periods. B) potential national incomes for the two periods. C) real national income for the two periods. D) unemployment rates for the two periods. E) inflation rates for the two periods. Answer: C Diff: 1 Type: MC Topic: 19.1b. national output/national income Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

12) In order to determine the economy's real GDP growth rate between two time periods, we should look at A) nominal national income, because it compares actual output in each time period. B) real national income in each time period, which is equal to nominal national income corrected for price-level changes. C) potential national income, corrected for price-level changes. D) real national income in each period, which is equal to nominal national income corrected for quantity changes. E) only the real national product from the latest time period. Answer: B Diff: 2 Type: MC Topic: 19.1b. national output/national income Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 13) In macroeconomics, if the value of the national product increases, there is A) an even larger increase in the value of income claims on that output, due to value added. B) a decrease in value of income claims on that output, due to taxation. C) a decrease in the value of income claims on that output, due to importing. D) a decrease in the value of income claims on that output, due to household saving. E) an equal increase in the value of income claims on that output. Answer: E Diff: 2 Type: MC Topic: 19.1b. national output/national income Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 14) Suppose Appliance Mart buys a used refrigerator for $100, repairs it, and resells it for $250. The result of this transaction is to A) increase the value of national product by $250. B) leave the value of national product unchanged. C) increase the value of national product by $150. D) decrease the value of national product by $100. E) There is insufficient information to know. Answer: C Diff: 1 Type: MC Topic: 19.1b. national output/national income Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

15) What does real GDP measure? A) the constant-dollar value of the potential output of the nation's economy over the period of one year B) the constant-dollar value of total output produced by the nation's economy over the period of one year C) the fluctuations of national income around its long-term trend D) the annual growth rate of real national income E) the long-term trend in total output produced by the nation's economy Answer: B Diff: 1 Type: MC Topic: 19.1b. national output/national income Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 16) Consider a small economy with 3 individuals where each individual produces and sells $1000 worth of final goods and services. The national income for this economy is A) $3000. B) less than $3000 if some of the income is saved. C) more than $3000 if some of the income is invested. D) less than $3000 if there are taxes in this economy. E) more than $3000 if the individuals are earning profits. Answer: A Diff: 2 Type: MC Topic: 19.1b. national output/national income Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 17) Consider a small economy with 3 individuals. Individual A produces 100 chickens that sell for $8 each. Individual B produces 50 bags of corn that sell for $10 each. Individual C produces 40 bushels of apples that sell for $20 each. National income in this economy is A) 100 chickens plus 50 bags of corn plus 40 bushels of apples. B) 190 units of goods produced. C) $2100. D) $2470. E) not determinable from the information provided. Answer: C Diff: 2 Type: MC Topic: 19.1b. national output/national income Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports.

Category: Quantitative 18) Which of the following is the best description of the business cycle? A) the normal cycle of profits and losses by producers in the economy B) the short-run fluctuations of national income around its trend value C) a five-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods D) a ten-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods E) the fluctuations of one country's national income in comparison to another country's national income Answer: B Diff: 2 Type: MC Topic: 19.1b. national output/national income Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 19) What is potential or full-employment output? A) the maximum GDP that an economy actually achieves throughout its entire history B) the level of output achieved during periods when all of the labour force is employed C) a target level of income determined by the government D) the GDP that would be produced if the economy's resources were fully employed at a normal intensity of use E) the GDP that could be produced if the economy's resources were fully employed at their maximum intensity of use Answer: D Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 20) Which of the following is an equivalent term for "full-employment output"? A) actual output B) long-run output C) gross national product (GNP) D) gross domestic product (GDP) E) potential output Answer: E Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income,

unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 21) In macroeconomics, the "output gap" is the difference between A) output in the current year and output in the base year. B) output and employment. C) potential real national income and actual real national income. D) real GNP and real GDP. E) real and nominal national income. Answer: C Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 22) In macroeconomics, what is the output gap? A) the measure of output that could have been produced if the economy were fully employed B) the dead-weight loss of inflation C) the difference between nominal and real output D) the percentage change in real GDP E) the difference between Y and Y* Answer: E Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 23) Which of the following correctly describes the meaning of the expression Y < Y*? A) actual output is less than potential output - a recessionary gap B) potential output is less than actual output - a recessionary gap C) actual output is less than potential output - an inflationary gap D) potential output is less than actual output - an inflationary gap Answer: A Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

24) Which of the following correctly describes the meaning of the expression Y > Y*? A) actual output is more than potential output - a recessionary gap B) potential output is more than actual output - a recessionary gap C) actual output is more than potential output - an inflationary gap D) potential output is more than actual output - an inflationary gap Answer: C Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 25) Consider an output gap where Y < Y*. This output gap A) is desirable because it keeps wage costs low. B) represents a loss of output due to unemployed resources. C) tends to force prices up. D) occurs when there is excess demand. E) is known as an inflationary boom. Answer: B Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 26) Suppose actual output is less than potential output. If the output gap measures the output loss due to the failure to achieve full employment, it can generally be concluded that the larger this output gap, the A) greater is the employment rate. B) greater is the unemployment rate. C) lower is frictional unemployment. D) lower the deadweight loss of unemployment. E) more upward pressure there is on prices. Answer: B Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

27) Economic booms can cause problems as well as create benefits because they are often accompanied by A) deflationary pressures. B) excessive labour-force participation. C) inflationary pressures. D) pressure on the government budget deficit to rise. E) rising real interest rates. Answer: C Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 28) In the study of short-run fluctuations in national income, potential income (output) is usually assumed to be A) falling at its average growth rate. B) moving together with potential output in neighbouring countries. C) constant. D) equal to actual income. E) irrelevant, as the economy is rarely there. Answer: C Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 29) Consider short-run fluctuations in real GDP around its trend value. We can say that such fluctuations are A) generally ignored by economists, because these fluctuations do not affect behaviour of other variables such as the unemployment rate. B) generally ignored by economists, because these fluctuations are constant and predictable. C) referred to in economics as "background noise." D) referred to in economics as "the business cycle." E) unimportant to the study of macroeconomics. Answer: D Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

30) Consider an economy in which existing capital is being used intensively, shortages in labour and goods markets are developing, and costs are rising. Which of the following terms best describes this stage of the business cycle? A) trough B) recovery C) boom D) recession E) slump Answer: C Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 31) On a graph showing real national income on the vertical axis and time on the horizontal axis, the trend-line would probably be a good approximation of the A) business cycle. B) distribution of income. C) inflation rate. D) path of potential output. E) unemployment rate. Answer: D Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 32) On a graph showing real national income on the vertical axis and time on the horizontal axis, the fluctuations of real national income around the trend-line would indicate the A) business cycle. B) distribution of income. C) inflation rate. D) path of potential output. E) unemployment rate. Answer: A Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Graph

Category: Qualitative 33) When macroeconomists use the term "recession" they usually define it as a fall in real GDP that lasts for at least A) one quarter. B) two quarters. C) three quarters. D) one year. E) two years. Answer: B Diff: 1 Type: MC Topic: 19.1c. potential output and output gaps Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 34) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2012 2013 2014 2015 2016 2017 2018

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 19-1 Refer to Table 19-1. In which years was this economy experiencing a recessionary gap? A) 2015, 2016 B) 2012, 2013, 2017 C) 2014, 2018 D) 2012, 2013, 2014 E) 2016, 2017, 2018 Answer: B Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

35) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2012 2013 2014 2015 2016 2017 2018

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 19-1 Refer to Table 19-1. In which years was this economy experiencing an inflationary gap? A) 2015, 2016 B) 2012, 2013 C) 2016, 2017 D) 2014, 2018 E) 2012, 2013, 2017 Answer: A Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

36) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2012 2013 2014 2015 2016 2017 2018

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 19-1 Refer to Table 19-1. What is the unemployment rate when this economy is at "full employment"? A) 5.9% B) 6.0% C) 6.3% D) 7.0% E) 7.1% Answer: C Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Qualitative

37) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2012 2013 2014 2015 2016 2017 2018

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 19-1 Refer to Table 19-1. In which years are the factors of production in this economy said to be "fully employed"? A) 2012, 2013, 2017 B) 2014, 2018 C) 2015, 2016 D) all years E) none of the years Answer: B Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

38) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2012 2013 2014 2015 2016 2017 2018

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 19-1 Refer to Table 19-1. What is the output gap in 2013? A) $408 billion B) $411 billion C) $7.1 billion D) $3 billion E) -$3 billion Answer: E Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

39) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2012 2013 2014 2015 2016 2017 2018

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 19-1 Refer to Table 19-1 What is the output gap in 2015? A) $420 billion B) $418 billion C) -$2 billion D) -$20 billion E) $2 billion Answer: E Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

40) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2012 2013 2014 2015 2016 2017 2018

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 19-1 Refer to Table 19-1. In the year 2015, it is probably the case that workers are ________ and factories are ________. A) facing cyclical unemployment; facing temporary shut downs B) working longer than normal hours; facing temporary shutdowns C) experiencing zero unemployment; operating extra shifts D) experiencing zero unemployment; operating beyond their normal capacity E) working longer than normal hours; operating beyond their normal capacity Answer: E Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Qualitative

41) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2012 2013 2014 2015 2016 2017 2018

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 19-1 Refer to Table 19-1. In the year 2017, it is probably the case that workers are ________ and factories are ________. A) facing cyclical unemployment; facing temporary shut downs B) working longer than normal hours; facing temporary shutdowns C) experiencing zero unemployment; operating extra shifts D) experiencing zero unemployment; operating beyond their normal capacity E) working longer than normal hours; operating beyond their normal capacity Answer: A Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Qualitative 42) Women entered the labour force in large numbers in the 20 th century and increased the economy's GDP. This change A) created inflationary gaps. B) created recessionary gaps. C) raised potential output. D) was only possible in an economy operating above normal rates of utilization. E) was only possible in an economy operating below normal rates of utilization. Answer: C Diff: 2 Type: MC Topic: 19.1c. potential output and output gaps Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

43) A worker is considered unemployed if that worker has no job, is legally eligible to work, A) and is actively searching for employment. B) and is not collecting unemployment insurance. C) whether the worker is looking for a job or is not looking for a job. D) but only if they previously held a job. E) but only if they were previously employed for at least three consecutive months. Answer: A Diff: 1 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 44) Consider the growth in Canada's labour force and employment. Over the last 50 years, A) the labour force has grown much more rapidly than employment. B) both the labour force and employment have remained roughly constant. C) the number of unemployed persons has been a much larger fraction of the labour force than it was during the first half of the 20th century. D) the main trend of the economy has been one of growth in employment that roughly matches the growth in the labour force. E) the main trend of the economy has been to have employment grow more rapidly than the growth in output. Answer: D Diff: 2 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 45) How is Canada's unemployment rate determined? A) The rate is determined by Canada Census data. B) The rate is determined by a survey of Canadian employers. C) The federal government department HRSDC (Human Resources and Skills Development Canada) conducts a monthly survey of the labour force. D) Statistics Canada conducts a Labour Force Survey each month. E) An estimate is produced by HRSDC based on the previous month's unemployment rate adjusted by the current month's job losses and job gains. Answer: D Diff: 2 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income,

unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 46) Canada's unemployment rate has been as low as ________ in the 1960s and as high as ________ during the recession in the early 1980s. A) 4.6%; 14% B) 2.0%; 15% C) 5.5%; 17% D) 2.4%; 10% E) 3.4%; 12% Answer: E Diff: 1 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 47) If a country's labour force is 15 million people, and 1 million of those are unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 7.1%. Answer: D Diff: 2 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 48) If a country's population is 15 million people, and 1 million of those are unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 6.7%. D) 7.1% E) There is not enough information to know. Answer: E Diff: 3 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports.

Category: Quantitative

49) If a country's labour force is 15 million people, and 1.35 million of those are unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 9.0%. Answer: E Diff: 2 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 50) Suppose a country's population is 30 million and it has a labour force of 15 million people. If there are 1.35 million people unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 9.0%. Answer: E Diff: 2 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 51) Suppose that a country's population is 30 million and it has a labour force of 15 million people. If 14.5 million people are employed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 9.0%. Answer: B Diff: 2 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

52) Suppose the city of Calgary has a population of 1 million, a labour force of 575 000, and employment equal to 545 000. We can conclude that for legal and various other reasons ________ people are excluded from the labour force. A) 30 000 B) 420 000 C) 425 000 D) 445 000 E) 450 000 Answer: C Diff: 2 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 53) Suppose the city of Calgary, Alberta has a population of 1 million, a labour force of 575 000, and employment is equal to 545 000. The unemployment rate in Calgary is approximately A) 3.0%. B) 5.2%. C) 5.5%. D) 54.5%. E) 57.5%. Answer: B Diff: 2 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 54) Suppose a country has an unemployment rate of 20%. If we know the population is 38 million and the labour force is 25 million, then the number of people unemployed must be A) 5 million. B) 13 million. C) 20 million. D) 7.6 million. E) 2.6 million. Answer: A Diff: 3 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports.

Category: Quantitative

55) Suppose a small city has a population of 100 000 and a labour force of 60 000. Employment is 55 000 and 5000 workers are unemployed. How many people are not in the labour force? A) 40 000 B) 35 000 C) 30 000 D) 5000 E) 0 Answer: A Diff: 1 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 56) Suppose 27 million people in a country are employed and 3 million people are unemployed. What is the unemployment rate? A) 11% B) 89% C) 10% D) 90% E) Not able to determine from the information provided Answer: C Diff: 3 Type: MC Topic: 19.1d. employment, unemployment and the labour force Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 57) Which of the following is the best example of frictional unemployment? A) A worker is laid off because his firm has to reduce production due to reduced demand. B) A worker quits her current job to search for a better one. C) An ironworker cannot find a job in Alberta because all job vacancies are in Quebec. D) Bank tellers are unable to find jobs due to technological advances in the banking system. E) Inflationary pressures have led to higher wages for all jobs. Answer: B Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

58) Which of the following is the best example of cyclical unemployment? A) A worker is laid off because his firm had to reduce production due to reduced demand. B) A worker quits her current job to search for a better one. C) An ironworker cannot find a job in Alberta because all job vacancies are in Quebec. D) Bank tellers are unable to find jobs due to technological advances in the banking system. E) Inflationary pressures have led to higher wages for all jobs. Answer: A Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 59) Economists expect some unemployment to exist even at times of "full employment" for, among others, the following reasons: 1) actual GDP is rarely equal to potential GDP; 2) as the economy changes, the structure of the existing labour force is not the same as the structure of labour demand; 3) people entering the labour force typically take some time to find a job. A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1 and 2 Answer: D Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 60) The unemployment rate will understate the true amount of unemployment if A) the unemployment rate is rising. B) crime, divorce, and social unrest are all positively correlated with unemployment. C) the official unemployment figure excludes discouraged workers who have stopped actively looking for work. D) the labour force has grown more rapidly than output. E) the actual unemployment rate is greater than the natural rate of unemployment. Answer: C Diff: 3 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income,

unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 61) Cyclical unemployment is associated with which of the following? A) changes to the economy's industrial structure resulting from growth in some industries and decline in others B) an output level different from the economy's potential output C) differences between the characteristics of the supply of labour and the demand for labour D) people entering the labour force typically take some time to find a job E) people quitting their present jobs to look for other jobs Answer: B Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 62) Workers with experience and skills sometimes lose their jobs and become unemployed due to changing technology or market conditions, even while firms in other industries or regions are looking to hire more workers. This type of unemployment is called A) cyclical unemployment. B) frictional unemployment. C) historical unemployment. D) natural rate of unemployment. E) structural unemployment. Answer: E Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 63) Workers with marketable skills sometimes quit a job and become unemployed, with the expectation of soon finding a better job. This type of unemployment is called A) cyclical unemployment. B) frictional unemployment. C) historical unemployment. D) overly-optimistic unemployment. E) structural unemployment. Answer: B Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment

Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 64) Suppose the unemployment rate is 8.5% and we know that frictional and structural unemployment together account for 5.5%. The cyclical unemployment rate is then A) 14%. B) 8.5%. C) 5.5%. D) 3.0%. E) -3.0%. Answer: D Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 65) If the cyclical unemployment rate is negative, then the A) economy is operating beyond full employment. B) economy is operating at less than full employment. C) frictional unemployment rate is negative. D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative. Answer: A Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 66) If the cyclical unemployment rate is greater than zero, then the A) economy is operating beyond full employment. B) economy is operating at full employment. C) economy is operating at less than full employment. D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative. Answer: C Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports.

Category: Qualitative

67) As the banking industry becomes more and more automated, tellers find themselves with unneeded skills and some of them become unemployed. At the same time, software engineers are in increasing demand. These unemployed tellers would be classified as A) cyclically unemployed. B) frictionally unemployed. C) naturally unemployed. D) structurally unemployed. E) underemployed. Answer: D Diff: 2 Type: MC Topic: 19.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 68) The three main reasons that Canada's real GDP has increased steadily for many years are A) rising employment, increasing levels of education of the labour force and the increase in the participation rate of women in the labour force. B) an increasing stock of physical capital, increasing exports and rising employment. C) the increase in life expectancy, the rise in employment and increasing productivity. D) rising employment, increasing stock of physical capital and increasing productivity. E) increasing productivity of labour, increasing productivity of land and increasing productivity of the capital stock. Answer: D Diff: 3 Type: MC Topic: 19.1f. productivity Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 69) In some macroeconomic analyses, it is common to treat the level of productivity as roughly constant. This is a justifiable assumption in A) the long run. B) the short run. C) both the long run and the short run. D) neither the long run nor the short run. E) macroeconomics but not microeconomics. Answer: B Diff: 1 Type: MC Topic: 19.1f. productivity Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports.

Category: Qualitative 70) In general, productivity is a measure of A) the economy's ability to increase real GDP per capita. B) the amount of output that the economy produces per unit of input. C) real GDP as a function of total employment. D) the total amount of output that the economy is capable of producing. E) potential output. Answer: B Diff: 1 Type: MC Topic: 19.1f. productivity Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 71) The most common measure of productivity is ________, which can be measured as real GDP divided by ________. A) indexed productivity; per capita output B) factor productivity; the total number of factors employed in the economy C) capital productivity; the number of units of capital employed in the economy D) potential productivity; the total number of factors that would be employed in the economy at full employment E) labour productivity; the number of units of work effort Answer: E Diff: 2 Type: MC Topic: 19.1f. productivity Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 72) Consider a small economy with real GDP of $1 billion and the total number of hours worked equal to 5 million. Which of the following is the best measure of labour productivity in this economy? A) real GDP per hour worked = $20 B) real GDP per employed worker = $20 C) real GDP per hour worked = $200 D) real GDP per employed worker = $200 E) Not able to determine from the information provided Answer: C Diff: 3 Type: MC Topic: 19.1f. productivity Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports.

Category: Quantitative

73) Consider a small economy with real GDP of $1 billion and the number of workers employed equal to 2500. Which of the following is the best measure of labour productivity in this economy? A) real GDP per hour worked = $200 B) real GDP per employed worker = $200 000 C) real GDP per hour worked = $400 D) real GDP per employed worker = $400 000 E) Not able to determine from the information provided Answer: D Diff: 3 Type: MC Topic: 19.1f. productivity Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 74) Consider a small economy with 2500 employed workers who worked a total of 5 million hours at an average wage of $40 per hour. Which of the following is the best measure of labour productivity in this economy? A) real GDP per hour worked = $40 B) real GDP per employed worker = $80 000 C) real GDP per hour worked = $80 D) real GDP per employed worker = $125 000 E) Not able to determine from the information provided Answer: E Diff: 3 Type: MC Topic: 19.1f. productivity Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 75) Most economists believe the single largest cause of rising material living standards over long periods of time is A) productivity growth. B) rising employment. C) growth in the capital stock. D) real GDP growth. E) rising real wages. Answer: A Diff: 1 Type: MC Topic: 19.1f. productivity Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

76) Changes in productivity can be analyzed by looking at how GDP per employed worker changes over time or how GDP per hour worked changes over time. Why might one measure be more preferable than the other? A) GDP per hour worked is preferable because it eliminates the need to adjust for variations in productivity between employed workers. B) GDP per employed worker is more accurate because the data available on the number of employed workers is more accurate than the data available on the number of hours worked. C) GDP per hour worked is more accurate because the average number of hours worked per employed worker has changed over time. D) GDP per employed worker is preferable because the number of employed workers has risen significantly over time. E) Both measures are equally good. Answer: C Diff: 3 Type: MC Topic: 19.1f. productivity Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 77) What is the approximate measure (2017 data) of Canada's productivity in terms of real GDP per hour worked (expressed in 2007 dollars)? A) $10 B) $920 C) $200 D) $475 E) $58 Answer: E Diff: 2 Type: MC Topic: 19.1f. productivity Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

78) Why is real income for an average Canadian today so much higher than it was for an average Canadian 100 years ago? A) Because of the increase in the labour force due to rising population, immigration and the increase in female labour-force participation. B) Primarily because productivity per worker is so much higher today than in the past. C) Because inflation has been maintained at relatively low levels throughout that time. D) Because free-trade agreements have vastly increased real incomes. E) Because the life span of the average worker has increased from about 55 years to about 80 years over that time period. Answer: B Diff: 2 Type: MC Topic: 19.1f. productivity Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 79) A change in the Consumer Price Index measures A) a change in a specific absolute price. B) a change in quantities of commodities sold. C) a change in relative prices. D) a change in a broad average price over some particular time span. E) the change in gross domestic product. Answer: D Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

80) The price level is measured in some time period with an index number, such as the number 118.6. How is such a number of use to us? A) It allows us to compare it to the value of the same index number from another time period to determine the rate of change of the price level. B) The index number tells us the rate of inflation. C) It tells us the dollar value for the average basket of goods and services bought by the typical Canadian household. D) It tells us the real value for the average basket of goods and services bought by the typical Canadian household. E) It tells us the percentage change in the price level from the previous time period. Answer: A Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 81) Inflation is the rate of change of average prices in the economy. In general, we can say that inflation A) benefits creditors if it is unanticipated. B) has no real effects if it is unanticipated. C) increases the purchasing power of money. D) reduces the real value of existing nominal debt. E) increases the real value of fixed money incomes. Answer: D Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

82) Suppose an employer and its employees enter into a wage contract specifying a wage increase of 2%. But suppose the price level rises by 3% over the course of the contract. In this case, A) the employees' purchasing power will rise. B) the employees' purchasing power will fall. C) the employer will experience a greater fall in purchasing power than would have occurred if the price level had held steady. D) both employer and employees will benefit from increased purchasing power. E) both employer and employees will experience a loss of purchasing power. Answer: B Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 83) If nominal national income increased by 10% over a certain period of time while real national income increased by 20%, then A) everybody in the economy became worse off. B) inflation has occurred during this time period. C) the labour force increased by 10%. D) the price level has declined by about 10%. E) the price level has increased by approximately 10%. Answer: D Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 84) If nominal national income increased by 20% over a certain period of time while real national income increased by 10%, then A) everybody in the economy became worse off. B) inflation has decreased during this time period. C) the labour force increased by 10%. D) the price level has declined by about 10%. E) the price level has increased by approximately 10%. Answer: E Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

85) If a country is experiencing inflation, the change in the nominal national product will A) equal the change in the real national product. B) overstate the inflation rate. C) overstate the change in the real value of production. D) understate the value of national income. E) be negative and will be falling faster than the rate of inflation. Answer: C Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 86) Economic theory argues that there will be fewer real effects from inflation as long as the A) actual rate of inflation is less than 5%. B) anticipated rate of inflation is more than the actual rate of inflation. C) anticipated rate of inflation is less than the actual rate of inflation. D) inflation is fully anticipated and no one changes their behaviour. E) whole private sector is unaware that it is happening. Answer: D Diff: 1 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 87) Which group tends to be most hurt by unexpected inflation? A) banks B) individuals with unindexed pensions C) employers D) fixed-income earners E) Both B and D are correct. Answer: E Diff: 1 Type: MC Topic: 19.1g. inflation and the price level Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

88) If the Consumer Price Index changes from 120 in year one to 122 in year two, the rate of inflation in the intervening year is A) 22%. B) 20%. C) 2.0%. D) 1.67%. E) 0%. Answer: D Diff: 3 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 89) If the Consumer Price Index changes from 120 in year one to 144 in year two, the rate of inflation in the intervening year is A) 10%. B) 12.5%. C) 20%. D) 25%. E) 30%. Answer: C Diff: 3 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 90) If the Consumer Price Index changes from 120 in the year 2016 to 126 in the year 2018, the average rate of inflation per year over this two-year period is approximately A) 6%. B) 5%. C) 3%. D) 2.5%. E) 1.5%. Answer: D Diff: 3 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

91) If the price index is P1 in one year and P2 in the next year, the inflation rate from one year to the next is calculated as A) (P2 - P1) × 100. B) (P2/P1) × 100. C) (P1/P2) × 100. D) [(P2 - P1)/P1] × 100. E) [(P1 - P2)/P2] × 100. Answer: D Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 92) If the price index is P1 in year 1 and P2 in year 3, the average inflation rate per year over this period is calculated as A) (P2 - P1) × (100/2). B) [(P2 - P1)/P1] × 100. C) [(P2 - P1)/P1] × [100/2]. D) [(P1 - P2)/P2] × 100. E) [(P1 - P2)/P2] × [100/2]. Answer: C Diff: 3 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 93) Suppose a price index for a certain basket of goods and services has a value of 150 in 2018 and a value of 156 in 2019. This index suggests that the cost of the market basket of goods and services A) was 4% higher in 2019 than in 2018. B) was 6% lower in 2019 than in 2018. C) was 6% higher in 2019 than in 2018. D) was 156% higher in 2019 than in 2018. E) was approximately the same in 2019 and 2018. Answer: A Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

94) Which of the following statements is correct? A) If the rate of inflation is high, the nominal rate of interest must be low. B) If the rate of inflation is less than the nominal interest rate, the real interest rate is positive. C) If the real interest rate is less than the nominal interest rate, inflation must be zero. D) If the real interest rate is less than the nominal interest rate, inflation must be negative. E) If the nominal interest rate is high, the real interest rate must be high. Answer: B Diff: 3 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 95) A worker currently earning $3000 per month has negotiated a 4% wage increase in anticipation of a 4% inflation rate in the next year. Under what scenario will the worker have a higher purchasing power? A) if next year's inflation rate is 4% B) if next year's inflation rate is 3% C) if next year's inflation rate is 5% D) if next year some prices increase by only 4% E) if next year some prices increase by only 5% Answer: B Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 96) Suppose that at the end of a given year there has been unanticipated inflation of 4%. Who is better off at the end of the year? A) a bank that lent money at the beginning of the year B) a bank that lent money at the end of the year C) a consumer who borrowed money at the beginning of the year D) a consumer who borrowed money at the end of the year E) a consumer who lent money at the end of the year Answer: C Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

97) If constant-dollar national income decreased by $6 billion over a one-year period, then it must be true that A) output of every product decreased. B) the price level decreased. C) aggregate output decreased. D) aggregate output decreased and the price level increased. E) aggregate output increased and the price level decreased. Answer: C Diff: 2 Type: MC Topic: 19.1g. inflation and the price level Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 98) Since 1960, in Canada the price level has ________, while the rate of inflation has ________. A) fluctuated widely; been relatively stable B) fluctuated widely; also fluctuated widely C) been rising steadily; been quite volatile D) been rising steadily; been relatively stable E) been quite volatile; been rising steadily Answer: C Diff: 1 Type: MC Topic: 19.1g. inflation and the price level Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 99) Since 1960 in Canada, the rate of inflation has ranged (approximately) between A) 0 and 12%. B) -5 and 5%. C) 2 and 4%. D) 2 and 20%. E) 1 and 24%. Answer: A Diff: 1 Type: MC Topic: 19.1g. inflation and the price level Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

100) Which of the following statements is correct? The real interest rate must be A) high if the nominal interest rate is high. B) high if the inflation rate is greater than the nominal interest rate. C) low if the nominal interest rate is high. D) positive if the nominal rate of interest is greater than the rate of inflation. E) negative if the nominal rate of interest is greater than the rate of inflation. Answer: D Diff: 3 Type: MC Topic: 19.1h. real and nominal interest rates Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 101) The real rate of interest is equal to the nominal interest rate A) divided by the price level. B) minus the rate of inflation. C) multiplied by the rate of inflation. D) plus the risk ratio. E) plus the price level. Answer: B Diff: 1 Type: MC Topic: 19.1h. real and nominal interest rates Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 102) Suppose the Bank of Montreal wants a 5% real rate of return on all its loans, and anticipates an annual inflation rate of 4%. It should therefore lend its money at a nominal interest rate of A) 10%. B) 9%. C) 5%. D) 4%. E) 1%. Answer: B Diff: 2 Type: MC Topic: 19.1h. real and nominal interest rates Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

103) Suppose the Bank of Montreal wants a 4% real rate of return on all its loans, and anticipates an annual inflation rate of 6%. It should therefore lend its money at a nominal interest rate of A) 10%. B) 9%. C) 5%. D) 4%. E) 1%. Answer: A Diff: 2 Type: MC Topic: 19.1h. real and nominal interest rates Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 104) Assume that Sarah agrees to lend $100 to Sam for one year. Sam agrees to pay Sarah $110 at the end of the year. If inflation over that one year is 7%, what real rate of interest does Sarah earn on her $100? A) 10% B) 7% C) 3% D) 13% E) 17% Answer: C Diff: 2 Type: MC Topic: 19.1h. real and nominal interest rates Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 105) Consider the situations of a lender of money and a borrower of money. Which of the following situations is least burdensome for the borrower? A) nominal interest rate of 15% and an inflation rate of 8% B) nominal interest rate of 10% and an inflation rate of 1% C) nominal interest rate of 8% and an inflation rate of 2% D) nominal interest rate of 4% and an inflation rate of 4% E) nominal interest rate of 29% and an inflation rate of 21% Answer: D Diff: 2 Type: MC Topic: 19.1h. real and nominal interest rates Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

106) Consider the situations of a lender and a borrower of money. Which of the following situations is most advantageous to the lender? A) inflation rate of 0% and a nominal interest rate of 2% B) inflation rate of 2% and a nominal interest rate of 7.5% C) inflation rate of -1% and a nominal interest rate of 3% D) inflation rate of 2% and a nominal interest rate of 4% E) inflation rate of 3% and a nominal interest rate of 7.5% Answer: B Diff: 2 Type: MC Topic: 19.1h. real and nominal interest rates Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 107) During the 1970s, Canada experienced an unusual pattern of interest rates. What happened during this period? A) The nominal interest rate was less than the real interest rate. B) The inflation rate was negative, implying a real interest rate that was higher than the nominal interest rate. C) The inflation rate exceeded the nominal interest rate, implying a negative real interest rate. D) The inflation rate was negative, implying a nominal interest rate higher than the real interest rate. E) The nominal and real interest rates were equal to each other. Answer: C Diff: 2 Type: MC Topic: 19.1h. real and nominal interest rates Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 108) Which of the following groups would benefit most in real terms from a period of high and unanticipated inflation, as was experienced in Canada in the early 1970s? A) mortgage companies and banks who issued fixed-rate mortgages to clients B) banks with outstanding loans to their customers C) seniors whose income is largely interest earnings on past savings D) firms that maintain large cash balances for the operation of their business E) homeowners who had long-term fixed-rate mortgages Answer: E Diff: 3 Type: MC Topic: 19.1h. real and nominal interest rates Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports.

Category: Qualitative 109) The Canadian exchange rate is defined to be the A) number of Canadian dollars needed to buy one unit of foreign currency. B) number of ounces of gold it takes to buy one hundred Canadian dollars. C) system of quotas imposed on the international exchange of goods. D) term for foreign currencies or claims on foreign currencies. E) value of one Canadian dollar in terms of foreign currencies. Answer: A Diff: 1 Type: MC Topic: 19.1i. the exchange rate and depreciation/appreciation Skill: Recall Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 110) If the Canadian dollar exchange rate increases, the A) internal value of the dollar falls. B) Canadian dollar appreciates relative to foreign currencies. C) internal value of the dollar rises. D) Canadian dollar depreciates relative to foreign currencies. E) external value remains unaffected. Answer: D Diff: 2 Type: MC Topic: 19.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 111) If one Canadian dollar can be exchanged for 0.5 euros, we say that the Canadianeuro exchange rate is A) 0.5. B) 2.0. C) 5.0. D) 20. E) 1.0. Answer: B Diff: 2 Type: MC Topic: 19.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

112) If 0.75 U.S. dollars can be exchanged for one Canadian dollar, we say that the Canadian-U.S. exchange rate is A) 0.75. B) 75. C) 1.0. D) 1.33. E) 1.25. Answer: D Diff: 2 Type: MC Topic: 19.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 113) Suppose Canada's exchange rate with the euro rises from 1.2 to 1.4. This rise indicates a(n) ________ of the Canadian dollar, which means it takes ________ Canadian dollars to purchase one euro. A) appreciation; more B) appreciation; fewer C) depreciation; more D) depreciation; fewer Answer: C Diff: 2 Type: MC Topic: 19.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 114) Suppose Canada's exchange rate with the U.S. dollar falls from 1.21 to 1.13. This fall indicates a(n) ________ of the Canadian dollar, which means it takes ________ Canadian dollars to purchase one U.S. dollar. A) appreciation; more B) appreciation; fewer C) depreciation; more D) depreciation; fewer Answer: B Diff: 2 Type: MC Topic: 19.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

115) Suppose Canada's exchange rate with the U.S. dollar increases from 1.14 to 1.22. Which of the following is likely to happen? A) More Canadians will cross the border to shop in the U.S. B) It is less expensive for Canadians to shop online from U.S. retailers. C) Fewer Canadians will cross the border to shop in the U.S. D) The Canadian dollar value of Canada's imports from the U.S. will fall. E) The Canadian dollar value of Canada's exports to the U.S. will fall. Answer: C Diff: 2 Type: MC Topic: 19.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj.: 19-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 19.2 Growth Versus Fluctuations 1) It is important for policymakers to recognize that most macroeconomic variables are characterized by A) long-run trends and short-run fluctuations. B) gradual increases over long periods of time. C) short-run fluctuations that need to be smoothed for a well-functioning economy. D) long-run economic growth. E) the impacts of the business cycle. Answer: A Diff: 1 Type: MC Topic: 19.2. growth vs. fluctuations Skill: Recall Learning Obj.: 19-2 Understand that most macroeconomic issues are about either longrun trends or short-run fluctuations, and that government policy is relevant for both. Category: Qualitative 2) Which of the following macroeconomic variables in Canada do NOT display a significant long-run trend over recent decades? A) real GDP B) the price level C) the level of unemployment D) the unemployment rate E) the level of labour productivity Answer: D Diff: 2 Type: MC Topic: 19.2. growth vs. fluctuations Skill: Applied Learning Obj.: 19-2 Understand that most macroeconomic issues are about either longrun trends or short-run fluctuations, and that government policy is relevant for both. Category: Qualitative

3) Which of the following macroeconomic variables in Canada do NOT display a significant long-run trend over recent decades? A) nominal GDP B) the labour force C) the real interest rate D) the value of Canada's exports E) the price level Answer: C Diff: 2 Type: MC Topic: 19.2. growth vs. fluctuations Skill: Applied Learning Obj.: 19-2 Understand that most macroeconomic issues are about either longrun trends or short-run fluctuations, and that government policy is relevant for both. Category: Qualitative 4) Which of the following macroeconomic variables in Canada display a significant longrun trend over recent decades? 1. real GDP 2. the price level 3. the unemployment rate A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: D Diff: 2 Type: MC Topic: 19.2. growth vs. fluctuations Skill: Applied Learning Obj.: 19-2 Understand that most macroeconomic issues are about either longrun trends or short-run fluctuations, and that government policy is relevant for both. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 20 The Measurement of National Income 20.1 National Output and Value Added 1) Total value added in an economy is equal to the value of A) all final goods produced. B) all final and intermediate goods produced. C) all inputs and outputs in the economy. D) all profits of all firms in the economy. E) the sum of the value of primary, intermediate and final goods. Answer: A Diff: 1 Type: MC

Topic: 20.1. national output and value added Skill: Recall Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 2) Suppose national accounting was done by adding up the market values of all outputs of all firms. This approach would A) accurately reflect the value of production in the economy. B) obtain gross domestic product. C) obtain gross national product. D) underestimate the value of production in the economy. E) overestimate the value of production in the economy. Answer: E Diff: 1 Type: MC Topic: 20.1. national output and value added Skill: Recall Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative

3) In national-income accounting, "double counting" A) occurs when the value of some output is omitted in the calculation of national income. B) means that pre-tax and after-tax GDP will be different. C) occurs when the value of output is counted more than once in the calculation of national income. D) means that consumption will always be less than GDP. E) leads to an underestimation of GDP in any given period. Answer: C Diff: 1 Type: MC Topic: 20.1. national output and value added Skill: Recall Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 4) All goods and services produced by one firm but used as inputs into a further stage of production are called A) value added. B) intermediate goods. C) national income goods. D) final goods. E) consumption goods. Answer: B Diff: 1 Type: MC Topic: 20.1. national output and value added Skill: Recall Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 5) In national-income accounting, the value of intermediate products A) should always be counted as part of GDP in the expenditure approach. B) should be subtracted from the value of final goods in determining a firm's total value added. C) should be added to the value of other inputs in determining a firm's contribution to GDP. D) must equal the value added by the firm. E) is counted as factor income in the calculation of GDP from the income side. Answer: B Diff: 1 Type: MC Topic: 20.1. national output and value added Skill: Recall Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative

6) When adding up the value of all goods produced in the economy, double counting can be avoided if only the ________ is included. A) value of final good and services B) value of intermediate goods and services C) cost of intermediate goods and services D) revenue of all goods and services E) revenue of intermediate goods and services Answer: A Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Recall Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 7) In Shoetown, a rancher takes $0 worth of inputs and produces animal skins, which he sells to the tanner for $400. The tanner then sells leather to the shoemaker for $700, and the shoemaker then sells $1200 worth of shoes. The value added from these transactions is A) $800. B) $1000. C) $1200. D) $2300. E) $2500. Answer: C Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Applied Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative 8) In Shoetown, a rancher takes $0 worth of inputs and produces animal skins, which he sells to the tanner for $400. The tanner then sells leather to the shoemaker for $700, and the shoemaker then sells $1200 worth of shoes. The value added by the tanner is A) $0. B) $300. C) $400. D) $500. E) $1200. Answer: B Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Applied Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income.

Category: Quantitative 9) Suppose a Canadian firm imports $5000 worth of frisbees from China and sells them for $10 000. The effect on GDP would be A) to decrease the value of GDP by $15 000. B) to increase the value of GDP by $15 000. C) to increase the value of GDP by $10 000. D) to increase the value of GDP by $5000. E) No effect on GDP since the frisbees were produced outside of Canada. Answer: D Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Applied Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative 10) A farmer raises free-range chickens, which he sells to a company for $1000. That company sells the "processed" chickens to a grocery store for $1600, which in turn produces roasted chickens which are sold to the public for $2400. Based on this information, the value of total output is equal to A) $1400. B) $1600. C) $2400. D) $4000. E) $5000. Answer: C Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Applied Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative

11) Consider a firm producing skateboards in one factory. In determining this firm's value added to national income, we would start with its total revenue and subtract the cost of (among other things) 1) salaries to the firm's cleaning staff; 2) electricity used in the factory; 3) the wood used for the base of the skateboards. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1 only E) 3 only Answer: B Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Applied Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 12) Consider a firm producing car parts in Oshawa, Ontario. In determining this firm's value added to national income, we would start with its total revenue and subtract the cost of (among other things) 1) imported plastic molds; 2) labour costs for sales and marketing; 3) computer-aided design (CAD) equipment. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1 only E) 2 only Answer: C Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Applied Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative

13) Consider a firm providing consulting engineering services. In determining this firm's value added to national income, we would start with its total revenue and subtract the cost of (among other things) 1) hard hats for engineers; 2) executive compensation; 3) wages and benefits to in-house engineers. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1 only E) 2 only Answer: D Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Applied Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 14) In Canada, the measurement of national income and national product is conducted by A) the Department of Finance. B) the Bank of Canada. C) the Treasury Board. D) statisticians in universities. E) Statistics Canada. Answer: E Diff: 1 Type: MC Topic: 20.1. national output and value added Skill: Recall Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative

15) Which of the following statements about national-income accounting is correct? A) The total value added in the economy is equal to the sum of all components in the circular flow of expenditure and income. B) The value of the expenditure on a nation's output is equal to the total income claims generated by producing that output. C) GDP on the expenditure side is calculated by adding up all the income claims generated by the act of production. D) GDP on the income side is calculated by adding up total expenditure for each of the main components of final output. E) GDP from the expenditure side and GDP from the income side differ by the amount of investment in the economy. Answer: B Diff: 3 Type: MC Topic: 20.1. national output and value added Skill: Recall Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 16) In Lumberville, the lumberjack cuts trees and sells them to the local mill for $500. The local mill processes these trees into wood planks and sells them to the carpenter for $800. Finally, the carpenter uses these wood planks to make tables which he sells for $1400 to Lumberville's residents. If we allowed double counting, the total value of Lumberville's output would be calculated as ________. But if we correctly compute the total value added, the value of the total output in Lumberville would be ________. A) $1400; $1400 B) $2200; $2700 C) $2200; $4200 D) $2700; $1400 E) $4200; $2700 Answer: D Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Applied Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative

17) The "value added" for an individual firm can be calculated by A) adding the cost of the intermediate goods used by the firm. B) subtracting the payments made to the factors of production used by the firm from the firm's revenue. C) calculating the revenue generated by the firm. D) calculating the profit generated by the firm. E) adding up the payments made to the factors of production used by the firm. Answer: E Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Recall Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 18) Jodie's Bakery generates a yearly revenue of $6000. Throughout the year Jodie spends $1500 on flour, $1000 on fruit, $500 on sugar & spices, $1500 on butter, and employs an assistant whom she pays $1000. Calculate the value of the annual output produced by Jodie's Bakery using the value added method. A) $1000 B) $1500 C) $4500 D) $5000 E) $6000 Answer: B Diff: 2 Type: MC Topic: 20.1. national output and value added Skill: Applied Learning Obj.: 20-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative

20.2 National-Income Accounting: The Basics 1) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow? A) imports B) taxes C) saving D) consumption E) investment Answer: E Diff: 2 Type: MC Topic: 20.2a. circular flow of income Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 2) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow? A) Bombardier imports machine parts from Germany. B) Bombardier exports subway cars to Mexico. C) Loblaws pays corporate income tax to the federal government. D) You put $500 into your TFSA (tax-free savings account). E) You make an online purchase from a U.S. retailer. Answer: B Diff: 2 Type: MC Topic: 20.2a. circular flow of income Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 3) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow? A) Loblaws imports cheese from Switzerland. B) You pay GST on your purchases. C) You contribute to your company pension plan. D) A Toyota plant in Canada imports car parts from Japan. E) The Government of Canada purchases new Coast Guard ships made in Halifax. Answer: E Diff: 2 Type: MC Topic: 20.2a. circular flow of income Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

4) Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow? A) investment B) consumption C) saving D) exports E) government purchases Answer: C Diff: 2 Type: MC Topic: 20.2a. circular flow of income Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 5) Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow? A) Your family buys weekly groceries. B) Bombardier exports subway cars to Mexico. C) You put $500 into your TFSA (tax-free savings account). D) The B.C. provincial government builds a new hospital. E) Canadian farmers sell wheat to China. Answer: C Diff: 2 Type: MC Topic: 20.2a. circular flow of income Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 6) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is a withdrawal from the circular flow? A) The Alberta provincial government purchases water bomber aircraft for fighting forest fires. B) Canadian barley is exported to the European Union. C) The Toronto transit authority buys subway cars from Mexico. D) A Toyota plant in Canada exports new vehicles to the United States. E) You spend your savings to pay for university tuition. Answer: C Diff: 2 Type: MC Topic: 20.2a. circular flow of income Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

7) In macroeconomics, what is meant by the term "investment"? A) the total amount of capital goods in the country B) the production of goods for immediate consumption C) the same thing as profits D) the production of goods not for immediate consumption use E) money spent in markets for financial capital Answer: D Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 8) To calculate GDP from the expenditure side, one must add together A) wages, profits, government purchases and net exports. B) consumption, government purchases, and interest. C) wages, rent, interest, and profits. D) consumption, investment, government purchases, and net exports. E) consumption, investment, government purchases, and exports. Answer: D Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 9) GDP from the expenditure side is equal to the sum of A) Ca + Ia + Ga + (IMa - Xa). B) Ca + Ia + Ga - net exports. C) Ca + Ia + Ga + (Xa - IMa). D) Ca + Ia + Ga. E) Ca + Ia + net exports. Answer: C Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

10) Which of the following purchases by households is considered as consumption expenditure for the purposes of national-income accounting? A) legal services B) a new house C) a Government of Canada Treasury bill D) tractors for use on a family farm E) the purchase of company stock Answer: A Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 11) Which of the following would be included in the consumption expenditure component of GDP? A) export sales of snowmobiles B) government expenditure for highway construction C) the increase in inventories at lumber mills D) expenditure by a firm for annual payroll services E) a municipal government's purchase of new desks for city council chambers Answer: D Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 12) When calculating GDP from the expenditure side, Ga comprises A) only expenditures made by the federal government. B) government purchases of goods and services, excluding transfer payments. C) only purchases of goods and not services. D) only expenditures made by provincial and local governments. E) government expenditures on goods and services, including transfer payments. Answer: B Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

13) In national-income accounting, a rise in Ga will be recorded (other things being equal) if A) labour productivity in the government sector rises. B) output of government-produced goods and services increases. C) the total salaries paid to civil servants rise. D) wages in the government sector fall. E) the government's purchases of office furniture falls. Answer: C Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 14) In national-income accounting, a fall in Ga (other things being equal) will be recorded if A) labour productivity in the government sector falls. B) the true market value of government-produced goods and services decreases. C) wages in the government sector rise. D) the Canadian armed forces reduces the size of the army. E) the number of employed civil servants increases, but total government salaries remains unchanged. Answer: D Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 15) Suppose a government collects $12 billion in various tax revenues, and pays $2.5 billion in debt interest, $9 billion in social security benefits, and $0.5 billion in government employee wages. What is the direct contribution to GDP coming from this government's fiscal actions? A) $0.5 billion B) $2.5 billion C) $3.0 billion D) $11.5 billion E) $12.0 billion Answer: A Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side.

Category: Quantitative

16) In macroeconomics, the term "capital goods" refers to A) the financial resources necessary to start a firm. B) man-made factors of production, such as tools, machines, and factory buildings. C) money. D) stocks and bonds. E) all factors of production. Answer: B Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 17) In national-income accounting, "depreciation" refers to A) a term used in accounting, not economics. B) the amount by which the capital stock is depleted during the accounting period. C) net investment. D) the increase in the economy's stock of capital per year. E) the decrease in the economy's stock of capital per year. Answer: B Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 18) In national-income accounting, a reduction of inventories counts as A) consumption. B) depreciation. C) negative investment. D) positive investment. E) saving. Answer: C Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

19) Consider the investment component (I) of GDP. To calculate the change in the value of inventories for the investment component of GDP, one should use their A) cost of production at the time they were produced. B) cost of production minus the costs of labour and capital. C) current market value. D) market value at the time they were produced. E) market value at the time they were added to inventory. Answer: C Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 20) In national-income accounting, replacement investment is the investment that A) is used in the calculation of GDP from the expenditure side. B) maintains the existing capital stock at a constant level. C) is equal to all existing capital stock in the country. D) when added to gross investment is equal to total saving. E) is done by the government. Answer: B Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 21) In national-income accounting, the term "fixed investment" refers to A) total gross investment minus depreciation. B) the existing capital stock. C) the creation of new plant and equipment. D) investment in stocks and bonds. E) capital stock that has been repaired. Answer: C Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

22) With regard to national-income accounting, which of the following statements regarding investment (Ia) is correct? A) The capital stock includes investment in stocks and bonds. B) The accumulation of inventories does not count as current investment. C) Rental payments are included as investment expenditures. D) Depreciation refers to funds used to increase the existing stock of capital. E) Housing construction is classified as investment expenditure rather than consumption expenditure. Answer: E Diff: 3 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 23) With regard to national-income accounting, which of the following statements about depreciation is correct? A) Depreciation includes net additions to the economy's total stock of capital. B) The total amount of capital goods in a country is called depreciation. C) Net investment is equal to gross investment minus depreciation. D) Net investment is equal to gross investment plus depreciation. E) Depreciation is equal to net investment. Answer: C Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 24) The total investment that occurs in the economy is called gross investment. When calculating GDP using the expenditure approach, the gross investment component (I a) is equivalent to A) net investment only. B) net investment minus depreciation. C) gross investment plus depreciation. D) net investment plus depreciation. E) fixed investment minus depreciation. Answer: D Diff: 3 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

25) Consider the investment component (I a) of GDP. The change in the country's capital stock during a year is equal to A) gross investment. B) capital consumption allowance. C) net investment. D) net change in inventories plus capital consumption allowance. E) gross fixed investment. Answer: C Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 26) Which of the following statements regarding housing expenditures in the national accounts is correct? A) Owner-occupied housing is counted as investment by imputing the value of the housing services enjoyed by the owner. B) Rental payments for houses are counted as part of consumption. C) The provision of new public housing by the government is classified as private investment. D) New residential construction is classified as consumption. E) The cost of a home purchased from its previous occupant is part of investment. Answer: B Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 27) In national-income accounting, government expenditures on the salaries of civil servants are included at A) their imputed market value. B) the market value of the goods and services they produce. C) their after-tax salaries. D) their pre-tax salaries, or factor incomes. E) opportunity cost. Answer: D Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

28) Why are transfer payments excluded from the government component (G a) in the calculation of GDP? A) Because they do not represent the purchase of a good or a service. B) Because they are not counted as income by any economic agent. C) Because they do not generate additional income in the economy. D) Because it is difficult to assess the market value of a transfer payment. E) Because they are small enough to ignore when computing the national accounts. Answer: A Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 29) Consider Canada's national accounts. An example of a transfer payment is A) government payments of salaries to schoolteachers. B) government spending on military equipment. C) pensions paid from the Canada Pension Plan. D) private firms' payments of dividends. E) government payments of salaries to Members of Parliament. Answer: C Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 30) When calculating GDP from the expenditure side, "actual consumption expenditures" includes A) the purchase of a new house. B) American tourists travelling to and spending in Canada. C) increases in automobile inventories. D) the construction of an apartment building. E) the monthly rental of an apartment. Answer: E Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

31) When calculating GDP from the expenditure side, "actual consumption expenditures" includes A) a tractor purchased by an Ontario farmer. B) fees paid by Google Canada to a Toronto law firm. C) robotic equipment purchased by Bombardier. D) snow-plow equipment purchased by the City of Montreal. E) Canadian fashion designs purchased by a Swiss department store. Answer: B Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 32) Which of the following would be classified as "investment" in the national income and product accounts? A) the purchase of a government bond B) the purchase of Telus stock C) the construction of a new factory D) the payment of real-estate fees E) the holding of money Answer: C Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 33) Suppose that in 2018, ABC Corporation produced $6 million worth of natural gas pipes but was able to sell only $5 million worth. Is the remaining $1 million of unsold pipes part of GDP for 2018? A) Yes, since changes in inventories are part of consumption expenditures. B) Yes, since they are part of the economy's output in 2018. C) No, since changes in inventories are part of actual investment. D) No, since they are part of the economy's output only when sold. E) No, since they are added to existing inventories. Answer: B Diff: 3 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

34) Suppose that in 2018, Canada Cars Corporation produced $20 million worth of cars and trucks but was able to sell only $16 million worth. Is the remaining $4 million increase in inventories part of GDP for 2018? 1. Yes, since changes in inventories are part of consumption expenditures. 2. Yes, since they are part of the economy's output in 2018. 3. Yes, since changes in inventories are part of actual investment. A) 1 only B) 2 only C) 3 only D) both 1 and 2 E) both 2 and 3 Answer: E Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 35) In national-income accounting, changes in inventories are A) classified as part of current actual investment. B) included under actual consumption expenditures. C) referred to as intermediate goods. D) described as actual fixed investment. E) not included in the national accounts. Answer: A Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 36) When computing GDP from the expenditure side, which of the following items is excluded from the government component (Ga)? A) employment-insurance benefits B) salaries to Canadian Forces officers C) costs of Parliamentary Committees D) rental of office space by the government E) operating costs of the Canadian Coast Guard Answer: A Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side.

Category: Qualitative 37) An example of an item that would be excluded from a measure of GDP from the expenditure side is A) the purchase of windows by an automobile assembly plant. B) fertilizer purchased by Farmer Jones to increase crop yields. C) buying tomato plants for your garden. D) government pension payments to a retired person. E) a new truck purchased by a furniture-delivery company. Answer: D Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 38) In national-income accounting, what does the term Ia represent? A) actual net investment B) actual net investment minus depreciation C) actual gross investment (including depreciation) D) actual inventory investment E) actual fixed investment minus depreciation Answer: C Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 39) When calculating GDP from the expenditure side, how do net exports enter the equation? A) They are NOT included because they do not represent an expenditure by Canadians. B) They may or may not be included depending on whether they are for final or intermediate goods. C) They are included as a separate category. D) They are included but as part of C, I, or G. E) They are included only if it is a positive number. Answer: C Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

40) Suppose a Canadian firm imports $1000 worth of bananas and sells them for $2000. The effect on Canadian GDP would be A) to decrease the value of GDP by $3000. B) to increase the value of GDP by $3000. C) to increase the value of GDP by $2000. D) to increase the value of GDP by $1000. E) no effect on GDP since the bananas were produced outside Canada. Answer: D Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Quantitative 41) When calculating GDP from the expenditure side, which of the following is true of the investment component, Ia? A) It excludes expansions of existing factories. B) It only includes business fixed investment. C) It includes the transfer of houses between individuals. D) It includes changes in inventories. E) It only includes decumulation of inventories. Answer: D Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 42) When calculating GDP from the expenditure side, which of the following is true of the government purchases component, Ga? A) It includes government subsidies to private firms. B) It is based on the government's planned spending. C) It includes employment insurance and employment benefits. D) It excludes transfer payments. E) It only includes federal government expenditures. Answer: D Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

43) If a firm's depreciation exceeds its gross investment, then its A) capital stock will be shrinking. B) capital stock will be growing. C) gross investment will be negative. D) net investment will be positive. E) depreciation cannot exceed gross investment. Answer: A Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 44) In national-income accounting, which of the following transactions by households is considered to be an investment expenditure? A) the purchase of an iPhone B) the purchase of a government bond C) the purchase of a Guaranteed Investment Certificate (GIC) D) payment for the construction of a custom-built new home E) the purchase of an imported car Answer: D Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 45) Which one of the following government expenditures is an example of "government purchases"? A) $2000 paid to a retiree B) $1000 paid to a poor person for income support C) $4000 spent for services provided by a private consultant D) $100 000 paid as interest on the national debt E) $600 paid to an unemployed worker for employment insurance Answer: C Diff: 2 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

46) When measuring actual gross domestic product from the expenditure side, we use the following simple equation: A) GNP = C + I + G + X. B) GDP = C + I + G + (X ). C) GDP =

+

+

+(

-

).

D) GNP = + + +( ). E) GDP = C + I + (G - transfers) + (X - IM). Answer: C Diff: 1 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 47) The table below includes data for a one-year period required to calculate GDP from the expenditure side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Government purchases Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $486.80 $94.00

TABLE 20-1 Refer to Table 20-1. What is the value of GDP, as calculated from the expenditure side? A) $1982.60 B) $1986.00 C) $2010.00 D) $2285.20 E) $2584.40 Answer: D Diff: 3 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

48) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Depreciation Consumption expenditure Government subsidies to firms Business profit Imports Interest and investment income Government purchases

3029 107 32 537 82 2808 51 423 35 276 524

TABLE 20-2 Refer to Table 20-2. What is the value of GDP (in billions of dollars), as calculated from the expenditure side? A) $3936 B) $3904 C) $3866 D) $3784 E) $3708 Answer: C Diff: 3 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

49) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Consumption expenditure Depreciation Government subsidies to firms Business profits Imports Interest and investment income Government purchases

6423 613 954 1850 5107 425 125 1256 982 652 2315

TABLE 20-3 Refer to Table 20-3. What is the value of GDP (in billions of dollars), as calculated from the expenditure side? A) $12 134 B) $11 482 C) $11 208 D) $10 605 E) $9244 Answer: E Diff: 3 Type: MC Topic: 20.2b. GDP from the expenditure side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative 50) To calculate GDP from the income side, one must add together wages, A) consumption and depreciation. B) interest, rent, depreciation, profits and indirect taxes net of subsidies. C) investment, rent, depreciation, profits and indirect taxes net of subsidies. D) government income, interest, and profits. E) net exports, depreciation, and profits. Answer: B Diff: 2 Type: MC Topic: 20.2c. GDP from the income side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

51) In national-income accounting, the concept of "net domestic income" is useful because it A) does not include inventory investment. B) includes government transfer payments. C) includes all goods produced but not exchanged in markets. D) excludes the value of output that is used as replacement investment. E) represents national income plus depreciation. Answer: D Diff: 3 Type: MC Topic: 20.2c. GDP from the income side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 52) Gross domestic product is the sum of factor incomes ________ indirect business taxes, ________ subsidies, ________ depreciation. A) plus; plus; plus B) plus; plus; minus C) plus; minus; minus D) plus; minus; plus E) minus; plus; plus Answer: D Diff: 3 Type: MC Topic: 20.2c. GDP from the income side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 53) How does "net domestic income" differ from gross domestic product? Net domestic income is GDP minus A) that part of it not actually paid to households, plus transfer payments to households. B) that part of it not actually paid to households, minus personal income taxes paid by households. C) that part of it not actually paid to households, plus transfer payments to households, minus personal taxes paid by households. D) replacement investment. E) the sum of corporate, personal and sales taxes paid to the government. Answer: D Diff: 2 Type: MC Topic: 20.2c. GDP from the income side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side.

Category: Qualitative

54) When calculating GDP from the income side, which of the following is included in non-factor payments? A) wages and salaries B) GST C) income tax D) bond interest E) business profits Answer: B Diff: 2 Type: MC Topic: 20.2c. GDP from the income side Skill: Recall Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 55) The table below includes data for a one-year period required to calculate GDP from the income side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Indirect taxes less subsidies Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $175.20 $94.00

TABLE 20-4 Refer to Table 20-4. What is the value of GDP, as calculated from the income side? A) $1982.60 B) $1986.00 C) $2010.00 D) $2285.20 E) $2584.40 Answer: D Diff: 3 Type: MC Topic: 20.2c. GDP from the income side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

56) The table below includes data for a one-year period required to calculate GDP from the income side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Indirect taxes less subsidies Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $175.20 $94.00

TABLE 20-4 Refer to Table 20-4. When calculating GDP from the income side, we need to add together the following items from the data provided: A) interest and investment income, business profits, depreciation, indirect taxes less subsidies. B) wages and salaries, business profits, indirect taxes less subsidies. C) investment expenditure, consumption expenditure, net exports. D) interest and investment income, business profits, depreciation. E) wages and salaries, interest and investment income, business profits, depreciation, indirect taxes less subsidies. Answer: E Diff: 2 Type: MC Topic: 20.2c. GDP from the income side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Qualitative

57) The table below includes data for a one-year period required to calculate GDP from the income side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Indirect taxes less subsidies Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $175.20 $94.00

TABLE 20-4 Refer to Table 20-4. What is the value of net domestic income at factor cost? A) $1711.60 B) $1811.40 C) $1840.40 D) $1910.80 E) $2004.80 Answer: D Diff: 3 Type: MC Topic: 20.2c. GDP from the income side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

58) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Depreciation Consumption expenditure Government subsidies to firms Business profit Imports Interest and investment income Government purchases

3029 107 32 537 82 2808 51 423 35 276 524

TABLE 20-2 Refer to Table 20-2. What is the value of GDP (in billions of dollars), as calculated from the income side? A) $3866 B) $3590 C) $3968 D) $3784 E) $3708 Answer: A Diff: 3 Type: MC Topic: 20.2c. GDP from the income side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

59) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Depreciation Consumption expenditure Government subsidies to firms Business profit Imports Interest and investment income Government purchases

3029 107 32 537 82 2808 51 423 35 276 524

TABLE 20-2 Refer to Table 20-2. What is the value of net domestic income at factor cost? A) $3626 B) $3869 C) $3936 D) $3728 E) $3904 Answer: D Diff: 3 Type: MC Topic: 20.2c. GDP from the income side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

60) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Consumption expenditure Depreciation Government subsidies to firms Business profits Imports Interest and investment income Government purchases

6423 613 954 1850 5107 425 125 1256 982 652 2315

TABLE 20-3 Refer to Table 20-3. What is the value of GDP (in billions of dollars), as calculated from the income side? A) $9494 B) $11 094 C) $9244 D) $8819 E) $10 606 Answer: C Diff: 3 Type: MC Topic: 20.2c. GDP from the income side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

61) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Consumption expenditure Depreciation Government subsidies to firms Business profits Imports Interest and investment income Government purchases

6423 613 954 1850 5107 425 125 1256 982 652 2315

TABLE 20-3 Refer to Table 20-3. What is the value of net domestic income at factor cost? A) $9244 B) $9494 C) $8292 D) $8331 E) $8167 Answer: D Diff: 3 Type: MC Topic: 20.2c. GDP from the income side Skill: Applied Learning Obj.: 20-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative 20.3 National-Income Accounting: Some Further Issues 1) Historically, nominal GDP has increased faster than real GDP because A) the general price level has fallen. B) improvements in product quality have not been reflected in prices. C) exports have risen more rapidly than imports. D) imports have risen more rapidly than exports. E) the general price level has increased. Answer: E Diff: 1 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Category: Quantitative

2) Which of the following is equivalent to real GDP? A) the money value of all goods and services produced in an economy per year plus imports B) the market value of all goods and services produced in an economy per year C) personal disposable income plus depreciation D) the value added of all goods and services produced in an economy per year adjusted for price changes E) the nominal value of all goods and services in an economy per year Answer: D Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Recall Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Category: Qualitative 3) Suppose nominal national income in some country fell from $100 billion to $95 billion during the year. Over the same period, inflation was 5%. In this case, the real national income in this country A) fell by 10%. B) fell by 5%. C) was unaffected. D) rose by 5%. E) rose by 10%. Answer: A Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Category: Quantitative 4) Suppose nominal national income in some country increased by 10% during the year, when inflation was 5%. In this case, the real national income A) fell by 10%. B) fell by 5%. C) was unaffected. D) rose by 5%. E) rose by 10%. Answer: D Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Category: Quantitative

5) The table below shows total output for an economy over 2 years. 2018 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2019 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 20-5 Refer to Table 20-5. The nominal Gross Domestic Product in 2019 was A) $700. B) $840. C) $980. D) $1740. E) $1820. Answer: E Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

6) The table below shows total output for an economy over 2 years. 2018 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2019 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 20-5 Refer to Table 20-5. The real GDP in 2019, expressed in 2018 prices, was A) $700. B) $840. C) $970. D) $1010. E) $1740. Answer: D Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

7) The table below shows total output for an economy over 2 years. 2018 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2019 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 20-5 Refer to Table 20-5. The implicit GDP deflator in 2019, when 2018 is used as the base year, was approximately A) 105. B) 160. C) 180. D) 193. E) 203. Answer: C Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

8) The table below shows total output for an economy over 2 years. 2018 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2019 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 20-5 Refer to Table 20-5. Assume the output of all three goods is consumed in the country, and there are no imported goods and services. If 2018 is used as the base year, then the consumer price index (CPI) in 2019 was approximately A) 102. B) 180. C) 179. D) 193. E) 418. Answer: B Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

9) The table below shows total output for an economy over 2 years. 2018 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2019 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 20-5 Refer to Table 20-5. If 2018 is the base year, the GDP deflator in 2018 was A) 100. B) 102. C) 180. D) 193. E) 1000. Answer: A Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

10) The table below shows the total output and prices for an economy that produces only two goods, potatoes and oil. Data is provided for the years 2008 and 2018.

2008 2018

Quantities Produced Potatoes Oil (kilograms) (barrels) 1000 50 1100 65

Prices Potatoes Oil ($/kilogram) ($/barrel) 4 55 6 60

TABLE 20-6 Refer to Table 20-6. What is the real GDP for 2018 if 2008 is the base year? A) $6750 B) $7975 C) $9000 D) $10 500 E) $20 100 Answer: B Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

11) The table below shows the total output and prices for an economy that produces only two goods, potatoes and oil. Data is provided for the years 2008 and 2018.

2008 2018

Quantities Produced Potatoes Oil (kilograms) (barrels) 1000 50 1100 65

Prices Potatoes Oil ($/kilogram) ($/barrel) 4 55 6 60

TABLE 20-6 Refer to Table 20-6. What is the real GDP for 2008 if 2018 is the base year? A) $6750 B) $7975 C) $9000 D) $10 500 E) $20 100 Answer: C Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

12) The table below shows the total output and prices for an economy that produces only two goods, potatoes and oil. Data is provided for the years 2008 and 2018.

2008 2018

Quantities Produced Potatoes Oil (kilograms) (barrels) 1000 50 1100 65

Prices Potatoes Oil ($/kilogram) ($/barrel) 4 55 6 60

TABLE 20-6 Refer to Table 20-6. If 2008 is the base year, the GDP deflator in 2018 was A) 59.1. B) 85.7. C) 100. D) 131.67. E) 159.1. Answer: D Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

13) The table below shows total output for an economy over 3 years. Year 2016 2017 2018

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2010 dollars TABLE 20-7 Refer to Table 20-7. The nominal Gross Domestic Product in 2016 was A) $700 000. B) $724 000. C) $774 000. D) $798 000. E) $820 000. Answer: D Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

14) The table below shows total output for an economy over 3 years. Year 2016 2017 2018

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2010 dollars TABLE 20-7 Refer to Table 20-7. The real GDP in 2017, expressed in 2010 prices, was A) $773 585. B) $798 000. C) $800 000. D) $869 200. E) $900 000. Answer: A Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

15) The table below shows total output for an economy over 3 years. Year 2016 2017 2018

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2010 dollars TABLE 20-7 Refer to Table 20-7. The implicit GDP deflator for 2018 is approximately A) 94. B) 107. C) 108. D) 109. E) 110. Answer: B Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

16) The table below shows total output for an economy over 3 years. Year 2016 2017 2018

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2010 dollars TABLE 20-7 Refer to Table 20-7. The growth rate of nominal output from 2016 to 2017 is A) 2.76%. B) 3.36%. C) 4.09%. D) 4.27%. E) 5.00%. Answer: A Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

17) The table below shows total output for an economy over 3 years. Year 2016 2017 2018

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2010 dollars TABLE 20-7 Refer to Table 20-7. The growth rate of real output from 2017 to 2018 is A) 1.03%. B) 1.84%. C) 3.25%. D) 3.41%. E) 4.27%. Answer: D Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

18) The table below shows total output for an economy over 2 years. 2017 coconuts bananas pineapples

Price $1.00 $3.00 $6.00

Quantity 100 units 200 units 100 units

2018 coconuts bananas pineapples

Price $2.00 $4.00 $8.00

Quantity 120 200 90

TABLE 20-8 Refer to Table 20-8. The nominal Gross Domestic Product in 2018 was A) $1760. B) $1500. C) $1300. D) $1260. E) $410. Answer: A Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

19) The table below shows total output for an economy over 2 years. 2017 coconuts bananas pineapples

Price $1.00 $3.00 $6.00

Quantity 100 units 200 units 100 units

2018 coconuts bananas pineapples

Price $2.00 $4.00 $8.00

Quantity 120 200 90

TABLE 20-8 Refer to Table 20-8. The real GDP in 2018, expressed in 2017 prices, was A) $1760. B) $1500. C) $1300. D) $1260. E) $410. Answer: D Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

20) The table below shows total output for an economy over 2 years. 2017 coconuts bananas pineapples

Price $1.00 $3.00 $6.00

Quantity 100 units 200 units 100 units

2018 coconuts bananas pineapples

Price $2.00 $4.00 $8.00

Quantity 120 200 90

TABLE 20-8 Refer to Table 20-8. The implicit GDP deflator in 2018 (using 2017 as the base year) is A) 71.59. B) 100. C) 103.4. D) 114.6. E) 139.7. Answer: E Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

21) The table below shows total output for an economy over 2 years. 2017 coconuts bananas pineapples

Price $1.00 $3.00 $6.00

Quantity 100 units 200 units 100 units

2018 coconuts bananas pineapples

Price $2.00 $4.00 $8.00

Quantity 120 200 90

TABLE 20-8 Refer to Table 20-8. The implicit GDP deflator in 2018 (using 2018 as the base year) is A) 71.59. B) 100. C) 103.4. D) 114.6. E) 139.7. Answer: B Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

22)

FIGURE 20-1 Refer to Figure 20-1. Which of the following years was used as the base year for constructing real GDP? A) 1995 B) 2000 C) 2003 D) 2005 E) 2010 Answer: C Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Graph Category: Quantitative

23)

FIGURE 20-1 Refer to Figure 20-1. Nominal GDP increased by approximately ________% between 2000 and 2005. A) 20 B) 45 C) 65 D) 85 E) 100 Answer: A Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Graph Category: Quantitative

24)

FIGURE 20-1 Refer to Figure 20-1. Real GDP increased by approximately ________% between 1995 and 2010. A) 9 B) 17 C) 35 D) 52 E) 75 Answer: C Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Graphics: Graph Category: Quantitative

25) If nominal GDP in some year is $3800 and the GDP deflator for the same year is 152, then the real GDP for that year is A) $2280. B) $2500. C) $3500. D) $3800. E) $5776. Answer: B Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Category: Quantitative 26) A country's computed GDP deflator 1) excludes the changes in the price of imported goods; 2) is less relevant than the measured CPI for the typical consumer; 3) is set to be equal to 100 in its base year. A) 1 only B) 2 only C) 1, 2, and 3 D) 1 and 3 E) 2 and 3 Answer: C Diff: 2 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Category: Qualitative 27) Consider Canada's GDP deflator and Consumer Price Index (CPI). Now suppose the prices of the following goods and services increased. Which is likely to have a larger effect on the GDP deflator than the CPI? A) bananas B) chocolate C) Hollywood movies D) consumer electronics E) forest products Answer: E Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Category: Qualitative

28) Consider Canada's GDP deflator and Consumer Price Index (CPI). Now suppose the prices of the following goods and services increased. Which is likely to have a larger direct effect on the CPI than the GDP deflator? A) consumer electronics B) lumber C) car parts D) aircraft engines E) engineering services Answer: A Diff: 3 Type: MC Topic: 20.3a. real/nominal GDP and the GDP deflator Skill: Applied Learning Obj.: 20-3 Explain the difference between real and nominal GDP. Category: Qualitative 29) One major reason that GDP is an inaccurate measure of the true level of economic activity is that A) people frequently buy things they do not want. B) it is statistically very inaccurate. C) it does not include non-market activities. D) it cannot be adjusted for changes in prices. E) it includes net exports. Answer: C Diff: 1 Type: MC Topic: 20.3b. omissions from GDP Skill: Recall Learning Obj.: 20-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 30) One major reason that GDP is an inaccurate measure of the "quality of life" is that A) people frequently buy things they do not want. B) it does not include the value of leisure. C) it is statistically very inaccurate. D) it cannot be adjusted for changes in prices. E) it includes net exports. Answer: B Diff: 1 Type: MC Topic: 20.3b. omissions from GDP Skill: Recall Learning Obj.: 20-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative

31) One reason that real GDP tends to overstate the economic well-being of the country's residents is that it ignores A) the costs of increased leisure time. B) the market-based activity done from the home. C) the economic "bads" associated with production, such as pollution. D) non-market activities, such as teenaged-babysitting services. E) illegal activities, such as the drug trade. Answer: C Diff: 1 Type: MC Topic: 20.3b. omissions from GDP Skill: Applied Learning Obj.: 20-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 32) Measures of GDP may understate the economic well-being of people in developing countries if those countries tend to A) import much more than they export. B) have a high degree of foreign direct investment. C) emphasize agricultural and resource-based production. D) have very high rates of pollution. E) have a large share of nonmarket activities. Answer: E Diff: 2 Type: MC Topic: 20.3b. omissions from GDP Skill: Applied Learning Obj.: 20-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 33) Which of the following statements about the underground economy and how it relates to GDP is correct? A) Activity in the underground economy in Canada is estimated at over 25% of the value of GDP, which therefore significantly understates total output. B) Transactions in the underground economy are not legal, are not reported for tax purposes, and therefore not included in GDP. C) Transactions in the underground economy are legal but are not reported for tax purposes, and therefore not included in GDP. D) Activity in the underground economy is illegal and therefore should not be included in any measure of legitimate economic activity. E) Transactions in the underground economy are legal and therefore an estimate of their total value is included in GDP. Answer: C Diff: 2 Type: MC Topic: 20.3b. omissions from GDP Skill: Recall

Learning Obj.: 20-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 34) Which of the following is included in current calculations of GDP? A) computers produced here and exported to Europe B) the value of a vintage automobile purchased from the previous owner C) volunteer work D) the value of vegetables consumed by the home gardener E) welfare payments Answer: A Diff: 1 Type: MC Topic: 20.3b. omissions from GDP Skill: Applied Learning Obj.: 20-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 35) Statistics Canada excludes from GDP the value of goods and services exchanged "under the counter" because A) Statistics Canada is responsible for making an ethical decision about which activities to exclude from national income measures. B) satisfactory methods for their measurement have not been developed. C) their production has zero opportunity cost. D) these goods are all intermediate goods. E) these goods do not contribute to well-being. Answer: B Diff: 2 Type: MC Topic: 20.3b. omissions from GDP Skill: Applied Learning Obj.: 20-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 36) Why are illegal activities, unreported activities, and non-market activities excluded from GDP? A) They do not contribute to human welfare. B) They do not have an opportunity cost. C) They are difficult to measure. D) The do not contribute to the true national output of goods and services. E) They are morally repugnant. Answer: C Diff: 1 Type: MC Topic: 20.3b. omissions from GDP Skill: Applied Learning Obj.: 20-4 Discuss the many important omissions from official measures of

GDP. Category: Qualitative

37) Which of the following is excluded from GDP? A) the labour services provided by a police officer in the narcotics squad B) the purchase of new computers by a police department C) the repairs to a police car after damage as a result of a high speed chase D) the labour supplied by a lawyer to defend a suspect charged with a criminal offense E) the purchase price of illegal drugs sold by a drug dealer Answer: E Diff: 1 Type: MC Topic: 20.3b. omissions from GDP Skill: Applied Learning Obj.: 20-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 38) Using GDP as a measure of the economic well-being of a country can be criticized for ignoring non-market and other activities. However, it remains useful because A) GDP is the best measure we have of the effects of economic "bads" on the well-being of the country. B) the change in GDP from one year to the next is a good indication of what rates of inflation and unemployment will be. C) it provides a good indication of household income distribution when measured from the income side. D) the change that is measured in GDP from one year to the next is a good indication of the change in economic activity. E) it is simply not possible to reform the current measure of GDP. Answer: D Diff: 2 Type: MC Topic: 20.3b. omissions from GDP Skill: Recall Learning Obj.: 20-5 Understand why real per capita GDP is a good measure of average material living standards but an incomplete measure of overall well-being. Category: Qualitative

39) Researchers have been developing broad indexes of "social well-being" as an alternative to measures of per capita GDP. What are they trying to capture with such a measure? A) The variation in aggregate consumption because consumption is a better measure of individual well-being than income. B) Variation in aggregate income adjusted for variations in the country's net foreign asset position. C) Detailed measures of the various components of GDP that have meaningful impact on the social well-being of individuals and households. D) Variations in the true purchasing power of income, especially as influenced by changes in interaction between prices and the exchange rate. E) Movement in variables that are important to people's well-being, such as environment, education, and leisure, that are not captured in current measures of per capita income. Answer: E Diff: 3 Type: MC Topic: 20.3b. omissions from GDP Skill: Applied Learning Obj.: 20-5 Understand why real per capita GDP is a good measure of average material living standards but an incomplete measure of overall well-being. Category: Qualitative 40) Consider the following statement: "An increase in per capita income guarantees an increase in living standards." Is this statement true or false, and why? A) False. Living standards have no statistical correlation with per capita income, and so such a guarantee is not possible. B) False. Per capita income could be increasing while at the same time living standards are deteriorating due to, for example, environmental degradation or a decline in social cohesion. C) True. The measure of living standards is a subset of per capita income, so when one measure increases, the other measure must also increase. D) True. Per capita income is the most important contributor to living standards. E) Impossible to determine because "living standards" is a subjective concept that cannot be measured. Answer: B Diff: 3 Type: MC Topic: 20.3b. omissions from GDP Skill: Applied Learning Obj.: 20-5 Understand why real per capita GDP is a good measure of average material living standards but an incomplete measure of overall well-being. Category: Qualitative

41) Country X is highly ranked in terms of social well-being but is much lower ranked in terms of per capita GDP. A possible explanation is A) Country X has high levels of social cohesion, income security and environmental protection. B) Country X has high GDP growth but low population growth. C) Country X has a higher than average rate of real economic growth. D) Country X has a high level of income inequality. E) Country X has average performance in terms of non-income-related determinants of well-being. Answer: A Diff: 3 Type: MC Topic: 20.3b. omissions from GDP Skill: Applied Learning Obj.: 20-5 Understand why real per capita GDP is a good measure of average material living standards but an incomplete measure of overall well-being. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 21 The Simplest Short-Run Macro Model 21.1 Desired Aggregate Expenditure 1) With respect to consumption, investment, government purchases and net exports, the national-income and product accounts measure A) desired expenditures in each of the categories. B) both actual and desired expenditures, since actual expenditure must equal desired expenditure in each category. C) the flow of saving at any income. D) neither actual nor desired expenditures. E) actual expenditures in each of the categories. Answer: E Diff: 1 Type: MC Topic: 21.1a. desired vs. actual expenditures Skill: Recall Learning Obj.: 21-1 Explain the difference between desired and actual expenditure. Category: Qualitative 2) For firms or individual households in the simple macro model, which of the following statements is correct? Desired expenditure is A) always greater than planned expenditure. B) always greater than actual expenditure. C) not relevant because human wants are unlimited. D) what they plan on spending, given the resources at their command. E) not a useful concept because it cannot be measured. Answer: D Diff: 1 Type: MC Topic: 21.1a. desired vs. actual expenditures

Skill: Applied Learning Obj.: 21-1 Explain the difference between desired and actual expenditure. Category: Qualitative 3) In the simple macroeconomic model, what are "autonomous expenditures"? A) expenditures that are dependent on national income B) expenditures that are not dependent on national income C) induced expenditures D) expenditures that are constant E) non-domestic expenditures Answer: B Diff: 1 Type: MC Topic: 21.1a. desired vs. actual expenditures Skill: Recall Learning Obj.: 21-1 Explain the difference between desired and actual expenditure. Category: Qualitative 4) When would we expect to see undesired or unplanned inventory accumulation? A) when consumption exceeds investment B) when investment exceeds consumption C) when autonomous expenditure exceeds induced expenditure D) when desired aggregate expenditure exceeds actual aggregate expenditure E) when actual aggregate expenditure exceeds desired aggregate expenditure Answer: E Diff: 2 Type: MC Topic: 21.1a. desired vs. actual expenditures Skill: Recall Learning Obj.: 21-1 Explain the difference between desired and actual expenditure. Category: Qualitative 5) When would we expect to see undesired or unplanned inventory decumulation? A) when consumption exceeds investment B) when investment exceeds consumption C) when autonomous expenditure exceeds induced expenditure D) when desired aggregate expenditure exceeds actual aggregate expenditure E) when actual aggregate expenditure exceeds desired aggregate expenditure Answer: D Diff: 2 Type: MC Topic: 21.1a. desired vs. actual expenditures Skill: Recall Learning Obj.: 21-1 Explain the difference between desired and actual expenditure. Category: Qualitative 6) In each of the four expenditure categories, national income accounts measure ________ expenditures, while the theoretical model of the economy deals with ________ expenditures.

A) actual; autonomous B) desired; actual C) induced; exogenous D) endogenous; exogenous E) actual; desired Answer: E Diff: 1 Type: MC Topic: 21.1a. desired vs. actual expenditures Skill: Recall Learning Obj.: 21-1 Explain the difference between desired and actual expenditure. Category: Qualitative

7) Consider the equation: AE = C + I + G + (X - IM). Which of the following statements correctly describes this sum? A) This summation tells us total desired expenditures on domestically produced output. B) It is a summation of actual expenditures and is equivalent to GDP. C) This summation of planned expenditures is equal to actual nominal GDP. D) It is a summation of planned expenditures and is always equal to real GDP. E) It is a summation of the desired expenditures of domestic households, firms and government. Answer: A Diff: 2 Type: MC Topic: 21.1a. desired vs. actual expenditures Skill: Recall Learning Obj.: 21-1 Explain the difference between desired and actual expenditure. Category: Qualitative 8) Consider the consumption function in our macro model. Which of the following statements is correct? The consumption function A) and the aggregate expenditure function describe the same functional relationship. B) describes the relationship between desired consumption expenditure and the factors that determine it, like national income. C) refers to the relationship between consumption expenditure and relative prices. D) refers to the relationship between an individual's consumption and his/her wealth. E) is relatively unimportant in macroeconomics, because consumption is such a small component of aggregate expenditure. Answer: B Diff: 1 Type: MC Topic: 21.1b. the consumption function Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 9) Consider the consumption function in our macro model. The key factors that influence desired consumption are assumed to be A) expectations about the future. B) wealth. C) interest rates. D) disposable income. E) all of the above Answer: E Diff: 1 Type: MC Topic: 21.1b. the consumption function Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

10) The percentage of disposable income that is saved by Canadian households has been changing over time. In 2017, it was estimated to be about ________ percent. A) 0 B) 4 C) 15 D) 20 E) 25 Answer: A Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 11) The consumption function is based on the assumption that as real disposable income rises, aggregate desired consumption A) will fall and desired saving will rise. B) will rise and desired saving will fall. C) and desired saving will both rise. D) remains constant and desired saving will rise. E) remains constant and desired saving will fall. Answer: C Diff: 1 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 12) In a simple macro model, an increase in households' wealth is generally assumed to A) cause no change in desired consumption because consumption is a function of disposable income only. B) cause no change in desired consumption because the increase is always expected. C) cause a downward shift in the aggregate consumption function. D) cause an upward shift in the aggregate consumption function. E) affect only desired saving, not desired consumption. Answer: D Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative

13) In a simple macro model, a decrease in households' wealth is generally assumed to A) cause no change in consumption because consumption is a function of disposable income only. B) cause no change in consumption because the decline is always expected. C) cause a downward shift in the consumption function. D) cause an upward shift in the consumption function. E) affect only saving, not consumption. Answer: C Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 14) Consider the consumption function in a simple macro model with no taxes. At the level of national income where APC = 1, the nation's households are A) consuming all of their disposable income. B) allocating their income equally between saving and consumption. C) saving a portion of their income, but saving is less than consumption. D) spending more than their current income. E) saving all of their disposable income. Answer: A Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

15)

FIGURE 21-1 Refer to Figure 21-1. The average propensity to consume (APC) will be equal to one (1.0) when disposable income is equal to A) 0. B) Y1. C) Y2. D) Y3. E) desired saving. Answer: C Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

16)

FIGURE 21-1 Refer to Figure 21-1. If disposable income is equal to Y3, desired consumption expenditure is equal to the vertical distance A) Y3E. B) Y3D. C) Y3F. D) Y3. E) DE. Answer: B Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

17)

FIGURE 21-1 Refer to Figure 21-1. The marginal propensity to consume is equal to A) EF/Y2Y3. B) EF/DF. C) ED/CF. D) DF/Y2Y3. E) ED/Y2Y3. Answer: D Diff: 3 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

18)

FIGURE 21-1 Refer to Figure 21-1. If disposable income is Y3, the level of desired saving is A) DE. B) FD. C) Y3F. D) Y3D. E) Y2Y3. Answer: A Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

19)

FIGURE 21-1 Refer to Figure 21-1. The marginal propensity to save can be expressed as A) DE/Y1Y3. B) DE/Y2Y3. C) DF/Y2Y3. D) FE/Y1Y3. E) FE/Y2Y3. Answer: B Diff: 3 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

20)

FIGURE 21-1 Refer to Figure 21-1. Desired consumption expenditures will equal disposable income at an income level of A) zero. B) Y1. C) Y2. D) Y3. E) more than Y3. Answer: C Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

21)

FIGURE 21-1 Refer to Figure 21-1. If disposable income is zero, then A) autonomous desired consumption is 0A. B) autonomous desired consumption is 0Y1. C) desired consumption must also be zero. D) the level of desired saving will be 0A. E) autonomous desired saving will be 0A. Answer: A Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

22)

FIGURE 21-2 Refer to Figure 21-2. If disposable income is $3000, desired consumption expenditure is equal to A) $0. B) $500. C) $1000. D) $1500. E) $2000. Answer: E Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

23)

FIGURE 21-2 Refer to Figure 21-2. The average propensity to consume (APC) will be equal to one (1.0) when disposable income is A) $0. B) $1000. C) $2000. D) $3000. E) Not enough information to determine. Answer: B Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Quantitative

24)

FIGURE 21-2 Refer to Figure 21-2. Which of the following is the correct equation for the consumption function depicted in the figure? A) C = 500 + (2/3)YD B) C = (0.5)YD C) C = 1000 + (2/3)YD D) C = 500 + (0.5)YD E) C = 2000 + (2/3)YD Answer: D Diff: 3 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

25)

FIGURE 21-2 Refer to Figure 21-2. The slope of the consumption function in the figure is equal to A) the marginal propensity to consume. B) the average propensity to consume. C) the marginal propensity to save. D) the average propensity to save. E) the slope of the 45-degree line. Answer: A Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

26)

FIGURE 21-2 Refer to Figure 21-2. The slope of the consumption function in the figure is equal to A) 1.0. B) 0.67. C) 0.5. D) -0.5. E) -1.0. Answer: C Diff: 3 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Quantitative

27)

FIGURE 21-2 Refer to Figure 21-2. What is the marginal propensity to consume associated with this consumption function? A) 0.5 B) 0.67 C) 1.0 D) -0.5 E) -1.0 Answer: A Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Quantitative

28)

FIGURE 21-2 Refer to Figure 21-2. The amount of desired consumption expenditure that is unrelated to the level of disposable income is A) $0. B) $500. C) $1000. D) $1500. E) $2000. Answer: B Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Quantitative 29) Consider a consumption function of the following form: C = 50 + (0.6)Y D. At what level of disposable income will desired savings be equal to zero? A) 31.25 B) 50 C) 83.33 D) 125 E) 208.33 Answer: D Diff: 3 Type: MC Topic: 21.1b. the consumption function Skill: Applied

Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 30) On a graph of a consumption function, what is the significance of the 45-degree line? A) It connects all points where desired consumption equals desired expenditure. B) It connects all points where desired consumption equals actual disposable income. C) It shows the slope of the average consumption function, against which we measure other consumption functions. D) It connects all points where desired consumption equals desired saving. E) Desired consumption is zero at all points along the 45-degree line. Answer: B Diff: 3 Type: MC Topic: 21.1b. the consumption function Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 31) If the consumption function coincides with the 45-degree line, then we know that A) desired consumption is constant at all levels of disposable income. B) the marginal propensity to consume is less than one. C) the marginal propensity to consume is greater than one. D) desired consumption equals desired saving at all levels of disposable income. E) desired saving is zero at all levels of disposable income. Answer: E Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 32) Consider a consumption function that is upward sloping but flatter than the 45-degree line. When real disposable income rises, A) desired consumption will fall and saving will rise. B) desired consumption will rise and saving will fall. C) desired consumption and saving will both rise. D) desired consumption remains constant. E) saving remains constant. Answer: C Diff: 2 Type: MC Topic: 21.1b. the consumption function Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment.

Category: Qualitative

33) If a family's annual disposable income rose from $60 000 to $65 000 and their desired consumption expenditures rose from $50 000 to $54 000, it can be concluded that the family's A) marginal propensity to consume is $800. B) average propensity to consume is 0.8. C) marginal propensity to consume is 0.8. D) average propensity to save is 0.8. E) marginal propensity to save is 0.8. Answer: C Diff: 2 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 34) Suppose disposable income for an entire economy rises from $400 billion to $440 billion and desired consumption rises from $350 billion to $380 billion. We can conclude that the marginal propensity to consume for this economy is A) 0.65. B) 0.75. C) 0.80. D) 0.90. E) 1.33. Answer: B Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 35) Suppose disposable income for an entire economy rises from $400 billion to $440 billion and desired saving rises from $50 billion to $60 billion. We can conclude that the marginal propensity to save for this economy is A) 0.10. B) 0.20. C) 0.25. D) 0.75. E) 1.0. Answer: C Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment.

Category: Quantitative

36) The table below shows disposable income and desired consumption for a closed economy with no government.

Disposable Income 0 50 150 300

Desired Consumption 10 30 70 130

TABLE 21-1 Refer to Table 21-1. The marginal propensity to consume is equal to A) 0.8. B) 0.67. C) 0.6. D) 0.4. E) 0.2. Answer: D Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Table Category: Quantitative

37) The table below shows disposable income and desired consumption for a closed economy with no government.

Disposable Income 0 50 150 300

Desired Consumption 10 30 70 130

TABLE 21-1 Refer to Table 21-1. The marginal propensity to save is equal to A) 0.2. B) 0.4. C) 0.6. D) 0.67. E) 0.8. Answer: C Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Table Category: Quantitative

38) The table below shows disposable income and desired consumption for a closed economy with no government.

Disposable Income 0 30 70 130

Desired Consumption 10 34 66 114

TABLE 21-2 Refer to Table 21-2. The marginal propensity to save is equal to A) 0.8. B) 0.67. C) 0.6. D) 0.4. E) 0.2. Answer: E Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Table Category: Quantitative

39) The table below shows disposable income and desired consumption for a closed economy with no government.

Disposable Income 0 30 70 130

Desired Consumption 10 34 66 114

TABLE 21-2 Refer to Table 21-2. The marginal propensity to consume is equal to A) 0.2. B) 0.4. C) 0.6. D) 0.67. E) 0.8. Answer: E Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Table Category: Quantitative 40) Desired consumption divided by disposable income is called the A) average propensity to consume. B) average propensity to save. C) average propensity to spend. D) marginal propensity to save. E) total propensity to save. Answer: A Diff: 1 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

41) Desired consumption divided by disposable income is called the A) consumption function. B) marginal propensity to consume. C) average propensity to consume. D) average propensity to save. E) relative consumption ratio. Answer: C Diff: 1 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 42) The "marginal propensity to consume" refers to the additional A) desired saving that occurs out of an additional dollar of disposable income. B) desired consumption that occurs out of an additional dollar of disposable income. C) desired consumption that occurs out of an additional dollar of investment. D) desired consumption caused by a change in tastes. E) desired consumption that occurs out of an additional dollar of national income. Answer: B Diff: 2 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 43) The change in desired consumption divided by the change in disposable income that brought it about is called the A) average propensity to consume. B) average propensity not to consume. C) consumption function. D) marginal propensity to consume. E) marginal propensity not to spend. Answer: D Diff: 1 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

44) What is the definition of "marginal propensity to consume"? A) the change in desired consumption divided by the change in saving that brought it about B) the change in desired consumption divided by total disposable income C) the change in desired consumption divided by the change in disposable income that brought it about D) total desired consumption divided by total disposable income E) total desired consumption divided by the change in disposable income that brought it about Answer: C Diff: 1 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 45) If the marginal propensity to consume (MPC) is equal to 0.9, an increase in household income causes desired consumption expenditure to A) rise by more than the increase in income. B) rise by the full increase in income. C) rise by less than the full increase in income. D) fall, as an increase in income will increase saving. E) remain constant, because the MPC is also constant. Answer: C Diff: 2 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 46) The consumption function used in the textbook is based on a number of assumptions. Given these assumptions, which of the following statements is true? A) Below a certain level of income, APC > 1 and MPC < 0. B) The MPC and APC are always less than unity. C) As income rises, the MPC falls and the APC rises. D) The MPC is greater than zero and less than one, and the APC falls as income rises. E) The APC is greater than zero and less than one, and the MPC falls as income rises. Answer: D Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

47) The Smith family's disposable income rose from $40 000 per year to $42 000 and their desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that their A) average propensity to consume is 0.8. B) average propensity to save is 0.8. C) marginal propensity to consume is $800. D) marginal propensity to consume is 0.8. E) marginal propensity to save is 0.8. Answer: D Diff: 2 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 48) The Smith family's disposable income rose from $40 000 per year to $42 000 and his desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that their A) average propensity to consume decreased from 0.950 to 0.943. B) average propensity to save decreased from 0.950 to 0.943. C) marginal propensity to consume is 0.050. D) marginal propensity to consume increased from 0.050 to 0.058. E) marginal propensity to save is 0.80. Answer: A Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 49) Jeff and Lori's disposable income rose from $80 000 per year to $84 000 and their desired consumption expenditure rose from $76 000 to $79 000. It can be concluded that their A) average propensity to consume is constant. B) average propensity to save is always 0.25. C) marginal propensity to consume decreased. D) marginal propensity to consume is 0.25. E) marginal propensity to save is 0.25. Answer: E Diff: 2 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment.

Category: Quantitative

50) Which of the following statements must be true in the simple macro model (with a closed economy and no government)? A) APC increases as income rises. B) APS decreases as income rises. C) MPS and MPC are both negative. D) MPC is negative below a certain level of income. E) The sum of MPC and MPS is one. Answer: E Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 51) If the Jones family's disposable income increases from $1200 to $1700 and their desired saving increases from -$100 to +$100, then the family's A) average propensity to consume is 0.60. B) average propensity to consume is 0.40. C) marginal propensity to consume is 0.40. D) marginal propensity to consume is 0.60. E) marginal propensity to save is 1. Answer: D Diff: 3 Type: MC Topic: 21.1c. average and marginal propensities to consume Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 52) Total desired saving divided by total income is called the A) average propensity to consume. B) average propensity to save. C) average propensity to spend. D) marginal propensity to save. E) total propensity to save. Answer: B Diff: 1 Type: MC Topic: 21.1d. the saving function Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

53) The marginal propensity to save refers to the A) additional saving that occurs out of an additional dollar of income. B) additional saving that occurs out of an additional dollar of investment. C) total saving divided by a change in income. D) change in saving divided by total income. E) additional saving that occurs over time. Answer: A Diff: 1 Type: MC Topic: 21.1d. the saving function Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 54) In a simple model of the economy, without government or taxes, a shock that causes an upward shift of the aggregate consumption function also causes ________ shift of the saving function. A) an equal upward B) a less-than-equal upward C) an equal downward D) a less-than-equal downward E) no Answer: C Diff: 2 Type: MC Topic: 21.1d. the saving function Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 55) When desired consumption exceeds disposable income, desired saving is ________; when desired consumption is less than the disposable income, desired saving is ________. A) negative; negative B) positive; negative C) negative; positive D) positive; positive E) zero; positive Answer: C Diff: 2 Type: MC Topic: 21.1d. the saving function Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

56) In the simple macro model, desired investment expenditure will generally fall as a result of which of the following changes? A) a decrease in business confidence B) a decrease in interest rates C) an increase in government purchases D) an increase in sales volume E) an increase in business confidence Answer: A Diff: 1 Type: MC Topic: 21.1e. desired investment Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 57) In the simple macro model, desired investment is assumed to be autonomous with respect to national income. Which of the following will cause a shift of the investment function? 1) a decrease in interest rates 2) an increase in firms' optimism about the economy 3) an expectation of a downturn in future economic activity A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1, 2, and 3 E) 1 only Answer: D Diff: 2 Type: MC Topic: 21.1e. desired investment Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 58) Investment expenditure is the ________ volatile component of GDP, and changes in investment are ________ associated with business-cycle fluctuations. A) most; strongly B) most; weakly C) least; strongly D) least; weakly E) least; not Answer: A Diff: 1 Type: MC Topic: 21.1e. desired investment Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired

investment. Category: Qualitative

59) A rise in the real rate of interest ________ the opportunity cost of holding an inventory of a given size, and therefore ________ desired investment expenditure. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; leaves unaffected E) decreases; decreases Answer: B Diff: 2 Type: MC Topic: 21.1e. desired investment Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 60) In Canada, as in many other countries, the largest component of domestic investment expenditure is A) residential housing. B) inventories. C) financial assets. D) plant and equipment. E) savings. Answer: D Diff: 1 Type: MC Topic: 21.1e. desired investment Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 61) Consider desired investment in the simple macro model. Other things being equal, higher real interest rates tend to A) reduce every component of desired investment expenditure except residential housing. B) reduce every component of desired investment expenditure except inventories. C) reduce every component of desired investment expenditure except plant and equipment. D) increase every component of desired investment expenditure. E) reduce every component of desired investment expenditure. Answer: E Diff: 2 Type: MC Topic: 21.1e. desired investment Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

62) In the simplest macroeconomic model, with a closed economy and no government, the aggregate expenditure (AE) function is the sum of A) saving and desired investment. B) consumption and disposable income. C) desired consumption and desired investment. D) consumption and saving. E) actual consumption and actual investment. Answer: C Diff: 1 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 63) Consider the simplest macroeconomic model, with a closed economy and no government. If we assume that desired investment is autonomous with respect to national income, then the investment function (which graphs desired investment against actual national income) will be A) negatively sloped. B) positively sloped and relatively steep. C) positively sloped and relatively flat. D) vertical. E) horizontal. Answer: E Diff: 1 Type: MC Topic: 21.1e. desired investment Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 64) The assumed relationship between desired total expenditures and actual national income is called the A) consumption function. B) desired aggregate demand function. C) aggregate expenditure function. D) dissaving function. E) equilibrium function. Answer: C Diff: 1 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

65) Which of the following correctly describes the meaning of the aggregate expenditure (AE) function? A) The AE function relates the level of desired aggregate expenditure to the level of actual national income. B) The AE function relates the level of desired consumption expenditure to desired aggregate expenditure. C) The AE function relates the level of desired investment expenditure to desired aggregate expenditure. D) The AE function relates the level of nominal GDP to the level of real GDP. E) The AE function relates the level of desired aggregate expenditure to the price level. Answer: A Diff: 1 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 66) The increase in aggregate planned expenditures divided by the change in national income that brought it about is called the A) average propensity to consume. B) average propensity to save. C) marginal propensity to spend. D) marginal propensity to save. E) marginal propensity to consume. Answer: C Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 67) The slope of the aggregate expenditure (AE) function is always equal to the marginal propensity to A) save. B) invest. C) import. D) spend. E) tax. Answer: D Diff: 1 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment.

Category: Qualitative

68) Suppose there is an increase in the marginal propensity to spend out of national income. The result will be A) a movement to the right along the AE curve. B) a movement to the left along the AE curve. C) an increase in the slope of the AE curve. D) a decrease in the slope of the AE curve. E) a parallel upward shift in the AE curve. Answer: C Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 69) Suppose there is a decrease in the marginal propensity to spend out of national income. The result will be A) a movement to the right along the AE curve. B) a movement to the left along the AE curve. C) an increase in the slope of the AE curve, which rotates it upward. D) a decrease in the slope of the AE curve, which rotates it downward. E) a parallel downward shift in the AE curve. Answer: D Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

70)

FIGURE 21-3 Refer to Figure 21-3. Assuming AE0 is the prevailing aggregate expenditure function, the distance 0A is a measure of A) aggregate expenditure at equilibrium national income. B) autonomous desired expenditures. C) induced expenditures. D) desired saving. E) desired investment. Answer: B Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

71)

FIGURE 21-3 Refer to Figure 21-3. Assuming AE0 is the prevailing aggregate expenditure function, at a level of national income equal to Y3 we can state that A) consumption is greater than desired aggregate expenditure. B) consumption is less than desired aggregate expenditure. C) desired aggregate expenditure is greater than output. D) desired aggregate expenditure is less than output. E) desired saving is less than zero. Answer: D Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

72)

FIGURE 21-3 Refer to Figure 21-3. In this demand-determined model of the macro economy, the price level is A) measured by Y2/0B. B) measured by Y1Y2/AB. C) increasing as the economy moves from E0 to E1. D) assumed to be constant. E) derived from the slope of the AE function. Answer: D Diff: 3 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

73)

FIGURE 21-3 Refer to Figure 21-3. If national income is Y1 and the aggregate expenditure function is AE1, then desired aggregate expenditure A) exceeds income and income will rise. B) exceeds income and income will fall. C) is less than income and income will rise. D) is equal to income and income will not change. E) is less than income and income will fall. Answer: A Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

74)

FIGURE 21-3 Refer to Figure 21-3. If national income is Y3 and the aggregate expenditure function is AE1, A) the economy is in equilibrium. B) there is unintended inventory accumulation and income will rise. C) there is unintended inventory accumulation and income will fall. D) there is unintended inventory decumulation and income will rise. E) there is unintended inventory decumulation and income will fall. Answer: C Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

75)

FIGURE 21-3 Refer to Figure 21-3. If national income is Y1 and the aggregate expenditure function is AE1, A) the economy is in equilibrium. B) there is unintended inventory accumulation and income will rise. C) there is unintended inventory accumulation and income will fall. D) there is unintended inventory decumulation and income will rise. E) there is unintended inventory decumulation and income will fall. Answer: D Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

76) The aggregate expenditure (AE) function is an upward-sloping curve that describes A) the amount spent on an economy's output at each national income. B) what firms and households would like to spend at each level of national income. C) what an economy would like to spend, in the absence of income constraints, at each level of output. D) what is actually spent on an economy's output at each level of output. E) what is actually spent at each level of national income. Answer: B Diff: 1 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 77) In general, the marginal propensity to spend is the change in total desired expenditure induced by a change in ________ whereas the marginal propensity to consume is the change in desired consumption expenditure induced by a change in ________. In the case of the simplest macro model with no government and no international trade, however, the marginal propensity to spend is ________ the marginal propensity to consume. A) national income; disposable income; greater than B) national income; disposable income; equal to C) disposable income; national income; equal to D) disposable income; national income; greater than E) national income; disposable income; smaller than Answer: B Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 78) Consider the following aggregate expenditure function: AE = $300 billion + (0.87)Y. Assuming that we have no government, no international trade and desired investment is autonomous and is equal to $56 billion, then which of the following is the correct statement of the consumption function? A) C = $356 billion + (0.87)Y B) C = $356 billion + (0.13)Y C) C = $244 billion + (0.87)Y D) C = $244 billion + (0.13)Y E) C = $300 billion + (0.13)Y Answer: C Diff: 3 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied

Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 79) Consider the following aggregate expenditure function: AE = $500 billion + (0.75)Y. Assuming no government, no international trade, and desired investment is autonomous and equal to $120 billion, then which of the following is the correct statement of the consumption function? A) C = $620 billion + (0.75)Y B) C = $620 billion + (0.25)Y C) C = $500 billion + (0.75)Y D) C = $500 billion + (0.25)Y E) C = $380 billion + (0.75)Y Answer: E Diff: 3 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 80) Consider the following news headline: "Increase in consumer confidence leads to increase in spending". Which of the following correctly describes the likely effect in our simple macro model? A) The consumption function shifts downward. B) The consumption function gets flatter. C) The AE function shifts upward. D) The consumption function shifts upward. E) Both C and D are correct. Answer: E Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 81) Consider the following news headline: "Canadian business leaders fear reduced world demand for commodities". Which of the following correctly describes the likely effect in our simple macro model? A) The consumption function shifts upward. B) The AE function shifts downward. C) The investment function shifts upward. D) The savings function shifts downward. E) The AE function shifts upward. Answer: B

Diff: 2 Type: MC Topic: 21.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj.: 21-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

21.2 Equilibrium National Income 1) In a simple macro model with demand-determined output, the equilibrium level of national income is at an income A) to the left of the point where the AE curve intersects the 45-degree line. B) where the AE curve intersects the 45-degree line. C) to the right of the point where the AE curve intersects the 45-degree line. D) where saving equals consumption. E) where saving equals income. Answer: B Diff: 1 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative 2) Consider a simple macro model with demand-determined output. At the equilibrium level of national income, A) consumers' purchases of goods and services equal firms' purchases of investment goods. B) firms will hold no inventories of raw materials or final goods. C) desired aggregate expenditures will equal total output. D) desired aggregate expenditures will equal total output minus inventory holdings. E) consumers' purchases of goods and services equal their saving. Answer: C Diff: 1 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative 3) In a simple macro model with no government and no foreign trade, the equilibrium level of national income is the level of income at which A) aggregate desired expenditure is greater than actual national income. B) aggregate desired expenditure equals actual national income. C) aggregate desired expenditure equals consumer spending. D) saving equals income. E) saving equals consumer spending. Answer: B Diff: 1 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative

4) Consider the simplest macro model with a constant price level and demand-determined output. If desired aggregate expenditure is less than actual national income, then A) inventories begin to fall, causing firms to increase production. B) actual national income is below the equilibrium level. C) actual national income must be above the equilibrium level. D) actual national income must be at equilibrium. E) inventories begin to fall, causing national income to fall. Answer: C Diff: 2 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative 5) Consider the simplest macro model with demand-determined output. If desired aggregate expenditure is greater than actual national income, then A) inventories will likely begin to fall, causing firms to increase production. B) actual national income must be less than the equilibrium level. C) actual national income must be greater than the equilibrium level. D) inventories will likely begin to rise, causing firms to reduce production. E) both A and B are correct. Answer: E Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative 6) In a simple macro model with the price level assumed to be constant, a change in firms' level of desired investment is predicted to influence equilibrium national income by A) shifting the saving function. B) shifting the consumption function. C) shifting the aggregate expenditure function. D) causing movement along the investment function. E) shifting the 45-degree line. Answer: C Diff: 2 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative

7) Consider the simplest macro model with a constant price level and demand-determined output. If national income is less than its equilibrium level, it is likely that firms' inventories are ________, and so national income tends to ________. A) accumulating; rise B) accumulating; fall C) being depleted; rise D) being depleted; fall E) constant; fall Answer: C Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative 8) Consider a simple macro model with a constant price level and demand-determined output. If national income is above its equilibrium level, it is likely that inventories are ________, and so national income tends to ________. A) accumulating; rise B) accumulating; fall C) being depleted; rise D) being depleted; fall E) constant; fall Answer: B Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative 9) Consider a simple macro model with a constant price level and demand-determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case, A) inventories will build up, causing national income to rise. B) national income will fall, because desired expenditures are less than actual expenditures. C) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise. D) national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save. E) there will be no change in national income because only actual expenditure is relevant. Answer: C Diff: 2 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income.

Category: Qualitative 10) Consider a simple macro model with a constant price level and demand-determined output. Suppose desired aggregate expenditures are less than the current level of national income. The vertical distance between the AE curve and the 45-degree line represents A) desired accumulation of inventories. B) desired decumulation of inventories. C) the amount by which output exceeds desired expenditures. D) the output gap. E) the amount by which desired expenditures exceeds output. Answer: C Diff: 2 Type: MC Topic: 21.2. equilibrium national income Skill: Recall Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative

11)

FIGURE 21-3 Refer to Figure 21-3. What does each point along the 45-degree line represent? A) combinations of desired aggregate expenditure and actual national income where consumption expenditure equals saving B) the equilibrium condition that desired aggregate expenditure equals actual national income C) levels of actual national income where desired AE is equal to the sum of desired consumption and desired investment D) levels of actual national income that occur when autonomous expenditure is increasing at a constant (linear) rate E) levels of actual national income where desired saving is equal to zero Answer: B Diff: 2 Type: MC Topic: 21.2. equilibrium national income Skill: Recall Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Graph Category: Qualitative

12)

FIGURE 21-3 Refer to Figure 21-3. Consider the simplest macro model with no government and no foreign trade, and the aggregate expenditure function AE = C + I. If there was zero autonomous expenditure and the marginal propensity to consume was equal to one, then the AE function would be A) steeper than the 45-degree line. B) above the 45-degree line at all points. C) below the 45-degree line at all points. D) coincident with the 45-degree line. E) flatter than the 45-degree line. Answer: D Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Graph Category: Quantitative

13) Consider the simplest macro model with demand-determined output, where AE = C + I. Suppose actual national income is $900 billion and desired consumption plus desired investment is $920 billion. We can expect that A) firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income. B) firms will decrease autonomous investment by $20 billion until equilibrium national income is reached at $900 billion. C) firms will increase autonomous investment by $20 billion until equilibrium national income is reached at $920 billion. D) firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income. E) actual national income will decrease until equilibrium national income is reached at $900 billion. Answer: D Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Quantitative 14) Consider the simplest macro model with demand-determined output, where AE = C + I. Suppose actual national income is $900 billion and desired consumption plus desired investment is $890 billion. We can expect that A) firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income. B) firms will decrease autonomous investment by $10 billion until equilibrium national income is reached at $890 billion. C) firms will increase autonomous investment by $10 billion until equilibrium national income is reached at $900 billion. D) actual national income will increase until equilibrium national income is reached at $900 billion. E) firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income. Answer: E Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Quantitative

15) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions.

TABLE 21-3 Refer to Table 21-3. The correct expression for the aggregate expenditure function for this economy is A) AE = $760 billion. B) AE = $300 billion + 0.9Y. C) AE = $400 billion + 0.9Y. D) AE = $400 billion + 0.1 . E) AE = $200 billion + 0.1 . Answer: C Diff: 1 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

16) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions.

TABLE 21-3 Refer to Table 21-3. The equilibrium level of national income ($billions) will be A) $3000. B) $3600. C) $3900. D) $4000. E) $4400. Answer: D Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative 17) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions.

TABLE 21-3 Refer to Table 21-3. At the equilibrium level of national income, desired consumption expenditure ($billions) will be A) $300. B) $400. C) $3900. D) $3600. E) $4000. Answer: C Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table

Category: Quantitative 18) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions.

TABLE 21-3 Refer to Table 21-3. At the equilibrium level of national income, desired investment ($billions) is A) $100. B) $4000. C) $3900. D) $400. E) $1000. Answer: A Diff: 2 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative 19) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions.

TABLE 21-3 Refer to Table 21-3. At the equilibrium level of national income, desired saving ($billions) is A) $100. B) $300. C) $4000. D) $3900. E) $1000. Answer: A Diff: 3 Type: MC Topic: 21.2. equilibrium national income

Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative 20) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions.

TABLE 21-3 Refer to Table 21-3. Suppose this economy is in equilibrium. There is then a significant decline in house prices across the country. The likely effect is A) autonomous consumption will rise above $300 billion and equilibrium national income will therefore rise. B) autonomous saving will fall and equilibrium national income will therefore fall. C) autonomous saving will rise and equilibrium national income will therefore rise. D) autonomous investment will rise and equilibrium national income will therefore rise. E) autonomous consumption will fall below $300 billion and equilibrium national income will therefore fall. Answer: E Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

21) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions.

TABLE 21-4 Refer to Table 21-4. The equilibrium level of national income ($billions) will be A) $70. B) $93. C) $120. D) $160. E) $280. Answer: E Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative 22) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions.

TABLE 21-4 Refer to Table 21-4. At the equilibrium level of national income, desired consumption expenditure ($billions) will be A) $30. B) $70. C) $210. D) $240. E) $280. Answer: D Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table

Category: Quantitative 23) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions.

TABLE 21-4 Refer to Table 21-4. At the equilibrium level of national income, desired saving ($billions) will be A) zero. B) $40. C) $70. D) $200. E) $240. Answer: B Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative 24) Consider a simple macro model with a constant price level and demand-determined output. When national income falls short of desired aggregate expenditures, unplanned inventory ________ will induce firms to ________ the rate of output production. A) depletion; lower B) depletion; raise C) buildup; lower D) buildup; raise E) at zero; maintain the current Answer: B Diff: 2 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Category: Qualitative

25) Consider a simple macro model with a constant price level and demand-determined output. If the simple multiplier is 3 and there is a $2 billion increase in autonomous investment spending, then the equilibrium level of income will increase by A) $1.2 billion. B) $2 billion C) $3 billion. D) $4.5 billion. E) $6 billion. Answer: E Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 26) Consider the following information describing an economy with demand-determined output. There is no government or foreign trade. All dollar figures are in billions. 1. 2. 3. 4.

equilibrium condition is Y = C + I marginal propensity to save = 0.20 the autonomous part of C is $50 investment is autonomous and equals $25

TABLE 21-5 Refer to Table 21-5. The equilibrium level of national income is A) $375. B) $249. C) $155. D) $75. E) $93.75. Answer: A Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

27) Consider the following information describing an economy with demand-determined output. There is no government or foreign trade. All dollar figures are in billions. 1. 2. 3. 4.

equilibrium condition is Y = C + I marginal propensity to save = 0.20 the autonomous part of C is $50 investment is autonomous and equals $25

TABLE 21-5 Refer to Table 21-5. At the equilibrium level of national income, what is the level of desired consumption expenditures? A) $68.75 B) $125 C) $150 D) $350 E) $375 Answer: D Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

28) Consider the following information describing an economy with demand-determined output. There is no government or foreign trade. All dollar figures are in billions. 1. 2. 3. 4.

equilibrium condition is Y = C + I marginal propensity to save = 0.20 the autonomous part of C is $50 investment is autonomous and equals $25

TABLE 21-5 Refer to Table 21-5. At the equilibrium level of national income, the level of desired saving will be A) equal to consumption expenditures. B) $375. C) $50. D) $25. E) $0 Answer: D Diff: 3 Type: MC Topic: 21.2. equilibrium national income Skill: Applied Learning Obj.: 21-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative 21.3 Changes in Equilibrium National Income 1) Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause ________ in desired consumption and ________ in desired investment. A) an increase; an increase B) an increase; a decrease C) a decrease; a decrease D) a decrease; no change E) a decrease; an increase Answer: C Diff: 2 Type: MC Topic: 21.3a. shifts of the AE function Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

2) Consider a simple macro model with a constant price level and demand-determined output. In such a model, a downward shift of the saving function causes equilibrium national income to A) fall because the AE function shifts downward simultaneously. B) rise because the AE function shifts upward simultaneously. C) remain constant but consist of more consumption and less investment. D) remain constant but consist of less consumption and more investment. E) remain constant because it does not affect desired aggregate expenditure. Answer: B Diff: 2 Type: MC Topic: 21.3a. shifts of the AE function Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 3) Consider the simplest macro model with a constant price level and demand-determined output. In such a model, an upward shift of the saving function causes equilibrium national income to A) fall because the AE function shifts downward simultaneously. B) rise because the AE function shifts upward simultaneously. C) remain constant but consist of more consumption and less investment. D) remain constant but consist of less consumption and more investment. E) remain constant because it does not affect desired aggregate expenditure. Answer: A Diff: 2 Type: MC Topic: 21.3a. shifts of the AE function Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

4)

FIGURE 21-3 Refer to Figure 21-3. A shift in the aggregate expenditure function from AE0 to AE1 could be caused by A) a rise in the multiplier. B) a fall in the marginal propensity to consume. C) a rise in the marginal propensity to consume. D) an increase in desired investment expenditures. E) a decrease in desired investment expenditures. Answer: D Diff: 2 Type: MC Topic: 21.3a. shifts of the AE function Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Graph Category: Qualitative

5)

FIGURE 21-3 Refer to Figure 21-3. A shift in the aggregate expenditure function downward from AE1 to AE0 could be caused by A) a rise in the multiplier. B) a fall in the marginal propensity to consume. C) a rise in the marginal propensity to consume. D) an increase in autonomous desired saving. E) a decrease in autonomous desired saving. Answer: D Diff: 2 Type: MC Topic: 21.3a. shifts of the AE function Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Graph Category: Qualitative

6)

FIGURE 21-3 Refer to Figure 21-3. The simple multiplier could be measured by the ratio A) /0A. B) C)

/0B. /AB.

D) BA/Y1. E) 1/(Y2 - Y1). Answer: C Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Graph Category: Qualitative

7) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the increase in expenditure in this economy during the initial first round of spending? A) $75 million B) $25 million C) $100 million D) $400 million E) $500 million Answer: C Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 8) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the increase in expenditure in this economy during the second round of spending? A) $25 million B) $100 million C) $400 million D) $75 million E) $500 million Answer: D Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

9) The simple multiplier, which applies to short-run situations in which the price level is constant, describes changes in A) investment induced by changes in equilibrium income. B) saving caused by changes in desired investment. C) the equilibrium level of national income caused by changes in autonomous expenditure. D) the equilibrium rate of interest caused by changes in the demand for credit. E) employment induced by changes in equilibrium income. Answer: C Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 10) Consider a simple macro model with a constant price level and demand-determined output. Using this model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the A) average propensity to save. B) marginal propensity to save. C) equilibrium level of national income. D) simple multiplier. E) reciprocal of the marginal propensity to spend. Answer: D Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

11) The simple multiplier applies to short-run situations in which the price level is constant. The simple multiplier can be defined as A) national income divided by aggregate expenditure. B) the change in equilibrium national income divided by the initial change in autonomous expenditure that brought it about. C) the change in national income resulting from a change in expenditure, multiplied by the number of years since the initial change. D) a change in aggregate expenditures multiplied by the equilibrium level of national income. E) the change in national income resulting from a change in saving. Answer: B Diff: 1 Type: MC Topic: 21.3b. the simple multiplier Skill: Recall Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 12) In a simple macro model with demand-determined output, the simple multiplier is equal to 1/(1-z), where z equals the A) average propensity to spend. B) average propensity not to spend. C) level of autonomous expenditure. D) marginal propensity to spend. E) marginal propensity not to spend. Answer: D Diff: 1 Type: MC Topic: 21.3b. the simple multiplier Skill: Recall Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 13) Consider a simple macro model with demand-determined output. If z is the marginal propensity to spend out of national income, Y is national income and A is autonomous expenditure, then the simple multiplier is equal to A) z. B) 1 - z. C) 1/z. D) 1/(1 - z). E) Y/(1 - z). Answer: D Diff: 1 Type: MC Topic: 21.3b. the simple multiplier Skill: Recall Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium

income through the "simple multiplier." Category: Qualitative 14) Consider a simple macro model with a constant price level and demand-determined output. In the extreme situation where the marginal propensity to spend is zero, the simple multiplier is A) zero. B) a positive number between zero and one. C) one. D) a positive number greater than one but less than infinity. E) infinitely large. Answer: C Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 15) Consider a simple macro model with a constant price level and demand-determined output. In the extreme situation where the marginal propensity to spend is one, the simple multiplier is A) zero. B) a positive number between zero and one. C) one. D) a positive number greater than one but less than infinity. E) infinitely large. Answer: E Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 16) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend is between zero and one, the simple multiplier is A) zero. B) a positive number between zero and one. C) one. D) a positive number greater than one but less than infinity. E) infinitely large. Answer: D Diff: 2 Type: MC Topic: 21.3b. the simple multiplier

Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

17) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is 0.6, the simple multiplier is A) 0. B) 0.6. C) 1.67. D) 2.5. E) 6.0. Answer: D Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 18) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is 0.4, the simple multiplier is A) 0. B) 0.4. C) 1.67. D) 2.5. E) 4.0. Answer: C Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 19) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is 0.8, the simple multiplier is A) 0. B) 0.8. C) 1.25. D) 5.0. E) 8.0. Answer: D Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

20) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the marginal propensity to spend is 0.7, the simple multiplier is A) 0.33. B) 0.70. C) 1.00. D) 1.42. E) 3.33. Answer: E Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 21) Consider a simple macro model with demand-determined output. In such a model, the larger the marginal propensity to spend, the A) larger the MPC. B) smaller the MPS. C) smaller the simple multiplier. D) larger the simple multiplier. E) greater is investment. Answer: D Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 22) Consider a simple macro model with demand-determined output. In such a model, the smaller the marginal propensity to spend, the A) smaller the MPS. B) smaller the simple multiplier. C) larger is investment. D) larger the MPC. E) larger the simple multiplier. Answer: B Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

23) Consider a simple macro model with demand-determined output. In such a model, the multiplier is larger, the A) higher the level of autonomous expenditures. B) steeper is the AE function. C) flatter is the AE function. D) lower the APC. E) lower the level of autonomous expenditures. Answer: B Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 24) Consider a simple macro model with demand-determined output. Using such a model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the reciprocal of one minus A) the average propensity to save. B) the marginal propensity to save. C) the equilibrium level of national income. D) the marginal propensity not to spend. E) the marginal propensity to spend. Answer: E Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

25) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the eventual total new expenditure in this economy due to the increase in investment? A) $75 million B) $100 million C) $25 million D) $500 million E) $400 million Answer: E Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 26) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $30 million. The marginal propensity to spend in this economy is 0.9. What is the eventual total new expenditure in this economy due to the increase in investment? A) $3 million B) $30 million C) $27 million D) $270 million E) $300 million Answer: E Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

27) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $3.5 billion. The marginal propensity to spend in this economy is 0.6. What is the eventual total new expenditure in this economy due to the increase in investment? A) $2.1 billion. B) $5.8 billion. C) $3.5 billion. D) $7.0 billion. E) $8.75 billion. Answer: E Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 28) Consider the simplest macro model with a constant price level and demanddetermined output. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be A) 1/3. B) 1/2. C) 2/3. D) 4/5. E) 3. Answer: C Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

29) Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $20 billion, the marginal propensity to spend must be A) 2/5. B) 1/3. C) 1/2. D) 4/5. E) 5. Answer: D Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 30) Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $8 billion, the marginal propensity to spend must be A) 2/5. B) 1/2. C) 2/3. D) 4/5. E) 2. Answer: B Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 31) Consider the simplest macro model in which aggregate output is demand-determined. If autonomous consumption increases by $2 billion causing equilibrium national income to rise by $6 billion, the marginal propensity to spend must be A) 1.0. B) 0.5. C) 0.2. D) 0.67. E) 3.0. Answer: D Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier."

Category: Quantitative 32) Consider a simple macro model with a constant price level. If the AE function is horizontal, then we know the simple multiplier is A) less than zero. B) zero. C) between zero and one. D) exactly one. E) greater than one. Answer: D Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 33) Suppose aggregate output is demand-determined. If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending, then equilibrium income will ________ and the marginal propensity to spend must equal ________. A) decrease by $40 billion; 0.75 B) decrease by $10 billion; 0.25 C) increase by $40 billion; 0.25 D) increase by $40 billion; 0.75 E) increase by $10 billion; 4.0 Answer: D Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 34) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the consumption function is C = (2/3)Y, then the simple multiplier is A) 2/3. B) 1. C) 2. D) 3. E) Insufficient information to know. Answer: D Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium

income through the "simple multiplier." Category: Quantitative 35) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the consumption function is C = (1/2)Y, the simple multiplier is A) 2/3. B) 1. C) 2. D) 3. E) Insufficient information to know. Answer: C Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 36) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the saving function is S = -100 + (0.2)Y, the simple multiplier is A) 0.2. B) 1. C) 2.5. D) 5. E) Insufficient information to know. Answer: D Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 37) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the saving function is S = -100 + (0.4)Y, the simple multiplier is A) 0.2. B) 1. C) 2.5. D) 5. E) Insufficient information to know. Answer: C Diff: 3 Type: MC Topic: 21.3b. the simple multiplier

Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

38) Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant.

TABLE 21-6 Refer to Table 21-6. This economy's equilibrium level of national income is A) 500. B) 600. C) 750. D) 1000. E) 1500. Answer: C Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative 39) Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant.

TABLE 21-6 Refer to Table 21-6. The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. D) 4.0. E) 5.0. Answer: B Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative

40) Consider the following information concerning an economy with demand-determined output. There is no government or foreign trade.

TABLE 21-7 Refer to Table 21-7. This economy's equilibrium level of national income is A) 500. B) 600. C) 750. D) 1000. E) 1500. Answer: B Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative 41) Consider the following information concerning an economy with demand-determined output. There is no government or foreign trade.

TABLE 21-7 Refer to Table 21-7. The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. D) 4.0. E) 5.0. Answer: A Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table

Category: Quantitative 42) Consider the following information for an economy with demand-determined output and a constant price level. There is no government or foreign trade.

TABLE 21-8 Refer to Table 21-8. This economy's equilibrium level of national income is A) 500. B) 600. C) 750. D) 1000. E) 1500. Answer: E Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative 43) Consider the following information for an economy with demand-determined output and a constant price level. There is no government or foreign trade.

TABLE 21-8 Refer to Table 21-8. The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. D) 4.0. E) 5.0. Answer: E Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier."

Graphics: Table Category: Quantitative 44) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend is 0.9, the simple multiplier is A) 0.1. B) 0.9. C) 1.0. D) 1.1. E) 10.0. Answer: E Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 45) Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The simple multiplier is equal to A) -2.5. B) -0.6. C) 0.4. D) 0.6. E) 2.5. Answer: E Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 46) Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to A) -0.6. B) 0.4. C) 0.6. D) 2.5. E) -2.5. Answer: C Diff: 3 Type: MC Topic: 21.3b. the simple multiplier Skill: Applied

Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 47) Suppose aggregate output is demand-determined. Which of the following will lead to an increase in the simple multiplier? A) an increase in the marginal propensity to consume B) a decrease in the marginal propensity to consume C) a decrease in autonomous consumption D) an increase in autonomous consumption E) an increase in investment Answer: A Diff: 2 Type: MC Topic: 21.3b. the simple multiplier Skill: Recall Learning Obj.: 21-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 22 Adding Government and Trade to the Simple Macro Model 22.1 Introducing Government 1) In the simple macro model, how do government transfer payments to individuals affect desired aggregate expenditure? A) directly B) through the consumption function C) through business investment D) through net exports E) through the government's budget deficit Answer: B Diff: 1 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 2) Why are government expenditures such as Old Age Security payments, employment insurance payments, or welfare benefits paid to individuals not considered part of G, the government component of aggregate expenditure? A) These are transfer payments and place no direct demand on Canada's total output. B) These payments are directly included as part of C, consumption, because they become consumption expenditure for the recipient. C) Since the revenues from which these payments are made did not originate from tax collection, they are not considered part of G.

D) Since these expenditures are transfers from recipients to taxpayers, they are not included in G. E) These payments are included in G only when the payments are made directly by the federal government. Answer: A Diff: 1 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative

3) The G and T components in the national-income accounts measure purchases and net taxes collected by A) all levels of government. B) only provincial governments and the federal government. C) only the federal government. D) only provincial governments. E) only local governments. Answer: A Diff: 1 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 4) When economists use the term "budget surplus" they are referring to A) net tax revenues minus government purchases. B) national income minus transfer payments. C) national income minus consumption. D) disposable income minus consumption. E) net tax revenues minus transfer payments. Answer: A Diff: 1 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 5) Transfer payments made by the government affect its net tax revenues A) directly. B) indirectly through government purchases. C) indirectly through net exports. D) indirectly through the investment function. E) indirectly through the consumption function. Answer: A Diff: 1 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative

6) Consider the net tax rate, denoted by t. Which of the following correctly defines the net tax rate? A) It is total tax revenue minus transfer payments. B) It is the sum of the federal income tax rate plus an average of provincial income tax rates. C) It is the increase in net tax revenue when national income rises by one dollar. D) It is the sum of all government tax revenues. E) Both A and C are correct. Answer: C Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 7) Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is equal to 0.14Y. When Y = 2000, the government is running a budget A) deficit of 20. B) surplus of 20. C) balance. D) deficit of -20. E) surplus of 40. Answer: A Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 8) Consider the government's budget balance. Suppose G = 2500 and the government's net tax revenue is equal to 0.2Y. When Y = 11 000, the government is running a budget A) deficit of 1500. B) surplus of 300. C) balance. D) deficit of 300. E) surplus of 1500. Answer: D Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative

9) Consider the government's budget balance. Suppose G = 500 and the government's net tax revenue is equal to 0.25Y. When Y = 2920, the government is running a budget A) deficit of 730. B) surplus of 230. C) balance. D) deficit of 230. E) surplus of 730. Answer: B Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 10) Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is equal to 0.12Y. The government budget is balanced when Y equals A) 350. B) 1000. C) 2000. D) 2500. E) 3600. Answer: D Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 11) Consider the government's budget balance. Suppose G = 2500 and the government's net tax revenue is equal to 0.2Y. The government budget is balanced when Y equals A) 9500. B) 10 500. C) 11 500. D) 12 500. E) 13 500. Answer: D Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative

12) Consider the government's budget balance. Suppose G = 500 and the government's net tax revenue is equal to 0.2Y. The government budget is balanced when Y equals A) 2000. B) 2200. C) 2400. D) 2500. E) 2800. Answer: D Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 13) Consider the government's budget balance. Suppose G = 400 and the government's net tax revenue is 20% of national income (Y). Government saving is negative for all values of Y A) above 10 000. B) above 8000. C) above 2000. D) below 8000. E) below 2000. Answer: E Diff: 3 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 14) Consider the government's budget balance. Suppose G = 600 and the government's net tax revenue is 10% of Y. The government budget is balanced when Y equals A) 660. B) 1320. C) 3000. D) 4500. E) 6000. Answer: E Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative

15) Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is 0.3Y. The government budget is in surplus only when Y is A) less than 350. B) less than 1000. C) greater than 1000. D) greater than 2500. E) greater than 3000. Answer: C Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 16) Suppose real national income (Y) is equal to 800 and government purchases are equal to 200. If the government's net tax revenues are equal to tY, where t is the net tax rate, then what is the value of t necessary for the government to have a balanced budget? A) 20% B) 25% C) 30% D) 35% E) 40% Answer: B Diff: 3 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 17) Suppose Y = 400 and the government's net tax rate is 10%. If we are told that the government has a budget surplus, then government purchases must be A) greater than 30. B) less than 30. C) greater than 40. D) less than 40. E) Not enough information to know. Answer: D Diff: 3 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative

18) If the government's net tax rate increases, then for a given level of national income disposable income will ________ and net tax revenue will ________. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease E) not change; increase Answer: B Diff: 2 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 19) Consider a simple macro model with a constant price level and demand-determined output. The inclusion of government in such a model affects desired aggregate expenditure directly through ________ and indirectly through ________. A) the net taxes; the government purchases of goods and services B) the net taxes; its effect on disposable income C) the government purchases of goods and services; its effect on net exports D) the government purchases of goods and services; its effect on disposable income E) the government purchases of goods and services; its effect on investment Answer: D Diff: 3 Type: MC Topic: 22.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj.: 22-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 22.2 Introducing Foreign Trade 1) Why are exports treated as autonomous expenditure in our simple macro model? Because A) exports typically do not change as a result of a change in Canadian national income. B) exports are always constant in dollar terms. C) they are a component of net exports, which is autonomous in our model. D) exports are a small component in the Canadian economy and are not significant in the model. E) exports are a function of Canadian national income, which is autonomous in our model. Answer: A Diff: 1 Type: MC Topic: 22.2. net export function Skill: Recall

Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative

2) In a simple macro model, it is generally assumed that a country's exports A) and imports are autonomous. B) and imports are induced. C) are autonomous, whereas imports are induced. D) are induced, whereas imports are autonomous. E) are always equal to investment. Answer: C Diff: 2 Type: MC Topic: 22.2. net export function Skill: Recall Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 3) Consider the AE function in a simple macro model with government and foreign trade. It is generally assumed that as real national income A) increases, exports will decrease. B) increases, net exports will decrease. C) increases, imports will decrease. D) decreases, net exports will decrease. E) decreases, exports will decrease. Answer: B Diff: 2 Type: MC Topic: 22.2. net export function Skill: Recall Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 4) In a simple macro model, the net export (NX) function indicates a ________ relationship between net exports and ________. A) positive; exports B) positive; domestic national income C) negative; imports D) negative; domestic national income E) negative; foreign national income Answer: D Diff: 2 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative

5) A movement along the net export (NX) function can be caused by a change in A) domestic national income. B) foreign national income. C) domestic prices. D) the exchange rate. E) foreign prices. Answer: A Diff: 2 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 6) Which of the following can cause a parallel upward shift in the net export (NX) function? A) an increase in domestic national income B) an increase in foreign national income C) an increase in domestic prices relative to foreign prices D) a decrease in the Canadian-dollar price of foreign currency E) a decrease in foreign prices relative to domestic prices Answer: B Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 7) Which of the following can cause a parallel downward shift in the net export (NX) function? A) an increase in domestic national income B) a decrease in foreign national income C) a decrease in domestic prices D) an increase in the Canadian-dollar price of foreign currency E) a decrease in foreign prices Answer: B Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative

8) Which of the following can cause an upward shift and flattening of the net export (NX) function? A) an increase in domestic national income B) a decrease in foreign national income C) a decrease in domestic prices relative to foreign prices D) an increase in the Canadian-dollar price of foreign currency E) both C and D are correct Answer: E Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 9) Which of the following can cause a downward shift and steepening of the net export (NX) function? A) an increase in domestic national income B) a decrease in foreign national income C) an increase in domestic prices relative to foreign prices D) a decrease in the Canadian-dollar price of foreign currency E) both C and D are correct Answer: E Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 10) The net export (NX) function crosses the horizontal axis at a level of national income where the A) X and IM curves intersect. B) X curve reaches the horizontal axis. C) IM curve reaches the horizontal axis. D) X and IM curves are at their farthest distance apart. E) X curve reaches its maximum. Answer: A Diff: 2 Type: MC Topic: 22.2. net export function Skill: Recall Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative

11) A rise in domestic prices relative to foreign prices, other things being equal, causes the net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: E Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Quantitative 12) A fall in domestic prices relative to foreign prices, other things being equal, causes the net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: A Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 13) A rise in the Canadian-dollar price of foreign currency, other things being equal, causes Canada's net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: A Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative

14) A fall in the Canadian-dollar price of foreign currency, other things being equal, causes Canada's net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: E Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 15) A decrease in domestic national income will cause a ________ the net export (NX) function. A) movement to the left along B) parallel downward shift of C) parallel upward shift of D) rotation upward in E) rotation downward in Answer: A Diff: 2 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 16) Consider the net export function (NX). An increase in foreign income, other things being equal, is assumed to cause the NX function to A) shift parallel upward. B) shift parallel downward. C) pivot downward. D) pivot upward. E) remain stationary. Answer: A Diff: 2 Type: MC Topic: 22.2. net export function Skill: Recall Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative

17) Consider the net export function. An increase in domestic national income, other things being equal, is assumed to cause A) the net export function to shift upward. B) the net export function to pivot upward. C) movement to the right along the net export function. D) the net export function to pivot downward. E) no effect on net exports. Answer: C Diff: 2 Type: MC Topic: 22.2. net export function Skill: Recall Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Qualitative 18) Consider the net export function. Suppose exports are $200 and imports are given by IM = 0.2Y. At what level of national income will net exports equal zero? A) $0 B) $200 C) $250 D) $1000 E) $1250 Answer: D Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Quantitative 19) Consider the net export function. Suppose exports are $1850 and imports are given by IM = 0.13Y. At what level of national income will net exports equal zero? A) $0 B) $277 C) $1573 D) $14 231 E) $27 750 Answer: D Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Quantitative

20) Consider the net export function. Suppose exports are $940 and imports are given by IM = 0.1Y. At what level of national income will net exports equal zero? A) $0 B) $9400 C) $15 730 D) $94 E) $27 750 Answer: B Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Quantitative

21) The diagrams below show the import, export, and net export functions for an economy.

FIGURE 22-1 Refer to Figure 22-1. The function for desired imports for this economy can be expressed as A) NX = 450 - Y. B) IM = 450 - 0.5(Y). C) NX = 0.5(Y). D) IM = 0.5(Y). E) IM = 0.2(Y). Answer: E Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Graphics: Graph Category: Quantitative

22) The diagrams below show the import, export, and net export functions for an economy.

FIGURE 22-1

Refer to Figure 22-1. The net export function for this economy can be expressed as A) NX = 2250 - 450(Y). B) NX = 450 - 0.2(Y). C) NX = 2250 - 450. D) NX = 0.2Y. E) NX = 2250 - .2(IM). Answer: B Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Graphics: Graph Category: Quantitative

23) The diagrams below show the import, export, and net export functions for an economy.

FIGURE 22-1

Refer to Figure 22-1. If actual national income in this economy is equal to $1000, then net exports are equal to A) $90. B) $200. C) $250. D) $375. E) $400. Answer: C Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Graphics: Graph Category: Quantitative

24) The diagrams below show the import, export, and net export functions for an economy.

FIGURE 22-1

Refer to Figure 22-1. If actual national income is equal to $2000, then imports are equal to A) $0. B) $200. C) $400. D) $450. E) $1000. Answer: C Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Graphics: Graph Category: Quantitative

25) The table below shows national income and imports. The level of exports is fixed at $300. All figures in the table and in the questions are in millions of dollars. Income (Y) 2000 3000 4000 5000

Imports (IM) 150 250 350 450

Net Exports (NX) a b c d

TABLE 22-1 Refer to Table 22-1. What are the correct values for the level of net exports (a, b, c, and d) at each level of national income? A) a = $150, b = $50, c = -$50, d = -$150 B) a = -$150, b = -$50, c = $50, d = $150 C) a = $150, b = $250, c = $350, d = $450 D) a = $300, b = $300, c = $300, d = $300 E) not enough data to determine Answer: A Diff: 2 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Graphics: Table Category: Quantitative

26) The table below shows national income and imports. The level of exports is fixed at $300. All figures in the table and in the questions are in millions of dollars. Income (Y) 2000 3000 4000 5000

Imports (IM) 150 250 350 450

Net Exports (NX) a b c d

TABLE 22-1 Refer to Table 22-1. What is the marginal propensity to import? A) 0.01 B) 0.10 C) 1.0 D) 10.0 E) not enough data to determine Answer: B Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Graphics: Table Category: Quantitative

27) The table below shows national income and imports. The level of exports is fixed at $300. All figures in the table and in the questions are in millions of dollars. Income (Y) 2000 3000 4000 5000

Imports (IM) 150 250 350 450

Net Exports (NX) a b c d

TABLE 22-1 Refer to Table 22-1. On a graph of the net export function for this economy, at what level of Y would the NX function intersect the horizontal axis? A) at $0 B) at $2000 C) at $3500 D) at $4000 E) at $5000 Answer: C Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Graphics: Table Category: Quantitative

28) The table below shows national income and imports. The level of exports is fixed at $300. All figures in the table and in the questions are in millions of dollars. Income (Y) 2000 3000 4000 5000

Imports (IM) 150 250 350 450

Net Exports (NX) a b c d

TABLE 22-1 Refer to Table 22-1. In this economy, if actual national income increases by $600, the level of imports will A) rise by $30. B) rise by $60. C) rise by $100. D) fall by $100. E) not change. Answer: B Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Graphics: Table Category: Quantitative 29) Consider an open economy that has a marginal propensity to import equal to 0.30. If national income rises by $2500, imports will rise by A) $30. B) $300. C) $750. D) $7500. E) $8333. Answer: C Diff: 2 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Quantitative

30) Suppose exports (X) = 100, real GDP (Y) = 500, and imports are equal to mY, where m is the marginal propensity to import. Net exports would be equal to zero if the marginal propensity to import were A) 1%. B) 5%. C) 10%. D) 20%. E) 50%. Answer: D Diff: 3 Type: MC Topic: 22.2. net export function Skill: Applied Learning Obj.: 22-2 Explain how exports and imports relate to national income. Category: Quantitative 22.3 Equilibrium National Income 1) When compared to a simple macroeconomic model (with only consumption and investment), adding government and foreign trade to the AE function causes A) the autonomous component of AE to increase. B) the autonomous component of AE to fall. C) the AE function to become downward sloping. D) the AE function to become perfectly horizontal. E) no change in the AE function. Answer: A Diff: 1 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative 2) The AE function for an open economy with government can be written as A) AE = C + I - G + (X - IM). B) AE = C + I + G - (X - IM). C) AE = C + I - G - (X + IM). D) AE = C + I + S + (X + IM). E) AE = C + I + G + (X - IM). Answer: E Diff: 1 Type: MC Topic: 22.3a. the AE function Skill: Recall Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative

3) Consider the general form of the consumption function in a simple macro model. Once government and taxes are included in the model, desired consumption can be expressed as ________, where a = autonomous consumption, t = net tax rate, Y = national income, = disposable income, and MPC = marginal propensity to consume. A) C = a + MPC(1 - t) B) C = a - (1 - t) C) C = a + MPC ∙ Y D) C = a + MPC ∙ t ∙ E) C = a + MPC(1 - t)Y Answer: E Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Recall Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative 4) In our simple macro model with government, consider the equation T = (0.2)Y. Which of the following statements about this equation is correct? A) Total tax revenues are equal to 20% of disposable income. B) Total tax revenues are equal to 20% of real GDP. C) Net tax revenues are equal to 20% of disposable income. D) If national income increases by $1.00, then net tax revenue increases by $0.20. E) If total tax revenue increases by $0.20, then national income increases by $1.00. Answer: D Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

5) In our simple macro model with government, consider the equation Y D = (0.75)Y. Which of the following statements about this equation is correct? A) If disposable income increases by $0.75, then national income increases by $1.00 and total tax revenue rises by $0.75. B) Net tax revenue is equal to 75% of national income. C) If national income increases by $1.00, then disposable income increases by $0.75 and net tax revenue increases by $0.25. D) Net tax revenue is equal to 25% of disposable income. E) If national income increases by $1.00, then disposable income increases by $0.25 and net tax revenue increases by $0.75. Answer: C Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 6) In our simple macro model with government and foreign trade, the marginal propensity to consume out of disposable income is ________ whereas the marginal propensity to consume out of national income is ________. A) MPC; MPC(1 - t) B) MPC(1 - t); MPC C) MPC(1 - t) - m; MPC(1 - t) D) MPC; MPC(1 - t) - m E) MPC(1 - t); MPC(1 - t) - m Answer: A Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Recall Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative

7) Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.9 and a net tax rate of 10% of national income, the marginal propensity to consume out of national income is A) 0.09. B) 0.72. C) 0.81. D) 0.90. E) 1.00. Answer: C Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 8) Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.8 and a net tax rate of 20% of national income, the marginal propensity to consume out of national income is A) 0.36. B) 0.64. C) 0.80. D) 0.90. E) 1.00. Answer: B Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 9) Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.7 and a net tax rate of 30% of national income, the marginal propensity to consume out of national income is A) 0.49. B) 0.58. C) 0.70. D) 0.90. E) 1.00. Answer: A Diff: 3 Type: MC Topic: 22.3a. the AE function

Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 10) Consider a simple macro model with a constant price level and demand-determined output. The marginal propensity to spend out of national income, z, can be expressed as ________ (where t = net tax rate and m = marginal propensity to import). A) z = MPC(1 - t - m) B) z = tY - mY C) z = MPC - (1 - t- m)Y D) z = MPC - (1 - t - m) E) z = MPC(1 - t) - m Answer: E Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Recall Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 11) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. The marginal propensity to spend on national income, z, is A) 0.655. B) 0.760. C) 0.773. D) 0.840. E) 0.920. Answer: B Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 12) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. Total autonomous spending in this model is A) 120.0. B) 1120.0. C) 420.0. D) 600.0. E) 828.8. Answer: B Diff: 2 Type: MC

Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 13) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. The vertical intercept of the AE function is A) 120.0. B) 420.0. C) 600.0. D) 828.8. E) 1120.0. Answer: E Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 14) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. If national income is 2400, then desired aggregate expenditure is A) 1120. B) 1776. C) 2896. D) 3184. E) 3472. Answer: C Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 15) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The vertical intercept of the AE function is A) 60.0. B) 210.0. C) 300.0. D) 414.4. E) 560.0. Answer: E

Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 16) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. A national income of 1200 results in desired aggregate expenditure of A) 560. B) 926. C) 1004. D) 1016. E) 1148. Answer: C Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 17) Consider the simplest macro model with a constant price level and demanddetermined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The marginal propensity to spend on national income, z, is A) 0.06. B) 0.37. C) 0.43. D) 0.49. E) 0.63. Answer: B Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 18) Consider the simplest macro model with demand-determined output. The equations are: C = 150 + 0.8Yd, Yd = Y-T, I = 400, G = 700, T = .2Y, X = 130, and IM = 0.14Y. Autonomous expenditures in this model are A) 1120. B) 1350. C) 1380. D) 2700. E) 5400.

Answer: C Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 19) Consider the simplest macro model with demand-determined output. The equations are: C = 150 + 0.8Yd, Yd = Y -T, I = 400, G = 700, T = .2Y, X = 130, and IM = 0.14Y. The marginal propensity to spend on national income in this model is A) 0.50. B) 0.54. C) 0.64. D) 0.84. E) 0.86. Answer: A Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

20) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-2 Refer to Figure 22-2. What is the level of autonomous consumption? A) $0 B) $75 C) $100 D) $175 E) $250 Answer: B Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

21) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-2 Refer to Figure 22-2. What is total autonomous expenditure? A) $0 B) $75 C) $100 D) $175 E) $250 Answer: E Diff: 1 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

22) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-2 Refer to Figure 22-2. Which of the following correctly describes the consumption function for this economy? A) C = (0.6)YD B) Y = 250 + (0.75)YD C) C = 75 + (0.75)YD D) Y = 250 + (0.75)Y E) C = 250 + (0.6)Y Answer: C Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

23) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-2 Refer to Figure 22-2. Which of the following equations describes the aggregate expenditure function for this economy? A) AE = 250 + (0.6)Y B) AE = 225 + (0.75)Y C) AE = 250 +(0.15)Y D) AE = 75 + (0.75)Y + (0.2)YD E) AE = 250 +(0.75)Y + (0.2)YD Answer: A Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

24) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-2 Refer to Figure 22-2. What is the marginal propensity to spend (z) in this economy? A) 0.15 B) 0.20 C) 0.40 D) 0.60 E) 0.75 Answer: D Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

25) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.80 • net tax rate (t) = 0.15 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-3 Refer to Figure 22-3. What is the level of autonomous consumption? A) $0 B) $325 C) $350 D) $650 E) $1000 Answer: C Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

26) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.80 • net tax rate (t) = 0.15 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-3 Refer to Figure 22-3. What is total autonomous expenditure? A) $300 B) $325 C) $650 D) $1000 E) $1975 Answer: D Diff: 1 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

27) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.80 • net tax rate (t) = 0.15 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-3 Refer to Figure 22-3. Which of the following correctly describes the consumption function for this economy? A) C = 325 + (0.65)Y B) C = 350 + (0.68)YD C) C = 350 + (0.68)Y D) C = 1000 + (0.80) E) C = 1000 + (0.80)Y Answer: C Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

28) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.80 • net tax rate (t) = 0.15 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-3 Refer to Figure 22-3. Which of the following equations describes the aggregate expenditure function for this economy? A) AE = 1000 + (0.68)Y B) AE = 1000 + (0.80) C) AE = 1000 + (0.80)Y + 0.15 YD D) AE = 1975 + (0.68)Y E) AE = 1975 + (0.65)Y Answer: A Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph

Category: Quantitative 29) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.80 • net tax rate (t) = 0.15 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-3 Refer to Figure 22-3. What is the marginal propensity to spend (z) in this economy? A) 0.45 B) 0.48 C) 0.65 D) 0.68 E) 0.80 Answer: D Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

30)

FIGURE 22-4 Refer to Figure 22-4. The rotation from AE0 to AE1 could be caused by A) a higher net tax rate. B) a lower net tax rate. C) a balanced budget. D) lower government purchases. E) higher government purchases. Answer: B Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Qualitative

31)

FIGURE 22-4 Refer to Figure 22-4. The rotation from AE1 to AE0 could be caused by A) an increase in the marginal propensity to consume out of disposable income. B) a decrease in the marginal propensity to import. C) an increase in the marginal propensity to import. D) a decrease in the net tax rate. E) a decrease in government purchases. Answer: C Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

32)

FIGURE 22-4 Refer to Figure 22-4. Autonomous expenditures ________ as the AE curve rotates from AE1 to AE0 and equilibrium national income ________. A) decrease; decreases B) increase; decreases C) remain constant; increases D) remain constant; decreases E) remain constant; remains constant Answer: D Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Qualitative

33) In a simple macro model with a constant price level, an increase in the net tax rate causes the AE curve to A) shift parallel downward. B) shift parallel upward. C) rotate downward. D) rotate upward. E) remain stationary. Answer: C Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative 34) In a simple macro model with a constant price level, a decrease in the net tax rate causes the AE curve to A) shift parallel downward. B) shift parallel upward. C) rotate downward. D) rotate upward. E) remain stationary. Answer: D Diff: 2 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative 35) Suppose the marginal propensity to consume out of disposable income is 0.6 and the marginal propensity to import is 0.14. If the net tax rate is 0.1, then what is the marginal propensity to spend in this economy? A) 0.30 B) 0.40 C) 0.46 D) 0.50 E) 0.60 Answer: B Diff: 3 Type: MC Topic: 22.3a. the AE function Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

36) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. Equilibrium national income is A) 1816. B) 5750. C) 7307. D) 7935. E) 17 250. Answer: B Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 37) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. Desired consumption expenditure at equilibrium national income is A) 1675.44. B) 4060.04. C) 4830.00. D) 4980.00. E) 6815.40. Answer: D Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 38) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. The trade balance at equilibrium national income is a A) deficit of 504.8. B) deficit of 460.0. C) deficit of 330.0. D) surplus of 125.0. E) surplus of 15.3. Answer: C Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade.

Category: Quantitative 39) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, X = 130, IM = 0.08Y, T = 0. Equilibrium national income is 5000 when G is equal to A) -40. B) 520. C) 580. D) 740. E) 812. Answer: B Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 40) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. Equilibrium national income is A) 2037.48. B) 3615.24. C) 4000.00. D) 4307.69. E) 8000.00. Answer: D Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 41) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. Desired consumption expenditure at equilibrium national income is A) 3113.54. B) 3307.73. C) 3824.61. D) 4250.00 E) Not enough information to determine Answer: C Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and

foreign trade. Category: Quantitative 42) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. Equilibrium national income is A) 560.00. B) 888.89. C) 1142.85. D) 1302.33. E) 1513.50. Answer: B Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 43) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The trade balance at equilibrium national income is A) a deficit of 36.67. B) a deficit of 21.43. C) zero. D) a surplus of 21.43. E) a surplus of 36.67. Answer: E Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 44) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.8Yd, Yd = Y-T, I = 400, G = 700, T = 0.2Y, X = 130, and IM = 0.14Y. Equilibrium national income in this model is A) 1120. B) 1350. C) 2240. D) 2760. E) 5400. Answer: D Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied

Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 45) Consider the following simple macro model with a constant price level and demanddetermined output: C = 150 + 0.9 , = 0.8Y, I = 400, G = 700, T = (0.2)Y, X = 130, IM = (0.08)Y. Equilibrium national income is A) 1380.00. B) 1916.67. C) 2156.25. D) 3833.33. E) 4928.57. Answer: D Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

46) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-2 Refer to Figure 22-2. What is the equilibrium national income in this economy? A) $187.50 B) $294 C) $333.34 D) $625 E) $1666.67 Answer: D Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

47) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.80 • net tax rate (t) = 0.15 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-3 Refer to Figure 22-3. What is the equilibrium national income in this economy? A) $1470.59 B) $3125.00 C) $1975.00 D) $5000.00 E) $6171.87 Answer: B Diff: 3 Type: MC Topic: 22.3b. equilibrium national income Skill: Applied Learning Obj.: 22-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

22.4 Changes in Equilibrium National Income 1) In an open economy with government and demand-determined output, an increase in the equilibrium level of national income could be caused by A) an increase in taxes at all levels of income. B) an increase in the desired level of imports at all levels of income. C) a decrease in desired consumption at all levels of income. D) a decrease in the desired level of saving at all levels of income. E) a decrease in government purchases. Answer: D Diff: 2 Type: MC Topic: 22.4a. changes in equilibrium national income Skill: Applied Learning Obj.: 22-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative 2) In an open economy with government and demand-determined output, a decrease in the equilibrium level of national income could be caused by A) a decrease in taxes at all levels of income. B) a decrease in the desired level of imports at all levels of income. C) a decrease in desired consumption at all levels of income. D) a decrease in the desired level of saving at all levels of income. E) an increase in government purchases. Answer: C Diff: 2 Type: MC Topic: 22.4a. changes in equilibrium national income Skill: Applied Learning Obj.: 22-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

3) Consider the following news headline: "Minister of Defence announces $2 billion purchase of military helicopters." Assuming that aggregate output is demand-determined, and that the helicopters are purchased domestically, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: D Diff: 2 Type: MC Topic: 22.4a. changes in equilibrium national income Skill: Applied Learning Obj.: 22-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative 4) Consider the following news headline: "Finance minister announces that the federal income-tax rate will rise by three percentage points." Assuming that aggregate output is demand-determined, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: C Diff: 2 Type: MC Topic: 22.4a. changes in equilibrium national income Skill: Applied Learning Obj.: 22-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

5) Consider the following news headline: "Business community gloomy about the economy—investment plans axed." Assuming that aggregate output is demanddetermined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: A Diff: 2 Type: MC Topic: 22.4a. changes in equilibrium national income Skill: Applied Learning Obj.: 22-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative 6) Consider the following news headline: "Canadian exporters hurt by foreign recession." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: A Diff: 2 Type: MC Topic: 22.4a. changes in equilibrium national income Skill: Applied Learning Obj.: 22-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

7) Consider the following news headline: "Canadians develop a greater taste for foreign vacations." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: C Diff: 2 Type: MC Topic: 22.4a. changes in equilibrium national income Skill: Applied Learning Obj.: 22-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative 8) Consider the following news headline: "Government follows through on election promise—cuts income-tax rate by 5 percentage points." Assuming that aggregate output is demand-determined, what will be the effect of this action, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: B Diff: 2 Type: MC Topic: 22.4a. changes in equilibrium national income Skill: Applied Learning Obj.: 22-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

9) Consider the following news headline: "China signs deal to buy more Canadian wheat." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: D Diff: 2 Type: MC Topic: 22.4a. changes in equilibrium national income Skill: Applied Learning Obj.: 22-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

10) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 22-2 Refer to Figure 22-2. What is the value of the multiplier in this economy? A) 1.33 B) 1.67 C) 2.0 D) 2.5 E) 6.67 Answer: D Diff: 3 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Quantitative

11) A decrease in the value of the simple multiplier can be caused by A) a decrease in the net tax rate. B) a decrease in the marginal propensity to import. C) an increase in the marginal propensity to consume. D) an increase in the marginal propensity to save. E) an increase in the marginal propensity to spend. Answer: D Diff: 2 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 12) An increase in the value of the simple multiplier can be caused by A) a decrease in the marginal propensity to consume. B) an increase in the marginal propensity to import. C) an increase in the net tax rate. D) an increase in the marginal propensity to save. E) a decrease in the net tax rate. Answer: E Diff: 2 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 13) In a simple macro model where the marginal propensity to consume out of disposable income is 0.8, the net tax rate is 0.25, and the marginal propensity to import is 0.12, the simple multiplier will be A) 0.480. B) 1.471. C) 1.923. D) 2.083. E) 2.110. Answer: C Diff: 3 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative

14) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The value of the simple multiplier in this model is A) 0.37. B) 1.59. C) 2.04. D) 2.32. E) 2.70. Answer: B Diff: 3 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative 15) Consider a model in which output is demand-determined. If the marginal propensity to spend out of national income is 0.4, then a $0.6 billion decrease in government purchases will cause equilibrium national income to ________ by approximately ________. A) decrease; $1.50 billion B) decrease; $1.00 billion C) decrease; $0.24 billion D) increase; $1.00 billion E) increase; $1.50 billion Answer: B Diff: 3 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative 16) Consider a model with demand-determined output and a constant price level. A decrease in the net tax rate causes ________ in autonomous spending and a ________ in the simple multiplier. A) a rise; rise B) a rise; fall C) no change; rise D) no change; fall E) a fall; fall Answer: C Diff: 2 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the

level of national income. Category: Qualitative 17) Suppose output is demand determined. An increase in the net tax rate ________ the marginal propensity to spend and thus ________ the simple multiplier. A) raises; raises B) raises; lowers C) causes no change in; raises D) lowers; lowers E) lowers; raises Answer: D Diff: 2 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 18) Suppose aggregate output is demand determined. If the marginal propensity to spend is 0.5, and the MPC is 0.7, a $1 billion reduction in government purchases will cause equilibrium national income to ________ by ________. A) decrease; $3.33 billion B) decrease; $2.00 billion C) decrease; $1.50 billion D) increase; $2.00 billion E) increase; $3.33 billion Answer: B Diff: 3 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative 19) In a simple macro model with government and demand-determined output, to raise equilibrium national income by $100 billion, G must be A) raised by $100 billion. B) raised by $100 billion times the simple multiplier. C) raised by $100 billion divided by the simple multiplier. D) lowered by $100 billion times the simple multiplier. E) lowered by $100 billion divided by the simple multiplier. Answer: C Diff: 3 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the

level of national income. Category: Quantitative 20) Consider a simple macro model with government and demand-determined output. If the government wants to reduce equilibrium national income by $20 billion, G must be A) raised by $20 billion times the simple multiplier. B) raised by $20 billion divided by the simple multiplier. C) lowered by $20 billion times the simple multiplier. D) lowered by $20 billion divided by the simple multiplier. E) lowered by $20 billion. Answer: D Diff: 3 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative

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FIGURE 22-4 Refer to Figure 22-4. The rotation from AE0 to AE1 implies that the marginal propensity to spend ________ and the value of the simple multiplier ________. A) increases; decreases B) increases; increases C) remains the same; increases D) decreases; increases E) decreases, decreases Answer: B Diff: 2 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

22) Consider a macro model with a constant price level and demand-determined output. A rise in the net tax rate ________ the simple multiplier and ________ equilibrium national income. A) lowers; has no effect on B) lowers; lowers C) lowers; raises D) raises; raises E) raises; has no effect on Answer: B Diff: 2 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 23) Consider a simple macro model with government and foreign trade and where the price level is taken as given. The simple multiplier is equal to A) 1/(1 - MPC). B) 1/MPC. C) 1/(1- MPS - t). D) 1/(1 - (MPC(1 - t) - m )). E) 1/(1- (MPS(1 - t) - m )). Answer: D Diff: 2 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Recall Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative

24) Consider a simple macro model with demand-determined output and the following specific parameter values: a) Marginal propensity to consume out of disposable income = 0.6 b) Marginal propensity to consume out of national income = 0.48 c) Marginal propensity to import = 0.23 The simple multiplier without government and foreign trade in this economy is ________ and the simple multiplier with government and foreign trade in this economy is ________. A) 1.67; 1.33 B) 1.67; 4 C) 2.5; 1.33 D) 2.5; 2.5 E) 2.5; 4 Answer: C Diff: 3 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative 25) Consider the simple macro with demand-determined output. If the marginal propensity to consume out of disposable income (MPC) is equal to the marginal propensity to spend out of national income (z), then A) the marginal propensity to import (m) is larger than the tax rate (t). B) the marginal propensity to import (m) is smaller than the tax rate (t). C) the simple multiplier is smaller in a closed economy with no government. D) the simple multiplier is larger in a closed economy with no government. E) there is no effect on the simple multiplier from imports or tax rates. Answer: E Diff: 2 Type: MC Topic: 22.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative

26) Fiscal policy involves the government's use of ________ to affect economic outcomes. A) exchange rate changes B) interest rate changes C) price level changes D) private investment expenditures E) expenditures and taxation Answer: E Diff: 1 Type: MC Topic: 22.4c. fiscal policy Skill: Recall Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 27) Consider a simple macro model with demand-determined output. Suppose the level of exports decreases unexpectedly by $6 billion. If the government wants to restore the initial equilibrium level of output it could, all other things equal, A) increase its purchases by more than $6 billion. B) increase its net tax revenues by $6 billion. C) increase its net tax revenues by less than $6 billion. D) increase its purchases by $6 billion. E) decrease its purchases by $6 billion. Answer: D Diff: 1 Type: MC Topic: 22.4c. fiscal policy Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative

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FIGURE 22-5 Refer to Figure 22-5. Diagram 1 illustrates an economy that is experiencing a(n) ________ gap. The goal of stabilization policy would be to ________ national income until it is equal to ________. A) recessionary; increase; actual national income B) inflationary; reduce; potential GDP C) inflationary; reduce; actual national income D) inflationary; increase; potential GDP E) recessionary; increase; potential GDP Answer: B Diff: 2 Type: MC Topic: 22.4c. fiscal policy Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

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FIGURE 22-5 Refer to Figure 22-5. Diagram 2 illustrates an economy that is experiencing a(n) ________ gap. The goal of stabilization policy would be to ________ national income until it is equal to ________. A) recessionary; increase; actual national income B) inflationary; reduce; potential GDP C) inflationary; reduce; actual national income D) inflationary; increase; potential GDP E) recessionary; increase; potential GDP Answer: E Diff: 2 Type: MC Topic: 22.4c. fiscal policy Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

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FIGURE 22-5 Refer to Figure 22-5, Diagram 1. Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output, Y*)? A) reduce government spending B) increase transfer payments C) reduce taxes D) increase government spending E) increase disposable income Answer: A Diff: 2 Type: MC Topic: 22.4c. fiscal policy Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

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FIGURE 22-5 Refer to Figure 22-5, Diagram 2. Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output, Y*)? A) reduce government spending B) reduce transfer payments C) increase taxes D) increase government spending E) decrease disposable income Answer: D Diff: 2 Type: MC Topic: 22.4c. fiscal policy Skill: Applied Learning Obj.: 22-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

22.5 Demand-Determined Output 1) If the price level is taken as given in a simple macro model with demand-determined output, it is implicitly being assumed that A) net exports are positive. B) net exports are negative. C) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income. D) all resources in the economy are fully employed. E) producers can provide whatever output is demanded of them without requiring higher prices to offset any higher costs. Answer: E Diff: 2 Type: MC Topic: 22.5. demand-determined output Skill: Recall Learning Obj.: 22-6 Understand why output is demand determined in our simple macro model. Category: Qualitative 2) Consider a macro model in which output is assumed to be demand-determined. One situation which may justify this assumption is when A) net exports are positive. B) net exports are negative. C) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income. D) all resources in the economy are fully employed. E) the economy is operating with some unemployed resources. Answer: E Diff: 2 Type: MC Topic: 22.5. demand-determined output Skill: Recall Learning Obj.: 22-6 Understand why output is demand determined in our simple macro model. Category: Qualitative

3) We would expect real national income to be "demand determined" when 1) there is large-scale unemployment of resources in the economy; 2) firms are price setters; 3) firms have excess capacity. A) 1, 2, and 3 B) 1 and 2 C) 2 and 3 D) 1 only E) 3 only Answer: A Diff: 2 Type: MC Topic: 22.5. demand-determined output Skill: Recall Learning Obj.: 22-6 Understand why output is demand determined in our simple macro model. Category: Qualitative 4) The simple macro model that is considered in Chapters 21 and 22 of the textbook is characterized by A) a given (constant) price level, and equilibrium national income determined by demand and supply. B) an endogenous price level, and national income that is solely demand determined. C) a given (constant) price level, and national income that is solely demand determined. D) an endogenous price level, and equilibrium national income determined by demand and supply. E) an open economy with an endogenous exchange rate. Answer: C Diff: 2 Type: MC Topic: 22.5. demand-determined output Skill: Recall Learning Obj.: 22-6 Understand why output is demand determined in our simple macro model. Category: Qualitative 5) In the simple macro model that is considered in Chapters 21 and 22 of the textbook, A) the economy is always in equilibrium. B) there is no government or foreign trade. C) the price level is determined within the model. D) there are no supply-side influences on national income. E) the simple multiplier is always equal to 1. Answer: D Diff: 2 Type: MC Topic: 22.5. demand-determined output Skill: Recall Learning Obj.: 22-6 Understand why output is demand determined in our simple macro model.

Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 23 Real GDP and the Price Level in the Short Run 23.1 The Demand Side of the Economy 1) Other things being equal, what is the effect of an exogenous rise in the domestic price level? A) a decrease in real saving B) a decrease in the real value of all assets denominated in money units C) domestic goods become more attractive to foreigners D) foreign goods become less attractive to domestic residents E) an increase in the real burden of repaying a fixed money value debt Answer: B Diff: 1 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 2) Other things being equal, an exogenous fall in the domestic price level leads to a rise in private-sector wealth. As a result, there is A) an increase in the average propensity to save. B) an increase in autonomous desired consumption. C) a downward shift in the AE curve. D) a downward shift in net exports. E) domestic goods appearing less attractive to foreigners. Answer: B Diff: 1 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative

3) Other things being equal, what is the effect of an exogenous rise in the domestic price level? There will be A) no effect on the level of desired real expenditure. B) an increase in the level of desired real expenditure. C) a decrease in desired real expenditure only if it is accompanied by a change in the current income of households. D) a decrease in desired real expenditure because it will affect the real value of wealth. E) an increase in net exports. Answer: D Diff: 1 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 4) Other things being equal, what is the effect of an exogenous fall in the domestic price level? A) Canadian goods become more expensive relative to foreign goods. B) The net export function shifts upward. C) The aggregate expenditure function shifts downward. D) Imports of foreign goods rise. E) The net export function shifts downward. Answer: B Diff: 2 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 5) Other things being equal, what is the effect of an exogenous rise in the domestic price level? A) Canadian goods become more expensive relative to foreign goods. B) The net export function shifts upward. C) The aggregate expenditure function shifts upward. D) Imports of foreign goods fall. E) The desired investment function shifts upward. Answer: A Diff: 2 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative

6) Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the domestic price level changes equilibrium real GDP A) in the same direction. B) in the opposite direction. C) by the same amount in the same direction. D) by the same amount in the opposite direction. E) by a lesser amount in either direction. Answer: B Diff: 2 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 7) Other things being equal, when the price level rises, the real value of money holdings ________; when the domestic price level falls, the real value of money holdings ________. A) rises; falls B) falls; is not affected C) falls; rises D) is not affected; falls E) is not affected; rises Answer: C Diff: 1 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 8) An exogenous fall in the domestic price level causes an increase in real wealth and A) a fall in desired investment. B) a rise in desired consumption. C) a downward shift in the AE curve. D) a downward shift of the net export function. E) a fall in government purchases. Answer: B Diff: 1 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative

9) Consider a simple macro-model with demand-determined output. An exogenous increase in the domestic price level will ________ the real value of the private sector's wealth, which leads to ________ in autonomous consumption and thus ________ shift in the AE function. A) increase; a decrease; a downward B) increase; an increase; a downward C) increase; an increase; an upward D) reduce; a decrease; a downward E) reduce; an increase; an upward Answer: D Diff: 2 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 10) Consider the net export function and the AE curve in a simple macro model with demand-determined output. What is the effect of an exogenous increase in the domestic price level? A) The net export function and the AE curve both shift upward. B) The net export function shifts upward and the AE curve shifts downward. C) The net export function and the AE curve both shift downward. D) The net export function shifts downward and the AE curve shifts upward. E) The net export function rotates upward and the AE curve shifts upward. Answer: C Diff: 2 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 11) Consider a simple macro model with demand-determined output. Other things being equal, the price level and desired aggregate expenditure are related to each other A) positively. B) proportionally. C) progressively. D) exponentially. E) negatively. Answer: E Diff: 1 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP.

Category: Qualitative

12) Suppose there is an exogenous increase in the domestic price level. Which of the individuals listed below would experience an increase in wealth? A) a person with a 25-year home mortgage B) a person with cash under the mattress C) a person with deposits in a bank savings account D) a person with a government bond that promises to pay the holder $1000, 5 years hence E) a person with a corporate bond that promises to repay the face value of the bond in the future Answer: A Diff: 2 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Applied Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 13) Other things being equal, a rise in the price level will imply ________ in wealth for the bondholder and ________ in the wealth of the issuer of the bond. A) a decline; an increase B) a decline; a decline C) a decline; no change D) an increase; a decline E) an increase; an increase Answer: A Diff: 2 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 14) Other things being equal, an exogenous increase in the price level causes the aggregate wealth of holders and issuers of private-sector bonds to A) decrease. B) increase. C) not change since the changes in the wealth of bondholders and bond issuers offset each other. D) either increase or decrease depending on other factors. E) rise in nominal terms, but fall in real terms. Answer: C Diff: 2 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative

15) Which of the following events would cause the AE function to shift upwards in a parallel way? A) an increase in the MPC B) a decrease in the net tax rate C) a decrease in the business confidence of firms D) a decrease in foreign income E) a decrease in the aggregate price level Answer: E Diff: 2 Type: MC Topic: 23.1a. effects of an exogenous change in the price level Skill: Applied Learning Obj.: 23-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 16) The AD curve relates the price level to which of the following? A) desired aggregate expenditure B) desired consumption C) the level of real GDP where desired AE equals actual national income D) the level of nominal GDP where desired AE equals actual national income E) equilibrium savings and wealth. Answer: C Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 17) Which of the following statements about the economy's aggregate demand curve is correct? All points on the AD curve A) correspond to a particular point on industry demand curves for a particular product. B) relate a particular price level to the total demand for output at that price level. C) show only changes in relative prices and quantities. D) show the direct relationship between the price level and net exports. E) show the direct relationship between the price level and the demand for consumer goods. Answer: B Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

18) Other things being equal, as the price level rises exogenously, the aggregate expenditure (AE) function shifts A) down and the economy will move upward to the left along the AD curve. B) down and the economy will move downward to the right along the AD curve. C) upward and the economy moves upward to the left along the AD curve. D) upward and the economy moves downward to the right along the AD curve. E) to the right and the AD curve will also shift to the right. Answer: A Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 19) Other things being equal, as the price level falls exogenously, the aggregate expenditure (AE) function shifts A) down and the economy will move upward along the AD curve. B) down and the economy will move downward along the AD curve. C) upward and the economy moves upward along the AD curve. D) upward and the economy moves downward along the AD curve. E) to the left, as does the AD curve. Answer: D Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 20) Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the price level causes a A) shift in both the AE and AD curves. B) movement along the AE curve and a shift in the AD curve. C) movement along both the AE and AD curves. D) shift in the AE curve and a movement along the AD curve. E) movement along AE but does not affect the AD curve. Answer: D Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

21) In a macro model with a constant price level, an increase in autonomous desired consumption will cause the AE curve to shift A) downward and the AD curve to shift to the left. B) downward and the AD curve to shift to the right. C) upward and the AD curve to shift to the left. D) upward and the AD curve to shift to the right. E) upward and a movement to the right along the AD curve. Answer: D Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 22) In a macro model with a constant price level, an increase in government purchases will cause the AE curve to shift A) downward and the AD curve to shift to the right. B) downward and the AD curve to shift to the left. C) downward and a movement to the right along the AD curve. D) upward and the AD curve to shift to the left. E) upward and the AD curve to shift to the right. Answer: E Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 23) On a graph that shows the derivation of the AD curve, an exogenous change in the price level causes A) a shift in the AE curve and a movement along the AD curve. B) a shift in both the AE and AD curves. C) a movement along the AE curve and a shift in the AD curve. D) a movement along the AE curve but not along the AD curve. E) a movement along both the AE and AD curves. Answer: A Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

24) Which of the following would likely cause an upward parallel shift in the AE curve and a rightward shift in the AD curve? A) an increase in the business confidence of firms B) a reduction in government purchases C) an increase in the MPC D) a decrease in the price level E) an increase in the price level Answer: A Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 25) Which of the following would likely cause a downward parallel shift in the AE curve and a movement upward along the AD curve? A) a decrease in the business confidence of firms B) a reduction in government purchases C) a decrease in the MPC D) a decrease in the price level E) an increase in the price level Answer: E Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 26) Which of the following would likely cause a downward parallel shift in the AE curve and a leftward shift in the AD curve? A) an increase in the business confidence of firms B) a reduction in government purchases C) a decrease in the MPC D) a decrease in the price level E) an increase in the price level Answer: B Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

27)

FIGURE 23-1 Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P 0. The corresponding point on the aggregate demand curve is point A) A. B) B. C) C. D) D. E) E. Answer: B Diff: 1 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative

28)

FIGURE 23-1 Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P 0. Other things being equal, exogenous changes in the price level will cause A) movement along the aggregate expenditure curve AE0 and shifts of the AD curve. B) movement along the aggregate expenditure curve AE0 and movement along the aggregate demand curve AD0. C) shifts of the AE curve and shifts of the AD curve. D) shifts of the AE curve and movement along the aggregate demand curve AD0. E) no change in either the AE curve or the AD curve. Answer: D Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative

29)

FIGURE 23-1 Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P 0. Now, suppose there is an exogenous rise in the price level to . Which of the following statements describes the likely macroeconomic effects? A) The AE curve shifts to AE1, a new equilibrium is established at point U, and the AD curve shifts from AD0 to AD1, and equilibrium from point B to point D. B) The AE curve shifts to AE2, a new equilibrium is established at point W, and the economy moves from point B to point C along AD0. C) The AE curve shifts to AE1, a new equilibrium is established at point U, and the economy moves from point B to point A along AD0. D) The AE curve shifts to AE2, a new equilibrium is established at point W, and the AD curve shifts from AD0 to AD1, and equilibrium moves from point B to point D. Answer: C

Diff: 3 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative

30)

FIGURE 23-1 Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P 0. Now, suppose there is an increase in desired investment and no change in the price level. Which of the following statements describes the likely macroeconomic effects? A) The AE curve shifts up to AE2, the AD curve shifts to AD2, and a new equilibrium is established at point C, with real GDP at Y2. B) The AE curve shifts down to AE1, the AD curve shifts to AD1, and a new equilibrium is established at point F, with real GDP at Y1. C) The AE curve shifts to AE1, the AD curve shifts to AD1, and a new equilibrium is established at point E, with real GDP at Y2. D) The AE curve shifts to AE2, the AD curve shifts to AD1, and a new equilibrium is established at point F, with real GDP at Y2. E) The AE curve shifts to AE2, the AD curve shifts to AD2, and a new equilibrium is established at point E, with real GDP at Y2. Answer: E

Diff: 2 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative

31)

FIGURE 23-1 Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P 0. Now, suppose the AE curve shifts to AE1 and we move to a new equilibrium level of GDP at Y1 and point A on AD0. A possible cause of this change in equilibrium is A) an exogenous rise in the price level. B) a decrease in desired investment. C) a decrease in autonomous consumption. D) a decrease in desired net exports. E) an increase in government purchases. Answer: A Diff: 3 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative

32)

FIGURE 23-1 Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P 0. Now, suppose the AE curve shifts to AE1 and we move to a new equilibrium level of GDP at Y1 and point F on AD1. A possible cause of this change in equilibrium is A) an exogenous rise in the price level. B) an exogenous fall in the price level. C) an increase in autonomous consumption. D) a decrease in desired net exports. E) an increase in government purchases. Answer: D Diff: 3 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative

33)

FIGURE 23-1 Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P 0. Now, suppose the AE curve shifts to AE2 and we move to a new equilibrium level of GDP at Y2 and point E on AD2. A possible cause of this change in equilibrium is A) an increase in government purchases. B) an increase in the net tax rate. C) a decrease in desired investment. D) a decrease in desired net exports. E) an exogenous fall in the price level. Answer: A Diff: 3 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph

Category: Qualitative 34)

FIGURE 23-1 Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P 0. Now, suppose the AE curve shifts to AE2 and we move to a new equilibrium level of GDP at Y2 and point C on AD0. A possible cause of this change in equilibrium is A) an increase in autonomous consumption. B) an increase in desired investment. C) an exogenous fall in the price level. D) an exogenous rise in the price level. E) an increase in desired net exports. Answer: C Diff: 3 Type: MC Topic: 23.1b. relationship between AE and AD curves Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift.

Graphics: Graph Category: Quantitative 35) Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income A) causes a movement along the AD curve. B) causes a movement along the AE curve. C) causes a shift of the AE curve but no movement of the AD curve. D) shifts the AD curve to the left. E) shifts the AD curve to the right. Answer: E Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 36) Consider the relationship between the AE curve and the AD curve. A fall in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income A) causes a movement along the AD curve. B) causes a movement along the AE curve. C) causes a shift of the AE curve but no movement of the AD curve. D) shifts the AD curve to the left. E) shifts the AD curve to the right. Answer: D Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 37) Which of the following could cause a leftward shift of the aggregate demand (AD) curve? A) a decrease in autonomous government purchases B) a decrease in induced imports C) a decrease in the net tax rate D) a decrease in autonomous desired saving E) a decrease in the price level Answer: A Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall

Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

38) Which of the following could cause a leftward shift in the aggregate demand (AD) curve? A) an increase in autonomous exports B) an increase in autonomous government purchases C) an increase in government transfer payments to households D) an increase in desired investment E) an increase in autonomous desired savings Answer: E Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 39) Which of the following could cause a leftward shift of the aggregate demand (AD) curve? A) an increase in desired exports B) an increase in government purchases C) an increase in government transfer payments to households D) an increase in the net tax rate E) an increase in desired investment Answer: D Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 40) Which of the following could cause a rightward shift in the aggregate demand (AD) curve? A) an increase in induced imports B) an increase in desired investment C) an increase in the net tax rate D) an increase in desired saving E) an increase in the price level Answer: B Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

41) Consider the AD curve in the simple macro model. The simple multiplier is reflected by the A) horizontal distance between initial macroeconomic equilibrium and the new intersection of the AD and AE curves in response to a change in autonomous expenditure. B) downward movement along the AD curve in response to a change in autonomous expenditure. C) size of the rightward shift of the AD curve in response to a change in autonomous expenditure. D) upward movement along the AD curve in response to a change in autonomous expenditure. E) size of the leftward shift of the AD curve in response to a rise in autonomous expenditure. Answer: C Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 42) Consider the AD curve in the simple macro model. When there is a change in autonomous desired expenditure, the simple multiplier is equal to the A) product of the horizontal shift of the AD curve times the change in autonomous expenditure. B) product of the vertical movement along the AD curve times the change in autonomous expenditure. C) ratio of the horizontal shift of the AD curve to the change in autonomous expenditure. D) ratio of the vertical movement along the AD curve to the change in autonomous expenditure. E) ratio of the vertical shift of the AD curve to the change in autonomous expenditure. Answer: C Diff: 3 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

43) Which of the following correctly describes one reason why the aggregate demand (AD) curve slopes downward? A) Aggregate expenditure increases as the price level rises, which leads to a rise in real GDP. B) Increases in the price level cause consumers to substitute foreign goods for domestic goods, which leads to a rise in real GDP. C) The increase in total output associated with the fall in the price level results in lower production costs. D) When the price level falls, firms must be more competitive when output increases. E) When the price level falls, consumers increase their saving rate. Answer: B Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 44) Which of the following correctly describes one reason why the aggregate demand (AD) curve slopes downward? A) Aggregate expenditure increases as the price level rises, which leads to a rise in real GDP. B) Decreases in the price level cause increases in privatE-sector wealth which lead to increases in desired consumption. C) The increase in total output associated with the fall in the price level results in lower production costs. D) When the price level falls, firms must be more competitive when output increases. E) When the price level falls, consumers increase their saving rate. Answer: B Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

45) Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired investment expenditure at each level of national income A) causes a movement along the AD curve. B) causes a movement along the AE curve. C) causes a shift of the AE curve but no movement of the AD curve. D) shifts the AD curve to the left. E) shifts the AD curve to the right. Answer: E Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 46) Consider the relationship between the AE curve and the AD curve. A decline in the amount of desired net exports at each level of national income A) shifts the AD curve to the right. B) shifts the AD curve to the left. C) causes a movement up along the AD curve. D) causes a movement down along the AD curve. E) causes an upward shift of the AE curve but no movement of the AD curve. Answer: B Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 47) Consider the AD curve in the simple macro model. Suppose there is an increase in autonomous desired consumption at a given price level. The result is A) the AE curve shifts downward and the AD curve shifts to the left. B) the AE curve shifts downward and the AD curve shifts to the right. C) the AE curve shifts upward and the AD curve shifts to the left. D) the AE curve shifts upward and the AD curve shifts to the right. E) no change in either the AE or the AD curve. Answer: D Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

48) Other things being equal, a higher marginal propensity to spend will lead to a ________ AD curve. A) flatter B) steeper C) rightward shift of the D) leftward shift of the Answer: A Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 49) Other things being equal, a closed economy will have a ________ marginal propensity to spend and thus a ________ AD curve compared to an open economy with foreign trade. A) lower; flatter B) higher; flatter C) higher; steeper D) lower; rightward shift of the E) lower; leftward shift of the Answer: B Diff: 3 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 50) Other things being equal, an economy with a higher net tax rate will have a ________ marginal propensity to spend and thus a ________ AD curve compared to an economy with a lower net tax rate. A) lower; steeper B) higher; flatter C) higher; steeper D) lower; rightward shift of the E) lower; leftward shift of the Answer: A Diff: 3 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

51) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.1 and a marginal propensity to import of 0.1. Economy B has a marginal propensity to consume of 0.6, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Suppose there is a decrease in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) The AD curve shifts farther to the left in Economy A than Economy B. B) The AD curve shifts farther to the right in Economy A than Economy B. C) The AD curve shifts to the left the same amount in both economies. D) The AD curve shifts to the right the same amount in both economies. E) The simple multiplier is larger in Economy B. Answer: A Diff: 3 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Quantitative 52) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.3 and a marginal propensity to import of 0.3. Economy B has a marginal propensity to consume of 0.9, a net tax rate of 0.1 and a marginal propensity to import of 0.3. Suppose there is an increase in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) The AD curve shifts farther to the left in Economy B than Economy A. B) The AD curve shifts farther to the right in Economy B than Economy A. C) The AD curve shifts to the left the same amount in both economies. D) The AD curve shifts to the right the same amount in both economies. E) The simple multiplier is larger in Economy A. Answer: B Diff: 3 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Quantitative

53) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.3 and a marginal propensity to import of 0.3. Economy B has a marginal propensity to consume of 0.9, a net tax rate of 0.1 and a marginal propensity to import of 0.3. Suppose there is an increase in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) There is a larger decrease in real GDP in Economy B as a result of the change in autonomous investment. B) There is a larger decrease in real GDP in Economy A as a result of the change in autonomous investment. C) There is a larger increase in real GDP in Economy B as a result of the change in autonomous investment. D) There is a larger increase in real GDP in Economy A as a result of the change in autonomous investment. E) There is an equal effect on real GDP in Economies A and B as a result of the increase in autonomous investment. Answer: C Diff: 3 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Quantitative 54) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Economy B has a marginal propensity to consume of 0.7, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Suppose there is an increase in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) The simple multiplier is larger in Economy A. B) The AD curve shifts farther to the left in Economy B than Economy A. C) The AD curve shifts farther to the right in Economy A than Economy B. D) The AD curve shifts to the left the same amount in both economies. E) The AD curve shifts to the right the same amount in both economies. Answer: C Diff: 3 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Quantitative

55) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Economy B has a marginal propensity to consume of 0.7, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Suppose there is an increase in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) There is a larger decrease in real GDP in Economy B as a result of the change in autonomous investment. B) There is a larger decrease in real GDP in Economy A as a result of the change in autonomous investment. C) There is a larger increase in real GDP in Economy B as a result of the change in autonomous investment. D) There is a larger increase in real GDP in Economy A as a result of the change in autonomous investment. E) There is an equal effect on real GDP in Economies A and B as a result of the increase in autonomous investment. Answer: D Diff: 3 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Applied Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 56) Consider the simple multiplier when the price level is constant. We can say that national income is ________ and that the simple multiplier measures the horizontal shift in ________ in response to a change in autonomous desired expenditure. A) demand determined; the AS curve B) unit-cost determined; the AD curve C) constant; the AD curve D) demand determined; the AD curve E) constant; the AE curve Answer: D Diff: 2 Type: MC Topic: 23.1c. slope and shifts of the AD curve Skill: Recall Learning Obj.: 23-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

23.2 The Supply Side of the Economy 1) Aggregate supply refers to the A) decisions of firms to decrease inputs in order to produce outputs. B) effects of increases in input prices on output. C) economy's potential output at each possible labour force. D) supply of labour inputs in the economy. E) total output of goods and services that firms would like to produce and sell. Answer: E Diff: 1 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 2) The economy's aggregate supply (AS) curve shows the relationship between the A) equilibrium real GDP and marginal cost. B) equilibrium real GDP and desired consumption. C) price level and the marginal propensity to consume (MPC). D) price level and the total output that firms wish to produce and sell, with technology and input prices held constant. E) price level and the total output that firms wish to produce and sell, as technology and input prices vary. Answer: D Diff: 1 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 3) The economy's aggregate supply (AS) curve shows the relationship between the price level and the total A) investment that firms wish to make, with input prices given. B) investment that firms wish to make, as input prices vary. C) output that firms wish to produce and sell, with input prices given. D) output that firms wish to produce and sell, as input prices vary. E) wealth accumulated by households, with national income given. Answer: C Diff: 1 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

4) The aggregate supply (AS) curve is drawn with which variables on the axes of the graph? A) the price level on the vertical axis and MPC on the horizontal axis B) national income on the vertical axis and total desired consumption on the horizontal axis C) the price level on the vertical axis and real GDP on the horizontal axis D) national income on the vertical axis and marginal cost on the horizontal axis E) the price level on the vertical axis and real disposable income on the horizontal axis Answer: C Diff: 1 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 5) The aggregate supply curve relates the price level to the quantity of output that firms would like to produce and sell, given the assumption that A) all firms are price takers. B) all firms are price setters. C) the state of technology is constant. D) the prices of all factors of production are constant. E) both C and D Answer: E Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 6) In the short run, the aggregate supply curve has a positive slope because, as the price level rises, producers can A) accumulate inventories. B) charge a higher price sufficient to cover their higher unit costs. C) experience rising factor prices. D) produce less in response to falling profits. E) increase output at unchanged unit costs. Answer: B Diff: 1 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

7) In building a macro model with an AS curve, it is assumed that producers will A) increase prices without changing their output. B) decrease their prices without changing output. C) decrease their prices when they expand output. D) produce as much as possible at the existing price level. E) produce more output only if prices rise. Answer: E Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 8) Which of the following explains why we assume that the economy's aggregate supply (AS) curve has a positive slope? A) Inputs become more expensive at higher levels of output. B) Inputs become less expensive at higher levels of output. C) Firms' unit costs rise as output increases. D) Firms' unit costs fall as output increases. E) Aggregate demand increases at higher levels of national income. Answer: C Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 9) The economy's aggregate supply curve is drawn under two main assumptions. They are A) firms' unit costs are constant; prices of all factors of production are constant. B) firms' unit costs are constant; the state of technology is constant. C) firms will produce more output only if prices rise; technology improves only if prices rise. D) the prices of all factors of production are constant; the state of technology is constant. E) the prices of all factors of production are constant; productivity improves as the price level rises. Answer: D Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

10) Consider the basic AD/AS model. If there is a decrease in the cost of non-labour inputs to production, the result will be to A) shift the AD curve to the left. B) shift the AD curve to the right. C) shift the AS curve to the left. D) shift the AS curve to the right. E) cause a movement to the left along the AS curve. Answer: D Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 11) Consider the basic AD/AS model. If major labour unions succeed in increasing wages across the economy, the AS curve will shift A) downward (to the right), reducing the price level. B) downward (to the right) and then return immediately to its original position. C) upward (to the left) and then return immediately to its original position. D) upward (to the left), increasing the price level. E) None of the above; there will no effect on the AS curve. Answer: D Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 12) Which of the following could cause a movement along the economy's AS curve? A) a change in labour productivity B) a change in the cost of capital C) a change in the price level D) a change in technology E) a change in the wage rate Answer: C Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

13) Which of the following could cause the economy's AS curve to shift upward in the short run? A) an improvement in technology B) a decrease in the cost of capital C) an increase in the price level D) a decrease in nominal wages E) an increase in nominal wages Answer: E Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 14) Which of the following could cause the economy's AS curve to shift upward in the short run? A) an increase in the cost of capital B) a decrease in the cost of capital C) a decrease in nominal wages D) a decrease in the price level E) an improvement in technology Answer: A Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 15) Which of the following could cause the economy's AS curve to shift downward in the short run? A) a decrease in labour productivity B) a decrease in the cost of capital inputs C) a decrease in the price level D) an increase in the price level E) an increase in nominal wages Answer: B Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

16) Which of the following is implied by a rightward shift in the economy's AS curve? A) At any given price level, a lower level of output will be supplied. B) At any given price level, a higher level of output will be supplied. C) There is a decrease in aggregate supply. D) There is a demand shock. E) The same output will be produced, but only at a higher price level. Answer: B Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 17) Which of the following is implied by a leftward shift in the economy's AS curve? A) There is an increase in aggregate supply. B) There is a demand shock. C) At any given price level, a lower level of output will be supplied. D) At any given price level, a higher level of output will be supplied. E) The same output will be produced in equilibrium, but at a lower price level. Answer: C Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 18) The economy's AS curve is often assumed to be relatively flat at low levels of real GDP. The underlying reasoning is that A) consumer demand for most goods tends to be non-responsive to price when output is low. B) consumer demand for most goods tends to be very responsive to price when output is low. C) at low levels of output, firms are faced with unused capacity and thus can increase output without significantly increasing their costs. D) the price level is constant. E) profits are normally high in this section of the AS curve, so firms are willing to expand output. Answer: C Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

19) Consider the economy's aggregate supply curve. Other things being equal, firms' unit costs will tend to increase if A) there is a reduction in the price of oil. B) the government reduces payroll taxes. C) wage increases exceed productivity increases. D) wages rise. E) wage and price controls are in effect. Answer: C Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 20) Consider the economy's aggregate supply curve. Other things being equal, firms' unit costs will tend to fall if A) there is a rise in the price of oil. B) the government increases payroll taxes. C) wages fall. D) wage and price controls are in effect. E) wage increases are less than productivity increases. Answer: E Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 21) Consider the basic AD/AS model. When wage rates rise faster than the increase in labour productivity, the A) AD curve shifts left. B) AS curve shifts upward. C) output gap falls. D) output gap increases. E) AS curve shifts downward. Answer: B Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

22) Suppose there is a drop in the price of an important factor input. What will be the effect on the aggregate supply curve? A) There will be movement to the left, along the AS curve. B) The AS curve will shift to the left. C) There will be movement to the right, along the AS curve. D) The AS curve will shift to the right. E) There will be no change in the AS curve. Answer: D Diff: 1 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 23) Consider the basic AD/AS model. Suppose that a rising percentage of high-school graduates are illiterate, resulting in a decrease in average labour productivity. This change will A) shift the AD curve to the left. B) shift the AD curve to the right. C) shift the AS curve to the left. D) shift the AS curve to the right. E) cause a movement to the right along the AS curve. Answer: C Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 24) Consider the basic AD/AS model. Suppose that high-school graduates have better computing skills than did graduates in the past, resulting in an increase in average labour productivity. This change will A) shift the AS curve to the left. B) shift the AS curve to the right. C) shift the AD curve to the left. D) shift the AD curve to the right. E) cause a movement along the AS curve to the right. Answer: B Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

25) Consider the basic AD/AS model. If their unit costs rise as output increases, pricetaking firms will be prepared to produce ________ only if ________. A) more; prices decrease B) more; the economy is in equilibrium C) their current output; prices increase D) less; prices increase E) more; prices increase Answer: E Diff: 1 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 26) The aggregate supply curve will shift as a result of a change in 1) the wage rate; 2) the price level; 3) technology. A) 1 only B) 2 only C) 3 only D) 1 and 3 E) 2 and 3 Answer: D Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 27) The aggregate supply curve tends to be relatively steep when GDP is above potential output because firms are operating above ________, and ________ are rising rapidly. A) equilibrium output; unit costs B) profit-maximizing output; total costs C) capacity; unit costs D) equilibrium output; total costs E) equilibrium output; average costs Answer: C Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

28) The aggregate supply curve is usually assumed to get progressively steeper at relatively higher levels of output because A) of increasing factor prices. B) of increasing productivity of the factors of production. C) of diminishing marginal productivity of the factors of production. D) of rising competition among price setters. E) of excess capacity at higher levels of output. Answer: C Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Recall Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 29) Consider the basic AD/AS model. If firms' unit costs remained constant as firms increased their output levels, this would lead to a A) vertical AD curve. B) horizontal AD curve. C) vertical AS curve. D) horizontal AS curve. E) horizontal AE curve. Answer: D Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 30) The concept of "demand-determined output" requires ________ to remain constant as output increases. A) technology of production B) government purchases C) firms' unit costs D) labour productivity E) the ratio of price setters to price takers Answer: C Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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FIGURE 23-2 Refer to Figure 23-2. Which of the following events could cause the upward shift of the AS curve? A) a decrease in the price of raw materials B) a decrease in the world supply of oil as a result of a major hurricane C) improved quality of the national education system D) rapid technological advances in mass production E) an increase in consumption Answer: B Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Graphics: Graph Category: Qualitative

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FIGURE 23-2 Refer to Figure 23-2. Which of the following events could cause the upward shift of the AS curve? A) improvements in communications technology B) a decrease in business confidence that reduces desired investment C) a recession in the U.S. that reduces our net exports D) a major discovery of new oil reserves that will increase the world supply E) a massive drought that reduces agricultural output Answer: E Diff: 2 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Graphics: Graph Category: Qualitative

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FIGURE 23-2 Refer to Figure 23-2. The shift from AS1 to AS2 shown in the diagram is referred to as a(n) A) increase in aggregate supply. B) increase in unit costs. C) negative aggregate supply shock. D) positive aggregate supply shock. E) decrease in unit costs. Answer: C Diff: 1 Type: MC Topic: 23.2. slope and shifts of the AS curve Skill: Applied Learning Obj.: 23-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Graphics: Graph Category: Qualitative 23.3 Macroeconomic Equilibrium 1) Macroeconomic equilibrium is described as the combination of A) potential output and price level that is on both the AD curve and AS curve. B) real GDP and price level that is on both the AD curve and 45-degree line. C) real GDP and price level that is on both the AD curve and AS curve. D) all individual demand curves and all individual supply curves. E) all individual demand curves and potential GDP. Answer: C Diff: 1 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Recall Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and

the price level. Category: Qualitative 2) Consider the nature of macroeconomic equilibrium. If, at a particular price level, aggregate output demanded is less than that supplied by producers, then A) the aggregate demand curve will shift to the right, re-establishing an equilibrium. B) the aggregate supply curve will shift to the left, re-establishing an equilibrium. C) the aggregate supply curve will shift to the right, re-establishing an equilibrium. D) the price level will rise toward its equilibrium value. E) the price level will decline toward its equilibrium value. Answer: E Diff: 1 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 3) Consider the nature of macroeconomic equilibrium. If, at a particular price level, the total output demanded is greater than that supplied by producers, then A) the price level will decline toward its equilibrium value. B) the price level will rise toward its equilibrium value. C) the aggregate demand curve will shift to the left, re-establishing an equilibrium. D) the aggregate supply curve will shift to the right, re-establishing an equilibrium. E) the aggregate supply curve will shift to the left, re-establishing equilibrium. Answer: B Diff: 1 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 4) If the AS curve is vertical and there is a decrease in aggregate demand, the result is A) a decrease in the price level with no change in real GDP. B) an equal decrease in national income. C) an increase in the price level. D) an increase in national income. E) no change in either price level or real GDP. Answer: A Diff: 1 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

5) Consider the AD/AS model. An increase in government purchases will have no impact on equilibrium real GDP if A) the AS curve slopes upward. B) the AS curve is vertical. C) the AS curve is horizontal. D) the marginal propensity to spend is very small. E) the simple multiplier is very small. Answer: B Diff: 2 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 6) Consider the basic AD/AS model. Real GDP is demand determined along the A) upward-sloping portion of the AS curve. B) downward-sloping portion of the AS curve. C) vertical portion of the AS curve. D) horizontal portion of the AS curve. E) None of the above — real GDP cannot be demand determined. Answer: D Diff: 2 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Recall Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 7) Over the horizontal range of the economy's AS curve (assuming such a range exists), a rightward shift of the AD curve will result in A) an increase in prices and no change in real GDP. B) an increase in real GDP and no change in prices. C) an increase in both real GDP and prices. D) a decrease in both real GDP and prices. E) a decrease in real GDP but no change in prices. Answer: B Diff: 2 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

8) If the economy's AS curve is upward sloping, a negative shock to aggregate demand will result in A) an increase in prices and no change in real GDP. B) a decrease in prices but no change in real GDP. C) an increase in real GDP and no change in prices. D) an increase in both real GDP and prices. E) a decrease in both real GDP and prices. Answer: E Diff: 2 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 9) Which of the following will cause a negative aggregate demand shock? A) an increase in the price of raw materials B) a decrease in the domestic price level C) an increase in the domestic price level D) an increase in government expenditures E) an increase in tax rates Answer: E Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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FIGURE 23-3 Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy A in its current equilibrium position? A) Unit costs are rising, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level. B) Firms are producing well below their capacity and are willing to produce more only if prices rise. C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase. D) Firms are producing well below their capacity and are willing to produce more output with no increase in price. E) Unit costs are rising, but firms are able to produce more output with no increase in the price level because there is excess capacity in the economy. Answer: C Diff: 2 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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FIGURE 23-3 Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy B? A) Unit costs are rising rapidly, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level. B) Firms are producing well below their capacity and are willing to produce more only if prices rise. C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase. D) Firms are producing well below their capacity and are willing to produce more output with no increase in price. E) Firms are not able to produce more output because there is no excess capacity in the economy. Answer: D Diff: 2 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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FIGURE 23-3 Refer to Figure 23-3. Suppose the price level in Economy A is above . Which of the following statements describes what would occur? A) The AD curve would shift to the right until macro equilibrium is reached. B) Real GDP would be below its equilibrium level which would put downward pressure on the price level until it reaches macro equilibrium at . C) The amount of output supplied by firms is greater than total desired expenditure; excess supply will put downward pressure on the price level until it reaches macro equilibrium at . D) Real GDP would be below its equilibrium level which would put upward pressure on the price level until it reaches macro equilibrium. E) The AS curve would shift to the left until macro equilibrium is reached. Answer: C Diff: 2 Type: MC Topic: 23.3a. macroeconomic equilibrium Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

13) An aggregate demand shock will have a large effect on real GDP and a small effect on the price level when A) the AS curve is steep. B) the AD curve intersects the AS curve on the downward-sloping portion of the AS curve. C) the AS curve is close to horizontal. D) the AS curve is vertical. E) the AD curve is steep. Answer: C Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 14) An aggregate demand (AD) shock will have a small effect on real GDP and a large effect on the price level when A) the AS curve is steep. B) the AD curve intersects the AS curve on the downward-sloping portion of the AS curve. C) the AS curve is close to horizontal. D) the AD curve is steep. E) the AD curve is flat. Answer: A Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 15) Consider the basic AD/AS model with an upward-sloping AS curve. A positive aggregate demand shock will result in A) an increase in prices but not output. B) an increase in output but not prices. C) an increase in both output and prices. D) a decrease in both output and prices. E) a decrease in output and an increase in prices. Answer: C Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

16) Consider the basic AD/AS model with an upward-sloping AS curve. A positive aggregate demand shock will initially cause A) a decrease in the price level. B) the equilibrium point to move rightward along the AS curve. C) a movement along the AD curve to the right. D) a shift to the right in the AS curve. E) the unemployment rate to remain constant. Answer: B Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 17) Consider the basic AD/AS model with a very steep, positively sloped AS curve. A negative aggregate demand shock will result in A) an increase in the price level and a decrease in real national income. B) an increase in both the price level and real national income. C) a decrease in the price level with almost no change in real national income. D) a decrease in the price level and an increase in real national income. E) no change in either price level or output. Answer: C Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 18) Consider the basic AD/AS model. Suppose firms are currently producing beyond their normal capacity. A change in AD leads to a relatively A) large change in price level and a large change in real GDP. B) large change in price level and a small change in real GDP. C) small change in price level and a large change in real GDP. D) small change in price level and a small change in real GDP. E) no change in both price and output. Answer: B Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

19) Suppose firms are currently producing output at a level beyond their normal capacity. In this situation, the AS curve will be relatively ________ and a positive AD shock will result in ________. A) steep; an increase in the price level with a small increase in real GDP B) flat; an equal increase in the price level and in real GDP C) flat; a very small increase in prices but a large increase in real GDP D) flat; a very small decrease in the price level and a decrease in real GDP E) steep; a decrease in the price level and a very small decrease in real GDP Answer: A Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 20) In the basic AD/AS model, the effect of an aggregate demand shock is divided between a change in output and a change in the price level. How the effect is divided depends on the A) amount of inflation in the economy. B) position of the AE curve. C) size of the simple multiplier. D) slope of the AD curve. E) slope of the AS curve. Answer: E Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 21) If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand increases, we expect the AE function to shift to a A) higher level and stay there. B) higher level, but then shift part of the way down to its original position as the price level rises. C) higher level but then return to its original position as the price level rises. D) lower level and stay there. E) lower level, but then return to its original position as the price level rises. Answer: C Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level.

Category: Qualitative

22) If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand decreases, we expect the AE function to shift to a A) higher level and stay there. B) higher level, but then shift part of the way down to its original position as the price level falls. C) higher level but then return to its original position as the price level falls. D) lower level and stay there. E) lower level, but then return to its original position as the price level falls. Answer: E Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 23) Which of the following represents a positive aggregate supply shock? A) an outbreak of war among oil-exporting countries B) a general labour strike across the country C) bad weather which cripples telecommunications for one month D) improved computer literacy for the typical worker E) an increase in exports Answer: D Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 24) Which of the following will cause a positive aggregate supply shock? A) an increase in the price of raw materials B) a decrease in the price of foreign output C) an increase in the price of foreign output D) a decrease in the price of oil E) a decrease in productivity Answer: D Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

25) Which of the following would cause a positive aggregate demand shock, but leave the aggregate supply curve unaffected? A) A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures. B) A severe drought lasting for six months that destroys agricultural and forestry production. C) A medical report confirming that improved health for Canadian workers caused fewer lost days of production. D) An improvement in the computer literacy of workers. E) A substantial increase in world oil prices. Answer: A Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 26) Aggregate supply shocks cause the price level and real GDP to change in A) the same direction with price changing by more than output. B) the same direction and by the same amount. C) opposite directions with price changing by less than output. D) opposite directions and not necessarily by the same amount. E) opposite directions but by the same amount. Answer: D Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 27) Consider the basic AD/AS macro model. A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level A) and real GDP are higher than in the initial equilibrium. B) and real GDP are lower than in the initial equilibrium. C) is lower and real GDP higher than in the initial equilibrium. D) is higher and real GDP remained the same as in the initial equilibrium. E) is higher and real GDP lower than in the initial equilibrium. Answer: E Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

28) Consider the basic AD/AS model. A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium, which in comparison to the original equilibrium, has a price level that is A) higher and a real GDP that is higher. B) higher and a real GDP that is lower. C) higher and a real GDP that is the same. D) lower and a real GDP that is higher. E) lower and a real GDP that is lower. Answer: B Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 29) Consider the AD/AS macro model. Suppose there is an increase in aggregate demand and, simultaneously, a decrease in aggregate supply. The result will be a A) rise in real GDP but price level changes will be indeterminate. B) rise in real GDP and a rise in the price level. C) rise in real GDP and a fall in the price level. D) an indeterminate change in real GDP and a rise in the price level. E) an indeterminate change in real GDP and a fall in the price level. Answer: D Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 30) Consider the AD/AS model. Suppose there is a decrease in aggregate demand and, simultaneously, an increase in aggregate supply. The result will be a A) rise in real GDP but price level changes will be indeterminate. B) rise in real GDP and a rise in the price level. C) rise in real GDP and a fall in the price level. D) an indeterminate change in real GDP and a rise in the price level. E) an indeterminate change in real GDP and a fall in the price level. Answer: E Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

31) Consider the following news headline: "World commodity prices rise sharply." Choose the statement below that best describes the likely macroeconomic effects in Canada. (Remember that Canada is both a producer and a consumer of commodities.) A) There is no change in either the AD or the AS curves. B) The AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate. C) The AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP decreases. D) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP increases. E) The AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate. Answer: E Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 32) Consider the following news headline: "Governments plan massive hospital construction programs across the country." Choose the statement below that best describes the likely macroeconomic effects. A) The AD curve shifts to the left; the price level falls and real GDP falls. B) The AD curve shifts to the right; the price level rises and real GDP rises. C) The AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate. D) The AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate. E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises. Answer: B Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

33) Consider the following news headline: "Information technology costs for Canadian firms continue to drop." Choose the statement below that best describes the likely macroeconomic effect. A) The AD curve shifts to the right; the price level rises and real GDP rises. B) The AD curve shifts to the left; the price level falls and real GDP falls. C) The AS curve shifts to the left; the price level rises and real GDP falls. D) The AS curve shifts to the right; the price level falls and real GDP rises. E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises. Answer: D Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 34) Consider the following news headline: "Threat of widespread labour unrest leads to generous wage increases in several industries." Choose the statement below that best describes the likely macroeconomic effects. A) The AS curve shifts to the left; the price level rises and real GDP falls. B) The AS curve shifts to the right; the price level falls and real GDP rises. C) The AD curve shifts to the left; the price level falls and real GDP falls. D) The AD curve shifts to the right; the price level rises and real GDP rises. E) The AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP falls. Answer: A Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

35) Consider the following two headlines appearing in the same day: "Federal government announces major new infrastructure investments" and "New technology drives down transport costs." Choose the statement below that best describes the likely macroeconomic effects. A) The AS curve shifts to the left; the price level rises and real GDP falls. B) The AS curve shifts to the right; the price level falls and real GDP rises. C) The AD curve shifts to the left; the price level falls and real GDP falls. D) The AD curve shifts to the right; the price level rises and real GDP rises. E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises. Answer: E Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 36) Suppose the economy is hit by a shock and we observe that the price level has decreased whereas real GDP has increased. We can conclude that this shock was A) a positive AD shock. B) a negative AD shock. C) a positive AS shock. D) a negative AS shock. E) a negative technology shock. Answer: C Diff: 2 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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FIGURE 23-4 Refer to Figure 23-4. Suppose the Canadian economy is initially in equilibrium at point A. An unexpected shock then shifts both the AD and the AS curves as shown and results in a new equilibrium represented by point B. Which of the following events could cause such a shock? A) an increase in the net tax rate B) a decrease in firms' desired investment expenditures C) an increase in factor prices D) a decrease in labour productivity E) a decrease in the world price of oil Answer: E Diff: 3 Type: MC Topic: 23.3b. AD shocks and AS shocks Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

38) If the economy's AS curve is completely horizontal, the multiplier in the AD/AS model is A) infinitely large. B) equal to the simple multiplier. C) smaller than the simple multiplier. D) is zero. E) negative. Answer: B Diff: 2 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 39) When the economy's AS curve is positively sloped, the multiplier in the AD/AS model is A) constant. B) equal to one. C) equal to the simple multiplier. D) smaller than the simple multiplier. E) larger than the simple multiplier. Answer: D Diff: 2 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 40) If the economy's AS curve is vertical, the multiplier in the AD/AS model is A) infinitely large. B) equal to the simple multiplier. C) smaller than the simple multiplier. D) zero. E) negative. Answer: D Diff: 3 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

41) Suppose the government embarks on an infrastructure program, spending $8 billion on the construction of new roads and bridges. What is the size of the multiplier if the AS curve is vertical? A) 0 B) greater than 1 C) less than 1 D) infinity E) insufficient information to solve Answer: A Diff: 2 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Quantitative 42) Consider the AD/AS model in which the price level varies. In this case, the multiplier is ________ the simple multiplier. A) larger than B) smaller than C) definitionally the same as D) not comparable to E) equal to Answer: B Diff: 2 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Recall Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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FIGURE 23-5 Refer to Figure 23-5. Suppose that an increase in government purchases by 50 causes the AD curve to shift to the right, as shown. The simple multiplier is ________ and the multiplier is ________. A) 6; 1.2 B) 2.8; 1.2 C) 4; 1.2 D) 4; 2.8 E) 4; 3.2 Answer: C Diff: 3 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 23-5 Refer to Figure 23-5. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 5, then how much was the increase in government purchases? A) 30 B) 40 C) 50 D) 12 E) not enough information to know Answer: B Diff: 3 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 23-5 Refer to Figure 23-5. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then what is the value of the multiplier? A) 1.2 B) 1.4 C) 4 D) 2.8 E) 3.2 Answer: A Diff: 3 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 23-5 Refer to Figure 23-5. Suppose that an increase in autonomous investment by 40 causes the AD curve to shift to the right, as shown. The simple multiplier is ________ and the multiplier is ________. A) 6; 1.2 B) 2.8; 1.2 C) 4; 1.2 D) 5; 1.5 E) 4; 3.2 Answer: D Diff: 3 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 23-5 Refer to Figure 23-5. Suppose that an increase in autonomous investment caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then how much was the increase in investment? A) 30 B) 40 C) 50 D) 12 E) not enough information to know Answer: C Diff: 3 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 23-5 Refer to Figure 23-5. Suppose that an increase in autonomous investment caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 5, then what is the value of the multiplier? A) 1.2 B) 1.5 C) 4.0 D) 5.0 E) not enough information to know Answer: B Diff: 3 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 23-3 Refer to Figure 23-3. Which of the two economies, A or B, will experience more volatile fluctuations in national income in response to aggregate demand shocks? A) Economies A and B will experience similar volatility because the slopes of the AD curves are the same. B) Economy A because the large fluctuations in the price level lead to large fluctuations in national income. C) Economy A because the multiplier is much larger than in Economy B. D) Economy B because the multiplier is much smaller than in Economy A. E) Economy B because output is purely demand determined, and there is no offsetting effect from a price level increase. Answer: E Diff: 2 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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FIGURE 23-3 Refer to Figure 23-3. Which of the following statements correctly describes the difference between the multipliers (in response to an increase in autonomous expenditure) in Economy A and Economy B? The multiplier in Economy A is ________ while the multiplier in Economy B is ________. A) very small; equal to one B) very small; equal to the simple multiplier C) equal to the simple multiplier; almost zero D) equal to one; almost zero E) equal to one; equal to the simple multiplier Answer: B Diff: 3 Type: MC Topic: 23.3c. the multiplier when the price level varies Skill: Applied Learning Obj.: 23-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative Economics - Canadian Edition, 16e (Ragan) Chapter 24 From the Short Run to the Long Run: The Adjustment of Factor Prices 24.1 Three Macroeconomic States 1) Which of the following are the defining assumptions of the short run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are changing. B) Factor prices adjust to output gaps, and technology and factor supplies are constant.

C) Factor prices are exogenous, and technology and factor supplies are constant. D) Factor prices adjust to output gaps, and technology and factor prices are changing. E) Factor prices are exogenous, technology and factor prices are endogenous. Answer: C Diff: 2 Type: MC Topic: 24.1. time spans in macroeconomics Skill: Recall Learning Obj.: 24-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 2) Which of the following are the defining assumptions of the long run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are changing. B) Factor prices adjust to output gaps, and technology and factor supplies are constant. C) Factor prices are exogenous, and technology and factor supplies are constant. D) Factor prices have fully adjusted to output gaps, and technology and factor supplies are changing. E) Factor prices are exogenous, and technology and factor prices are exogenous. Answer: D Diff: 2 Type: MC Topic: 24.1. time spans in macroeconomics Skill: Recall Learning Obj.: 24-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative

3) In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of A) the short run. B) the adjustment process. C) the national accounts model. D) the long run. E) the business cycle model. Answer: D Diff: 2 Type: MC Topic: 24.1. time spans in macroeconomics Skill: Recall Learning Obj.: 24-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 4) Which of the following is a defining assumption of the AD/AS macro model in the short run? A) Factor supplies are assumed to be flexible. B) Technology used in production is endogenous and variable. C) The level of potential output fluctuates with the price level. D) Factor prices are assumed to be exogenous. E) Firms cannot operate near their normal capacity. Answer: D Diff: 2 Type: MC Topic: 24.1. time spans in macroeconomics Skill: Recall Learning Obj.: 24-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 5) In the basic AD/AS model, which of the following is a defining assumption of the adjustment process that takes the economy from the short run to the long run? A) Factor supplies are assumed to be varying. B) Technology used in production is endogenous. C) The level of potential output is changing. D) Factor prices respond to output gaps. E) Firms cannot operate near their normal capacity. Answer: D Diff: 2 Type: MC Topic: 24.1. time spans in macroeconomics Skill: Recall Learning Obj.: 24-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative

6) Which of the following is a defining assumption of the AD/AS macro model in the long run? A) Factor supplies are assumed to be fixed. B) Technology used in production is constant. C) The level of potential output is constant. D) Factor prices are assumed to be fixed. E) Changes in real GDP are determined by the changes in potential output. Answer: E Diff: 2 Type: MC Topic: 24.1. time spans in macroeconomics Skill: Recall Learning Obj.: 24-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 7) When we study the adjustment process in macroeconomics, what assumption are we making about potential output, Y*? A) Potential output is adjusting to changes in factor prices. B) Potential output is adjusting to changes in factor supplies. C) Potential output is adjusting to changes in technology. D) Potential output is constant. E) Potential output is not relevant to the analysis of the adjustment process. Answer: D Diff: 2 Type: MC Topic: 24.1. time spans in macroeconomics Skill: Recall Learning Obj.: 24-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 8) When we study the adjustment process in macroeconomics, we are analyzing the process by which A) potential output is adjusting to changes in factor supplies. B) potential output is adjusting to changes in technology. C) real GDP returns to the level of potential output. D) real GDP expands over time. E) changes in technology affect the level of real GDP. Answer: C Diff: 2 Type: MC Topic: 24.1. time spans in macroeconomics Skill: Recall Learning Obj.: 24-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative

24.2 The Adjustment Process 1) How do we define the economy's output gap? A) the difference between actual GDP and potential GDP B) the level of total output that would be produced if capacity utilization is at its normal rate C) the difference between actual national income and desired aggregate expenditure D) the change in real GDP that results from economic growth E) the difference between nominal GDP and real GDP Answer: A Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 2) Which of the following best describes the concept of potential output? A) the total output that can be produced when all factors of production (land, labour, and capital) are fully employed B) the total output that can be produced when the economy is in short-run economic equilibrium C) the total output that can be produced when all productive resources (land, labour, and capital) are used at their maximum capacity D) the total output that could be produced in the future when technological advances allow for a higher level of output E) the total output that could be produced if no productive resource (land, labour, and capital) was ever left idle Answer: A Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 3) An inflationary output gap occurs when A) actual GDP exceeds potential GDP. B) nominal GDP exceeds real GDP. C) demand for labour services is very low. D) equilibrium national income is below potential national income. E) potential GDP exceeds actual GDP. Answer: A Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall

Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

4) An inflationary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs at real GDP below potential output. C) the economy's resources are being used beyond their normal capacity. D) there is a pressure for wages to decrease. E) there is excess supply of most factors of production. Answer: C Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 5) A recessionary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs where real GDP exceeds potential output. C) the economy's resources are being used at more than their normal capacity. D) there is upward pressure on wages. E) there is excess demand for most factors of production. Answer: A Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 6) An inflationary output gap would generate which of the following conditions in the economy? A) Firms are making low profits. B) Workers have relatively more bargaining power with employers. C) There is an unusually small demand for labour. D) There is downward pressure on wages. E) There is much idle capacity. Answer: B Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

7) An inflationary output gap is characterized by A) falling prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output. Answer: D Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 8) A recessionary output gap is characterized by A) rising prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output. Answer: E Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 9) Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap? A) falling prices B) increasing investment C) declining government purchases D) rising wages E) increasing tax rates Answer: D Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

10) Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap? A) rising prices B) decreasing investment C) increasing government purchases D) falling tax rates E) decreasing wages Answer: E Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 11) If the short-run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is A) at its full-employment level of output. B) experiencing a recessionary gap. C) experiencing an inflationary gap. D) threatened with an acceleration of inflation. E) operating at full capacity. Answer: B Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 12) If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is A) at its full-employment level of output. B) experiencing a recessionary output gap. C) experiencing an inflationary output gap. D) threatened with a demand shock. E) operating at full capacity. Answer: C Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

13) If wages rise faster than increases in labour productivity, then unit labour costs will A) fall and the AS curve will shift left. B) fall and the AS curve will shift right. C) rise and the AS curve will shift left. D) rise and the AS curve will shift right. E) not change because only total labour costs change. Answer: C Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 14) An important assumption in the AD/AS macro model is that when real GDP exceeds potential output, factor prices rise and the A) AS curve shifts to the left. B) AD curve shifts to the right. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) None of the above — the AS curve remains unchanged. Answer: A Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 15) An important assumption in the AD/AS macro model is that when real GDP is less than potential output, factor prices adjust and the A) AS curve shifts to the left fairly rapidly. B) AS curve shifts to the right only very slowly. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) None of the above — the AS curve remains unchanged. Answer: B Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

16) If the economy is experiencing an inflationary output gap, the adjustment process operates as follows: A) Wages do not adjust, but the AD curve shifts to the right. B) Wages fall, unit costs fall, and the AD curve shifts rightward. C) Wages rise, unit costs rise, and the AS curve shifts leftward. D) Wages rise, unit costs rise, and the AS curve shifts rightward. E) Wages fall, unit costs fall, and the AS curve shifts rightward. Answer: C Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 17) If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by A) the aggregate supply curve shifting to the left. B) the aggregate demand curve shifting to the left. C) the aggregate expenditure curve shifting upward. D) the intersection of the AD and AS curves at potential output. E) a point to the right of the aggregate supply curve at potential GDP. Answer: D Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

18)

FIGURE 24-1 Refer to Figure 24-1. If the economy is currently in a short-run equilibrium at Y0, the economy is experiencing A) an inflationary output gap. B) a labour shortage. C) a long-run equilibrium. D) a recessionary output gap. E) potential output growth. Answer: D Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative

19)

FIGURE 24-1 Refer to Figure 24-1. If the economy is currently producing output of Y0, the economy's automatic adjustment process will have the A) AS curve shifting to the right until point A is reached. B) vertical line at Y* shifting to the left until it gets to Y0. C) AD curve shifting to the right until point B is reached. D) economy remaining where it is. E) level of potential output falling. Answer: A Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative

20)

FIGURE 24-1 Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the A) economy will eventually move to point B. B) economy will move only slowly toward point A as wages slowly adjust. C) economy will quickly move to point A. D) level of output will decrease below Y0. E) AD curve will eventually shift to the right and return the economy to its fullemployment level of output. Answer: B Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative

21)

FIGURE 24-2 Refer to Figure 24-2. If the economy is currently in a short-run equilibrium at , the economy is experiencing A) potential output growth. B) a long-run equilibrium. C) an excess supply of labour. D) an inflationary output gap. E) a recessionary output gap. Answer: D Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative

22)

FIGURE 24-2 Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1. The economy's automatic adjustment process will restore potential output, Y*, through A) wage increases and a leftward shift of the AS curve. B) wage increases and a rightward shift in the AS curve. C) wage decreases and a rightward shift of the AD curve. D) an increase in potential GDP to intersect both the AD and AS curves at B. E) a leftward shift of the AD to intersect both the AS and potential GDP at A. Answer: A Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative 23) The Phillips curve describes the relationship between which two variables? A) aggregate expenditure and aggregate demand B) the money supply and interest rates C) unemployment and the rate of change of wages D) inflation and interest rates E) the output gap and potential GDP Answer: C Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to

change. Category: Qualitative 24) The Phillips curve provides a theoretical link between A) the liquidity preference and investment demand schedules. B) labour markets and foreign-exchange markets. C) the goods market and productivity. D) the goods market and the labour market. E) inflation and the demand for money. Answer: D Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 25) Which of the following describes the distinction between the Phillips curve and the AS curve? A) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis. B) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis. C) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. D) The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. E) There is no distinction: the two curves are essentially the same thing. Answer: C Diff: 3 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 26) If the economy in the short run is experiencing a recessionary gap, we are likely to see A) severe and widespread labour shortages. B) quickly rising output prices. C) an increase in the number of workers receiving employment-insurance benefits. D) the number of employment-insurance recipients the lowest ever. E) consumers optimistic about the future. Answer: C Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices

Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

27) Which of the following statements about output gaps is true? A) When actual GDP is below potential GDP, there is upward pressure on wages. B) When actual GDP is below potential GDP, there is upward pressure on output prices. C) When actual GDP is above potential GDP, there is downward pressure on wages. D) When actual GDP is above potential GDP, there is downward pressure on output prices. E) When actual GDP is above potential GDP, there is upward pressure on wages. Answer: E Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 28) Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps. A) demanded by households after all factor prices B) supplied by firms after all factor prices C) demanded by households before all factor prices D) supplied by firms before all factor prices E) supplied by firms after all output prices Answer: B Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 29) Which of the following is occurring as the macro economy is adjusting from the short run to the long run? A) Wages and other factor prices are adjusting to close output gaps. B) Potential output is adjusting to close inflationary or recessionary gaps. C) Wages and other factor prices remain constant. D) Aggregate demand shocks are causing deviations from potential output. E) Aggregate supply shocks are causing deviations from potential output. Answer: A Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

30) Following any AD or AS shock, economists typically assume that the adjustment process continues until A) the AD and AS curves intersect each other at the correct price level. B) real GDP returns to Y*. C) factor prices have returned to their levels previous to the shock. D) Y* adjusts to its long-run equilibrium level. E) the output gap is at a stable level. Answer: B Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 31) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 24-1 Refer to Table 24-1. Which of the economies is operating at its long-run equilibrium? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E Answer: C Diff: 1 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

32) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 24-1 Refer to Table 24-1. Which of the economies are experiencing an inflationary gap? A) Economies A and B B) Economies B and C C) Economies C and D D) Economies D and E E) none of the economies Answer: D Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

33) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 24-1 Refer to Table 24-1. Which of the following statements best describes the situation facing Economy B? A) There is a recessionary gap of $40 billion and wages are falling slowly. B) There is an inflationary gap of $40 billion and wages are rising. C) There is a recessionary gap of $20 billion and wages are falling slowly. D) There is no output gap and wages are stable. E) There is an output gap of $20 billion and wages are rapidly adjusting. Answer: C Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Quantitative

34) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 24-1 Refer to Table 24-1. Consider Economy E. Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy? A) The AD curve has shifted to the right and the economy is in a short-run disequilibrium position. B) The AS curve has shifted to the left and the economy is in a short-run disequilibrium position. C) The intersection of the AD and AS curves is to the right of Y*. D) The intersection of the AD and AS curves is to the left of Y*. E) The intersection of the AD and AS curves coincide with the long-run aggregate supply curve. Answer: C Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

35) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 24-1 Refer to Table 24-1. How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E? A) The size of the output gap is the same in Economies A and E, but wages are rising in A and falling in E. B) The output gap is larger in Economy A, yet wages are changing more slowly. C) The output gap is much larger in Economy E, so wages are changing at a faster rate. D) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E. E) There is insufficient data with which to observe the adjustment asymmetry. Answer: D Diff: 3 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

36) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 24-1 Refer to Table 24-1. Which of the following statements explains why wages are rising in Economy E? A) The inflationary gap generates lower profits for firms because workers are demanding higher wages. B) The inflationary gap generates excess demand for labour, which causes wages to rise. C) The aggregate supply curve is shifting to the right, which is causing wages to rise. D) The aggregate demand curve is shifting to the right, causing wages to rise. E) Potential output is rising, putting upward pressure on wages. Answer: B Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

37) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 24-1 Refer to Table 24-1. In which economy is there the most unused capacity? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E Answer: A Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative 38) Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases. We can conclude that ________ has increased and there is now a(n) ________ gap. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary Answer: D Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

39) Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level increases. We can conclude that ________ has decreased and there is now a(n) ________ gap. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary Answer: C Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 40) Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level decreases. We can conclude that ________ has increased and there is now a(n) ________ gap. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary Answer: A Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 41) Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level decreases. We can conclude that ________ has decreased and there is now a(n) ________ gap. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary Answer: B Diff: 2 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change.

Category: Qualitative

42) Suppose the following conditions are present in the economy: - firms are increasing output to meet rising demand for their goods - workers are able to demand higher wages as firms try to bid workers away from other firms Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) There is an inflationary output gap; aggregate demand will continue to increase, causing the AD curve to shift to the right. The price level will rise until equilibrium is restored at . B) The economy is in equilibrium at , but wages are rising. The AS curve will shift to the left until a new equilibrium is reached at a higher price level. C) There is a recessionary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at . D) There is an inflationary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at . E) There is a recessionary output gap; aggregate demand will rise, causing the AD curve to shift to the right until equilibrium is restored at . Answer: D Diff: 3 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 43) Suppose the following conditions are present in the economy: - firms are facing lower-than normal sales and have reduced output -there is an excess supply of labour and firms are starting to reduce their workforces Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) Output is below potential; aggregate demand will fall, causing the AD curve to shift to the left. The price level will fall until equilibrium is restored at . B) The economy is in equilibrium at , but wages are falling. The AS curve will shift to the right until a new equilibrium is reached at a lower price level. C) Output is below potential; wages will eventually fall; the AS curve will slowly shift to the right until equilibrium is restored at . D) Output is above potential; wages will fall, causing the AS curve to shift to the right until equilibrium is restored at . E) Output is above potential; aggregate demand will fall, causing the AD curve to shift to the left until equilibrium is restored at . Answer: C Diff: 3 Type: MC Topic: 24.2a. output gaps and the adjustment of factor prices

Skill: Applied Learning Obj.: 24-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 44) Consider the AD/AS macro model. An important asymmetry in the behaviour of the AS curve is that A) prices are sticky but wages are not. B) positive output gaps can persist for a long time without causing increases in wages and prices, whereas negative output gaps lead to immediate reductions in wages and prices. C) negative output gaps can persist for a while without causing large decreases in wages and prices, whereas positive output gaps lead more quickly to increases in wages and prices. D) wages are very flexible in the downward direction, but not in the upward direction. E) wages and prices are equally sticky in both directions. Answer: C Diff: 2 Type: MC Topic: 24.2b. adjustment asymmetry Skill: Recall Learning Obj.: 24-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative 45) Consider the AD/AS macro model. Why do we say that the wage-adjustment process is asymmetrical? A) Because factor prices fluctuate more frequently than goods prices. B) Because goods prices rise more quickly than factor prices. C) Because employers delay wage increases in a boom but lay off workers quickly during a slump. D) Because taxes rise quickly in a boom but do not fall during a slump. E) Because wages rise quickly in a boom but fall slowly during a slump. Answer: E Diff: 1 Type: MC Topic: 24.2b. adjustment asymmetry Skill: Recall Learning Obj.: 24-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative 46) Consider the AD/AS macro model. An important asymmetry in the behaviour of aggregate supply is the A) changing slope of the aggregate demand curve. B) difference between actual and potential output. C) different relative sizes of inflationary versus recessionary gaps. D) economy's path of potential output as a result of labour force growth. E) different speeds at which factor prices adjust to positive and negative output gaps.

Answer: E Diff: 2 Type: MC Topic: 24.2b. adjustment asymmetry Skill: Recall Learning Obj.: 24-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative 47) An economy may not quickly and automatically eliminate a recessionary output gap because wages A) never change in response to changes in the demand for labour. B) have a tendency to be sticky downward. C) have a tendency to fall too quickly. D) have a tendency to rise too quickly. E) are flexible but prices have a tendency to be sticky downward. Answer: B Diff: 1 Type: MC Topic: 24.2b. adjustment asymmetry Skill: Applied Learning Obj.: 24-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative 48) An adjustment "asymmetry" in aggregate supply is A) the concave shape of the AS curve. B) the convex shape of the AS curve. C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps). D) the difference in speed of increases in factor prices versus wage rates (when wages adjust to output gaps). E) the difference in speed of decreases in output levels. Answer: C Diff: 2 Type: MC Topic: 24.2b. adjustment asymmetry Skill: Recall Learning Obj.: 24-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative

49) "The level of potential output, Y*, acts like an anchor for the level of real GDP." Which of the following best explains this statement? A) Following an AD or AS shock that pushes real GDP away from Y*, the adjustment of factor prices brings real GDP back to Y*. B) The level of potential output, Y*, is equal to whatever the level of actual GDP, no matter what shocks hit the economy. C) Real GDP is "anchored" to potential output, Y*, because real GDP is, by definition, always equal to Y*. D) Following an AD or AS shock that pushes real GDP away from Y*, changing technology brings Y* back to real GDP. E) The concept of potential output, Y*, as an anchor for real GDP refers to the fiscal policy tools used to bring real GDP back to Y*. Answer: A Diff: 2 Type: MC Topic: 24.2b. adjustment asymmetry Skill: Recall Learning Obj.: 24-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative 24.3 Aggregate Demand and Supply Shocks 1) Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will A) allow a stable expansion of real income over time. B) always reverse itself. C) be negated in the long run, through the economy's adjustment process. D) result in a price level lower than that preceding the demand shock. E) set off an endless cycle of price rises and increases in unemployment. Answer: C Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

2) Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, will be eliminated if A) wages rise quickly. B) the AS curve shifts upward. C) wages and other factor prices fall sufficiently. D) real national income decreases. E) prices rise quickly. Answer: C Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 3) Consider an economy with a relatively steep AS curve. If there is a shift to the right in the AD curve, there will be a ________ in the price level and ________ in national output. A) small increase; a large increase B) small increase; a large decrease C) large increase; a small increase D) large increase; a small decrease E) large increase; no change Answer: C Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 4) Consider an economy with a relatively steep AS curve. If the AD curve shifts to the left, then the price level will ________ and national output will ________. A) increase slightly; significantly increase B) increase slightly; significantly decrease C) increase sharply; increase slightly D) fall sharply; will not change. E) fall sharply; decrease slightly. Answer: E Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

5) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in world demand for Canada's goods. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is below its original level with a lower price level B) real GDP and the price level both rise; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Answer: C Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 6) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is at its original level with a lower price level B) real GDP and the price level both fall; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Answer: A Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

7) Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output will ________. A) decrease; decrease; decrease further; decrease further B) decrease; decrease; decrease further; be restored to potential output C) increase; increase; increase further; increase further D) increase; decrease; increase further; be restored to potential output E) increase; increase; increase further; be restored to potential output Answer: E Diff: 3 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 8) Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run. A) a positive; no B) a positive; a positive C) no; a positive D) no; no E) not enough information to know Answer: A Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 9) Consider the basic AD/AS macro model in long-run equilibrium. A permanent expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run. A) a positive; no B) a negative; no C) a positive; an even larger D) a positive; a smaller E) a negative; a positive Answer: C Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock.

Category: Qualitative 10) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in the Canadian-dollar price of all imported raw materials. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is below its original level with a lower price level B) real GDP and the price level both rise; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level E) real GDP falls and the price level rises; real GDP and the price level return to their original levels Answer: E Diff: 3 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 11) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is below its original level with a lower price level B) real GDP and the price level both rise; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP and the price level return to their original levels E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Answer: D Diff: 3 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

12) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-3 Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from . The initial effect is A) a recessionary output gap of 100. B) a recessionary output gap of 300. C) a recessionary output gap of 550. D) an inflationary output gap of 200. E) an inflationary output gap of 100. Answer: A Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

to

13) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-3 Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from . At the new short-run equilibrium, the price level is ________ and real GDP is ________. A) 90; 900 B) 110; 800 C) 60; 1000 D) 60; 700 E) 90; 1250 Answer: A Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

to

14) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-3 Refer to Figure 24-3. Which of the following events could have shifted the AD curve from to ? A) an increase in net exports B) an increase in government purchases C) an increase in desired investment D) an increase in autonomous household saving E) an increase in autonomous consumption Answer: D Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative

15) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-3 Refer to Figure 24-3. After the negative aggregate demand shock shown in the diagram (from to ), which of the following describes the adjustment process that would return the economy to its long-run equilibrium? A) Wages would eventually fall, causing the AD curve to shift to the right, returning to the original equilibrium at point A. B) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E. C) Wages would increase, causing the AS curve to shift to the right, reaching a new equilibrium at point E. D) Wages would increase, causing the AD curve to shift to the right, returning to the original equilibrium at point A. E) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D. Answer: B Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative

16) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-3 Refer to Figure 24-3. Following the negative AD shock shown in the diagram (from to ), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 110; 1000 B) 60; 1000 C) 90; 900 D) 110; 800 E) 90; 1250 Answer: B Diff: 2 Type: MC Topic: 24.3a. AD shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

17) Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y* Answer: C Diff: 2 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 18) Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y* Answer: A Diff: 2 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 19) What is meant by the term "stagflation"? A) the combination of falling real GDP and a rising price level B) a persistent inflationary gap C) a persistent recessionary gap D) the sluggish downward wage adjustment in response to a recessionary gap E) the combination of inflation and rising real GDP Answer: A Diff: 1 Type: MC Topic: 24.3b. AS shocks Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

20) In the basic AD/AS macro model, which of the following events could cause a negative AS shock? A) a large decrease in wages B) a large increase in business confidence C) a large decrease in the net tax rate D) a widespread outbreak of a serious infectious disease E) a large increase in labour productivity Answer: D Diff: 2 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 21) In the basic AD/AS macro model, which of the following events would cause stagflation? A) a large decrease in wages B) a large increase in business confidence C) a large increase in the net tax rate D) a large increase in the price of raw materials E) a large increase in labour productivity Answer: D Diff: 3 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 22) Consider the basic AD/AS macro model in long-run equilibrium. A negative AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; decrease; decrease further; will be restored to potential output C) increase; decrease; decrease; will be restored to potential output D) increase; decrease; increase further; will be restored to potential output E) increase; increase; increase further; will be restored to potential output Answer: C Diff: 3 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

23) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-4 Refer to Figure 24-4. The initial effect of the positive AS shock shown in the diagram results in A) a recessionary output gap of 250. B) a recessionary output gap of 450. C) an inflationary output gap of 200. D) an inflationary output gap of 300. E) an inflationary output gap of 550. Answer: C Diff: 2 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

24) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-4 Refer to Figure 24-4. The positive aggregate supply shock shown in the diagram results in a new short-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1300 Answer: D Diff: 1 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

25) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-4 Refer to Figure 24-4. After the positive aggregate supply shock shown in the diagram, which of the following would shift the AS curve leftward during the economy's adjustment process? A) an increase in factor supplies B) an increase in the unemployment rate C) a decrease in wages and other factor prices D) an increase in labour productivity E) an increase in wages and other factor prices Answer: E Diff: 2 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative

26) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-4 Refer to Figure 24-4. Following the positive AS shock shown in the diagram, the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1000 Answer: E Diff: 1 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

27) Consider the basic AD/AS macro model, initially in a long-run equilibrium. A positive AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; increase; decrease further; will be restored to potential output C) decrease; increase; return to its initial level; will be restored to potential output D) increase; increase; decrease; will be restored to potential output E) increase; increase; return to its initial level; will be restored to potential output Answer: C Diff: 3 Type: MC Topic: 24.3b. AS shocks Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 28) The curve that is sometimes called the "long-run aggregate supply curve" (vertical Y*) relates the aggregate price level to real GDP A) in the short run. B) when wages are in adjustment but prices are unstable. C) when national income is at less than potential income. D) when technology is allowed to change. E) after factor prices have fully adjusted to eliminate output gaps. Answer: E Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 29) What economists sometimes call the "long-run aggregate supply curve" is A) vertical. B) horizontal. C) nonlinear. D) negatively sloped. E) positively sloped. Answer: A Diff: 1 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

30) What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit A) changes in the capital stock. B) wages and other factor prices to adjust. C) changes in technology to occur. D) changes in the size of the resource base to occur. E) population to increase. Answer: B Diff: 1 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 31) The "long-run aggregate supply curve," vertical at Y*, shows that A) potential output will rise as prices rise. B) potential output will fall as prices rise. C) potential output is compatible with any price level. D) potential output is compatible with one particular price level. E) prices will always rise in the long run. Answer: C Diff: 1 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 32) Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP A) and the price level are determined by aggregate demand. B) and the price level are determined by "long-run aggregate supply." C) is determined by aggregate demand and the price level by potential output. D) is determined by potential output and the price level by aggregate demand. E) is determined by AD and the price level is determined by the AS curve. Answer: D Diff: 3 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

33) Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of the AD curve is to determine the price level. This is true because A) Y* is independent of the price level. B) the aggregate demand curve is vertical. C) the aggregate demand curve is horizontal. D) Y* depends on the price level. E) the AS curve is upward sloping. Answer: A Diff: 3 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 34) Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will A) leave real output unaffected and increase the price level. B) decrease real output and decrease the price level. C) decrease real output and leave the price level unchanged. D) decrease real output and increase the price level. E) increase real output and decrease the price level. Answer: D Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 35) Consider the AD/AS model after factor prices have fully adjusted to output gaps. An increase in the level of potential output, with aggregate demand constant, will A) affect only the price level. B) decrease real GDP and the price level. C) affect only the level of real GDP. D) increase real GDP and lower the price level. E) decrease real GDP and raise the price level. Answer: D Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

36)

FIGURE 24-5 Refer to Figure 24-5. The economy is not in long-run equilibrium at E1 because the A) AD1 curve will shift back to AD0 due to an increase in the price level. B) AD1 curve will shift back to the left due to a fall in current consumption. C) AS will shift to the left due to an increase in wages. D) AS will shift to the left due to an increase in the price level. E) AS will shift to the right due to a decrease in the price level. Answer: C Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative

37)

FIGURE 24-5 Refer to Figure 24-5. Following a positive demand shock that takes the economy from E0 to E1, the movement of the economy from E1 to E2 indicates that A) a demand shock can keep real GDP above potential output permanently. B) an increase in the price level causes the AS curve to shift to the left. C) an increase in the price level causes the AD curve to shift to the left. D) the economy cannot return to potential output without government intervention. E) the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted. Answer: E Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative

38)

FIGURE 24-5 Refer to Figure 24-5. If the economy is currently in equilibrium at E3, the concept of asymmetrical adjustment of the AS curve suggests that A) the economy will attain potential output faster if there is no intervention by the government. B) a decrease in the price level will induce a rightward shift of AS. C) the return of the economy to potential output may be very slow without government intervention. D) the economy will never return to potential output. E) the price level is constant regardless of the level of equilibrium income. Answer: C Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative

39) Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in A) the AS curve. B) potential GDP. C) either the AS curve or potential GDP. D) either the AD or AS curves. E) the intersection of the AD and AS curves. Answer: B Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 40) Which of the following statements about the AD/AS macro model in the long run is correct? A) Both real GDP and the price level are determined by aggregate demand. B) Both real GDP and the price level are determined by Y*. C) Long-run real GDP is determined by Y* and the long-run price level by the AD curve. D) Real GDP is determined by aggregate demand and the price level by Y*. E) Long-run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve. Answer: C Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 41) Suppose the economy begins in a long-run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________. A) rightward; the aggregate supply curve B) rightward; the aggregate demand curve C) leftward; the aggregate supply curve D) leftward; the aggregate demand curve E) rightward; Y* Answer: C Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

42) Consider the AD/AS macro model. The main source of increases in material living standards over the long term is the A) maintenance of a continuous inflationary gap. B) continual avoidance of recessionary gaps. C) continuous outward shift of aggregate demand. D) continual increase in potential national income. E) positive slope of the aggregate supply curve. Answer: D Diff: 1 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 43) In the basic AD/AS macro model, permanent increases in real GDP are possible only if A) potential output is increasing. B) the correct fiscal policy is implemented. C) the economy's automatic stabilizers are allowed to operate. D) the aggregate supply curve is vertical. E) aggregate demand responds positively to demand shocks. Answer: A Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 44) What is the focus of study in the long run in macroeconomics? A) changes to actual GDP but not changes in potential GDP B) an equal focus on potential GDP and actual GDP C) primarily on changes to potential GDP D) primarily on changes to the output gap, with a constant level of potential output E) solely on the supply of factors of production Answer: C Diff: 1 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Recall Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

45) Which of the following is occurring when an economy is experiencing sustained growth in real GDP? A) actual GDP is greater than potential GDP B) actual GDP is less than potential GDP C) potential GDP is likely to be increasing D) factor prices are likely to be decreasing E) wage rates will decrease slowly as factor-utilization rates decrease Answer: C Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 46) Which of the following provides the best explanation for why GDP may increase over long periods of time? A) increase in capital stock B) increase in emigration C) increase in mortality rates D) increase in interest rates E) increase in unemployment Answer: A Diff: 2 Type: MC Topic: 24.3c. long-run equilibrium and potential output Skill: Applied Learning Obj.: 24-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 24.4 Fiscal Stabilization Policy 1) Fiscal policy refers to the A) government's attempts to maintain a vertical AS curve so as to stabilize output. B) government's use of spending and taxing policies to influence equilibrium real GDP. C) government's use of trade-related policy tools to influence the net export function, thereby influencing GDP. D) business sector's influence on investment and GDP. E) households' attempts to change saving to encourage growth. Answer: B Diff: 1 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

2)

FIGURE 24-1 Refer to Figure 24-1. If the economy is currently producing output of Y0 and the government initiates an expansionary fiscal policy adequate to close the output gap, the result is intended to be A) the vertical line at Y* will shift to the left, intersecting the AS and AD curves at Y0. B) no change in either price level or output, since expansionary fiscal policy is ineffective. C) that the AS curve will shift to the right until point A is reached. D) that the AS curve and the AD curve will shift left simultaneously. E) that the AD curve will shift to the right until point B is reached. Answer: E Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

3)

FIGURE 24-1 Refer to Figure 24-1. Suppose the economy is currently in a short-run equilibrium with output of Y0. An appropriate fiscal policy response, to attain potential output (Y*), is A) an increase in personal income taxes. B) a reduction in government purchases of goods and services. C) an increase in corporate income taxes. D) an increase in government purchases. E) an increase in interest rates to encourage increased saving. Answer: D Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

4)

FIGURE 24-2 Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for closing the output gap is A) a decrease in personal income taxes. B) a decrease in government purchases. C) an increase in current interest rates. D) an increase in government purchases. E) a decrease in corporate income-tax rates. Answer: B Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

5)

FIGURE 24-2 Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for attaining potential output (Y*) is a(n) A) increase in personal and corporate tax rates. B) increase in government spending. C) increase in current consumption. D) decrease in personal and corporate taxes. E) decrease in current imports. Answer: A Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

6)

FIGURE 24-2 Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. A contractionary fiscal policy would restore the economy to potential output (Y*) by shifting the A) AS curve to the left to intersect AD at C. B) AS curve to the right. C) potential GDP and the AS curve to the left. D) AD curve to the right. E) AD to the left to intersect AS at point A. Answer: E Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

7) One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that A) the economy will overshoot potential GDP and a boom will be underway. B) inflation will not be as stimulated. C) price level will rise higher than otherwise. D) the recovery is likely to be more rapid. E) the recovery will be slower, thereby causing less disruption. Answer: D Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 8) Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP. A) too weak; stay below B) too weak; rise above C) too strong; stay below D) too strong; rise above E) appropriate; equal Answer: D Diff: 3 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 9) Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP. A) too weak; stay below B) too weak; rise above C) too strong; stay below D) too strong; rise above E) appropriate; equal Answer: A Diff: 3 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

10) Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions? A) an expansionary fiscal policy that increases tax rates B) a contractionary fiscal policy that increases government purchases C) automatic fiscal stabilizers D) a contractionary fiscal policy that increases tax rates E) an expansionary fiscal policy that increases government purchases Answer: E Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

11) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 24-6 Refer to Figure 24-6. In the initial short-run equilibrium, there is ________ output gap of ________, but this gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) a recessionary; 200; fiscal contraction D) an inflationary; 100; fiscal contraction E) an inflationary; 200; fiscal expansion Answer: B Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Quantitative

12) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 24-6 Refer to Figure 24-6. If the government takes no action to change the short-run macro equilibrium in this economy, then A) the AD curve will shift downward until it intersects with the AS curve at point E. B) the AD curve will shift upward until it intersects with the AS curve at point C. C) the AS curve will shift to the left until it intersects with the AD curve at point D. D) the AS curve will shift to the right until it intersects with the AD curve at point B. E) the AS curve can either shift to the right or left depending on the fiscal policy. Answer: D Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

13) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 24-6 Refer to Figure 24-6. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) decreasing government purchases. D) decreasing government transfer payments. E) implementing a contractionary fiscal policy. Answer: B Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

14) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 24-7 Consider Figure 24-7. At the initial short-run equilibrium, there is ________ output gap of ________. This gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) an inflationary; 100; fiscal contraction D) an inflationary; 200; fiscal contraction E) an inflationary; 350; fiscal expansion Answer: D Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Quantitative

15) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 24-7 Refer to Figure 24-7. If the government takes no action to close the existing output gap, then A) the AD curve will shift down until it intersects with the AS curve at point D. B) the AD curve will shift up until it intersects with the AS curve at point B. C) the AS curve will shift to the left until it intersects with the AD curve at point C. D) the AS curve will shift to the right until it intersects with the AD curve at point E. E) the AS curve can either shift to the right or left depending on the fiscal policy. Answer: C Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

16) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 24-7 Refer to Figure 24-7. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) increasing government purchases. D) decreasing government transfer payments. E) implementing an expansionary fiscal policy. Answer: A Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

17) Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that A) it will reduce the upward pressure on the price level that would otherwise occur. B) if private-sector expenditures increase on their own, the policy will stabilize real GDP. C) it will shorten what might otherwise be a long recession. D) it will reduce the downward pressure on the price level that would otherwise occur. E) it will close the output gap. Answer: A Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 18) As a global recession began in late 2008, the governments of all major economies searched for policy responses to dampen the effects of the recession. In general, governments were aiming to A) shift the AD curve to the left by decreasing tax rates. B) increase potential GDP. C) shift the AS curve to the right through large increases in government spending. D) shift the AD curve to the right through large increases in government spending. E) shift the AS curve to the left by increasing wage rates. Answer: D Diff: 2 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

19) Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada's economy? A) The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap. B) The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap. C) The AS curve shifted to the right due to increased factor prices, which created a recessionary gap. D) The AS curve shifted to the left due to increased factor prices, which created a recessionary gap. E) Potential GDP fell, which reduced actual national income. Answer: B Diff: 3 Type: MC Topic: 24.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 20) Why are income taxes in Canada considered to be automatic stabilizers? Because A) tax revenues increase when income increases, thereby offsetting some of the increase in aggregate demand. B) tax revenues decrease when income increases, thereby intensifying the increase in aggregate demand. C) tax structures can be changed when the Minister of Finance brings down a budget. D) tax revenues are changed through discretionary fiscal policy to keep the budget balanced. E) tax revenues are changed through discretionary fiscal policy to create surpluses in recessions. Answer: A Diff: 3 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

21) Which of the following is an important automatic fiscal stabilizer in the Canadian economy? A) the exchange rate B) the marginal propensity to consume C) the marginal propensity to import D) the income-tax system E) government purchases of goods and services Answer: D Diff: 2 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 22) Automatic fiscal stabilizers are most helpful in A) making discretionary fiscal policy effective. B) removing persistent output gaps. C) promoting economic growth. D) eliminating price fluctuations in the economy. E) reducing the intensity of business cycles. Answer: E Diff: 1 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 23) "Automatic fiscal stabilization" in the economy refers to A) the properties of government spending and taxation that cause the simple multiplier to be increased. B) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap. C) the properties of government spending and taxation that cause the simple multiplier to be reduced. D) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap. E) all discretionary fiscal policies. Answer: C Diff: 2 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

24) Net tax revenues that rise with national income act as an automatic stabilizer by ________ the marginal propensity to spend and thereby causing the simple multiplier to ________. A) increasing; increase B) increasing; decrease C) decreasing; equal one D) decreasing; decrease E) decreasing; increase Answer: D Diff: 3 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 25) Consider the simplest macro model with demand-determined output. Other things being equal, the ________ the value of the simple multiplier, the ________ stable is real GDP in response to shocks to autonomous spending. A) larger; more B) larger; less C) smaller; more D) smaller; less E) both B and C are correct Answer: E Diff: 2 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 26) Consider a simple macro model with demand-determined output. Which of the following parameters will produce the most stable real GDP in the face of autonomous expenditure shocks? A) MPC = 0.8, t = 0.2, m = 0.3 B) MPC = 0.7, t = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2 Answer: C Diff: 3 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy.

Category: Quantitative

27) Consider a simple macro model with demand-determined output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks? A) MPC = 0.8, t = 0.2, m = 0.3 B) MPC = 0.7, t = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2 Answer: E Diff: 3 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Quantitative 28) Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's net tax revenues ________ during booms and ________ during recessions. A) magnify; increase; decrease B) magnify; decrease; increase C) dampen; increase; decrease D) dampen; decrease; increase E) do not affect; are constant; are constant Answer: C Diff: 3 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

29) Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP. One disadvantage of this policy is that A) the effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable. B) further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer. C) the level of private investment increases, which will destabilize the level of real GDP. D) the effect of the automatic stabilizer is reduced and the economy will be more unstable. E) the level of private investment decreases, which opens up a recessionary gap. Answer: D Diff: 2 Type: MC Topic: 24.4b. automatic fiscal stabilizers Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 30) The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to ________ their saving, but in aggregate this behaviour causes a ________ recession. A) decrease; more severe B) decrease; less severe C) increase; more severe D) increase; less severe E) increase; shorter Answer: C Diff: 2 Type: MC Topic: 24.4c. paradox of thrift Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 31) In the long run, aggregate demand is ________ for determining real GDP, and the "paradox of thrift" ________. A) not important; applies B) not important; does not apply C) the only influence; applies D) the most important influence; does not apply E) stable and important; applies Answer: B Diff: 2 Type: MC Topic: 24.4c. paradox of thrift Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of

fiscal stabilization policy. Category: Qualitative 32) Why does the "paradox of thrift" not exist in the long run? Because A) not everyone increases saving in the long run. B) aggregate supply has an impact on real GDP only in the short run. C) everyone increases consumption in the long run. D) changes in aggregate demand have no impact on real GDP in the long run. E) potential output is determined by changes in the price level. Answer: D Diff: 3 Type: MC Topic: 24.4c. paradox of thrift Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 33) In the basic AD/AS macro model, the "paradox of thrift" is only a short-run phenomenon because A) consumers exhibit cyclical consumption behaviour. B) in the long run output is determined by potential output. C) savings are transformed into expenditures in the long run. D) the marginal propensity to consume is fixed in the long run. E) consumers base their consumption expenditures only on their lifetime income. Answer: B Diff: 2 Type: MC Topic: 24.4c. paradox of thrift Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 34) Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because 1) the multiplier effects associated with fiscal policy take a long time; 2) changes in government spending and taxation are too small in relation to the size of the economy to have much effect; 3) there are long and uncertain lags in implementing fiscal policy. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Diff: 3 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Recall

Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 35) Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered, an argument supporting ________. A) larger; fine tuning B) larger; gross tuning C) smaller; fine tuning D) smaller; crowding out E) larger; crowding out Answer: B Diff: 3 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 36) Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of A) an execution lag. B) fine tuning. C) gross tuning. D) a decision lag. E) automatic fiscal stabilizers. Answer: D Diff: 1 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 37) Which of the following statements about fiscal policy is the best description of "fine tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps. Answer: A Diff: 2 Type: MC

Topic: 24.4d. limitations of fiscal policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

38) Which of the following statements about fiscal policy is the best example of "gross tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps. Answer: B Diff: 2 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 39) Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of A) a decision lag. B) fine tuning. C) gross tuning. D) automatic fiscal stabilizers. E) an execution lag. Answer: E Diff: 1 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 40) An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________. A) rises to an unsustainable level; real GDP is reduced B) is crowded out; corporate tax revenue is reduced C) increases; aggregate demand increases D) increases; net exports increases E) is crowded out; potential output is reduced Answer: E Diff: 3 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

41) Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output? A) The growth rate of potential output may be reduced due to the crowding out of private investment. B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy. C) Potential output will drop below its starting point because of the crowding out of investment. D) The growth rate of potential output will rise due to the higher level of aggregate demand. E) The level of potential output is fixed and will not be affected by fiscal policy. Answer: A Diff: 2 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 42) In any decision about stimulating the economy with a fiscal expansion (increasing government purchases), the government must weigh the short-run benefits of ________ against the long-run costs of ________. A) a higher price level; unemployment B) increased potential output; a higher price level C) a higher price level; lower real GDP D) increased real GDP; higher economic growth E) increased economic activity; lower economic growth Answer: E Diff: 2 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 43) The growth rate of potential output might be decreased by an expansionary fiscal policy if A) the budget deficits are persistent. B) the simple multiplier is small. C) the policy crowds out private investment. D) public investment has high productivity. E) the composition of output is not altered. Answer: C Diff: 2 Type: MC Topic: 24.4d. limitations of fiscal policy

Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 44) A reduction in the net tax rate might lead to an increase in the growth rate of potential output if A) the simple multiplier is large. B) the tax cuts stimulate private investment. C) firms are operating at their normal capacity. D) households are not forward looking. E) the marginal propensity to consume is large. Answer: B Diff: 2 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 45) The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output ( ) to increase? A) If the increase in G crowds out private investment. B) If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve. C) If the increase in G is spent on public infrastructure that increases the productivity of private-sector production. D) If the increase in G leads to a permanent increase in the level of autonomous saving in the economy. E) If the increase in G is offset by an equal decrease in C, I, and NX. Answer: C Diff: 3 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Applied Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

46) In our macro model, the level of aggregate output is determined in the short run by ________ but in the long run by the level of ________. A) the output gap; factor productivity B) the AD curve; interest rates C) the AS curve; potential output D) the AD and AS curves; Y* E) the AD and AS curves; factor utilization Answer: D Diff: 2 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 47) Fiscal policies typically affect the short-run level of GDP because they cause shifts in the ________, but they will not generally have any long-run effects on real GDP unless they affect ________. A) AS curve; factor-utilization rates B) AS curve; factor supplies or factor productivity C) AD curve; factor-utilization rates D) AD curve; the unemployment rate E) AD curve; the level of potential output Answer: E Diff: 2 Type: MC Topic: 24.4d. limitations of fiscal policy Skill: Recall Learning Obj.: 24-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 25 Long-Run Economic Growth 25.1 The Nature of Economic Growth 1) Over a long period of time, perhaps many years, changes in real GDP come primarily from A) upward shifts of the AS curve. B) upward shifts of the AE curve. C) rightward shifts of the AD curve. D) continuous increases in potential GDP. E) leftward shifts of the AD curve. Answer: D Diff: 1 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall

Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 2) Between the years 1960 and 2017, the Canadian economy experienced growth in real GDP at an average annual rate of ________%. A) 0.7 B) 1.2 C) 1.9 D) 3.3 E) 6.3 Answer: D Diff: 2 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 3) In the long run, changes in average material living standards are best shown by A) growth in real GDP. B) population growth. C) growth in real per capita GDP. D) improvements in fiscal policy. E) improvements in monetary policy. Answer: C Diff: 1 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative

4) Which of the following is implied by the compounding of economic growth rates? A) A large increase in investment today has little effect on national income over the long run. B) Small changes in sustained growth rates can have a significant impact on national income over several decades. C) Consumers should not save, given the low real returns that compounding produces. D) A 10% annual rate of return will double an investment in less than 6 years. E) A 2% annual growth rate of GDP will double national income in 27 years. Answer: B Diff: 1 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 5) Suppose per capita GDP in a richer country is growing at a faster annual rate than in a poorer country. An implication of this difference in growth rates is that A) the gap between their standards of living will close over time as long as the rate of population growth is higher in the poorer country. B) the gap between their standards of living will close over time. C) the difference in their living standards will not change over time. D) the gap between their standards of living will widen over time. E) whether the gap in living standards widens or closes over time depends on the absolute size of the relative growth rates. Answer: D Diff: 2 Type: MC Topic: 25.1a. the nature of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 6) Suppose GDP in a richer country is growing at the same annual rate as in a poorer country. An implication of these growth rates is that the A) gap between their standards of living will widen over time. B) gap between their standards of living will close over time. C) gap between their standards of living will close over time as long as the rate of population growth is lower in the poorer country. D) gap between their standards of living will close over time as long as the rate of population growth is lower in the richer country. E) difference in their living standards will not change over time. Answer: C Diff: 2 Type: MC Topic: 25.1a. the nature of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative

7) Which of the following is a common measure of a country's level of productivity? A) the average efficiency of capital B) the capital-output ratio C) output per capita D) output per unit of labour input E) per capita GDP Answer: D Diff: 1 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 8) Which of the following is a common measure of a country's rate of economic growth? A) the marginal efficiency of capital B) the capital-output ratio C) the level of output per capita D) the change in output per capita E) the level of real gross domestic product Answer: D Diff: 2 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 9) Over the long term, by far the most potent force for raising average material living standards is A) economic growth. B) reducing inefficiencies. C) redistributing income. D) increasing the money supply. E) appropriate fiscal policies. Answer: A Diff: 1 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative

10) If real income grows at approximately 2% per year, the number of years it will take for real income to double is approximately A) 5. B) 12. C) 24. D) 36. E) 72. Answer: D Diff: 2 Type: MC Topic: 25.1a. the nature of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Quantitative 11) If real income grows at approximately 4% per year, the number of years it will take for real income to double is approximately A) 5. B) 12. C) 18. D) 36. E) 72. Answer: C Diff: 2 Type: MC Topic: 25.1a. the nature of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Quantitative 12) Of the variables listed below, the best measure of a nation's average material standard of living is A) nominal GDP. B) percent change in nominal GDP. C) per capita real GDP. D) per capita nominal GDP. E) real GDP. Answer: C Diff: 1 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative

13) The theory of economic growth concentrates on the ________ over the long run, not on ________. A) growth of investment in capital goods; short-run fluctuations of investment B) growth of real GDP; growth of potential GDP C) factor utilization rates; growth of the supplies of factors D) factor utilization rates; growth of real GDP E) growth of potential output; fluctuations of output around potential Answer: E Diff: 2 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 14) Consider the following table for a hypothetical economy in which the initial level of GDP ( ) in all cases is 1000. Assume that real GDP grows according to the equation , where N is the number of years in the future. Numbers are rounded to the nearest whole number.

Year 0 1 5 20 50

Real GDP with Alternative Growth Rates 1% 2% 3% 1000 1000 1000 1010

4% 1000

TABLE 25-1 Note: This question requires a calculator with an exponent function. Refer to Table 25-1. If this economy is growing at an annual rate of 2%, then real GDP in Year 50 will be A) 1645. B) 1126. C) 2692. D) 500. E) 51 000. Answer: C Diff: 3 Type: MC Topic: 25.1a. the nature of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Graphics: Table Category: Quantitative

15) Consider the following table for a hypothetical economy in which the initial level of GDP ( ) in all cases is 1000. Assume that real GDP grows according to the equation , where N is the number of years in the future. Numbers are rounded to the nearest whole number.

Year 0 1 5 20 50

Real GDP with Alternative Growth Rates 1% 2% 3% 1000 1000 1000 1010

4% 1000

TABLE 25-1 Note: This question requires a calculator with an exponent function. Refer to Table 25-1. If this economy is growing at an annual rate of 4%, then real GDP in Year 50 will be A) 2000. B) 1268. C) 2255. D) 7107. E) 51 000. Answer: D Diff: 3 Type: MC Topic: 25.1a. the nature of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Graphics: Table Category: Quantitative

16) Consider the following table for a hypothetical economy in which the initial level of GDP ( ) in all cases is 1000. Assume that real GDP grows according to the equation , where N is the number of years in the future. Numbers are rounded to the nearest whole number.

Year 0 1 5 20 50

Real GDP with Alternative Growth Rates 1% 2% 3% 1000 1000 1000 1010

4% 1000

TABLE 25-1 Note: This question requires a calculator with an exponent feature. Refer to Table 25-1. What is real GDP in this economy in Year 20 if the annual growth rate is 1%? A) 200 B) 1020 C) 1220 D) 6727 E) 20 200 Answer: C Diff: 3 Type: MC Topic: 25.1a. the nature of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Graphics: Table Category: Quantitative

17) Consider the following table for a hypothetical economy in which the initial level of GDP ( ) in all cases is 1000. Assume that real GDP grows according to the equation , where N is the number of years in the future. Numbers are rounded to the nearest whole number.

Year 0 1 5 20 50

Real GDP with Alternative Growth Rates 1% 2% 3% 1000 1000 1000 1010

4% 1000

TABLE 25-1 Note: This question requires a calculator with an exponent function. Refer to Table 25-1. What is real GDP in this economy in Year 20 if the annual growth rate is 4%? A) 2191 B) 8000 C) 20 800 D) 80 000 E) 836 683 Answer: A Diff: 3 Type: MC Topic: 25.1a. the nature of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Graphics: Table Category: Quantitative

18) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 25-1 Refer to Figure 25-1. Which of the following statements best describes what we know about the difference between the two economies at Year 0? A) Economy A has a higher level of real GDP at Year 0 than Economy B. B) Economy B's households are consuming a larger percentage of GDP than Economy A's households. C) There is no opportunity cost for economic growth for Economy B at Year 0. D) There is no opportunity cost of economic growth for Economy A at Year 0. E) Economy A's households are consuming a larger percentage of GDP than Economy B's households. Answer: E Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative

19) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 25-1 Refer to Figure 25-1. Which of the following statements about Economies A and B is correct? A) Economy A will sustain higher material living standards than Economy B in the long run. B) Economies A and B will have equal material living standards beginning at Year 0. C) Economy B will sustain higher material living standards than Economy A in the long run. D) Economies A and B will have equal material living standards beginning at Year X. E) Economies A and B will have equal material living standards beginning at Year Y. Answer: C Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative

20) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 25-1 Refer to Figure 25-1. The area marked Area 1 represents A) the value of consumption from Year 0 to Year X in Economy A. B) the value of the investment in capital goods undertaken by Economy B. C) the value of the investment in capital goods undertaken by Economy A. D) the sacrifice of current consumption by Economy B, as compared to Economy A. E) the sacrifice of current consumption by Economy A, as compared to Economy B. Answer: D Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative

21) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 25-1 Refer to Figure 25-1. Suppose Economy A jumps to the path of Economy B at Year 0 by increasing the share of GDP that is saved. In that case, which of the following statements about Economy A is true? A) Economy A will not be able to regain the losses in consumption it incurs by jumping to the path of Economy B. B) By Year Y, the increase in consumption made possible by the economy's higher growth rate approximately equals the consumption sacrificed in earlier years. C) By Year X, Economy A is better off in terms of material living standards for having jumped to the path of Economy B. D) By jumping to a new growth path at Year 0, Economy A has increased the share of national income that is consumed. E) By Year X, Economy A is saving and investing the same share of its national income as it would have been had it stayed on its original path. Answer: B Diff: 3 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative

22) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 25-1 Refer to Figure 25-1. Which of the following costs of economic growth are reflected in this diagram? A) the sacrifice of current consumption B) lower real interest rate C) environmental degradation D) resource exhaustion E) national saving Answer: A Diff: 1 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative 23) Suppose a country transfers resources from the production of consumption goods to the production of capital goods. The result of this shift will be to A) raise future consumption. B) raise current living standards. C) decrease the long-run growth rate. D) lower future living standards. E) raise current consumption. Answer: A Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative

24) Which of the following is a benefit of long-run economic growth? A) growth in nominal GDP greater than real GDP B) decreased productive capacity C) a greater ability to reduce inequality D) increased future interest rates E) decreased current saving and increased current consumption Answer: C Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 25) The costs of long-run economic growth include: 1) declining future average living standards; 2) that current consumption must be sacrificed to increase investment in capital goods; 3) current increases in investment may only generate greater consumption in the distant future. A) 1 and 2 B) 2 and 3 C) 1 only D) 2 only E) 3 only Answer: B Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 26) For a given level of technology, a more rapid rate of economic growth can probably be achieved only if a country's citizens are prepared to A) redistribute income. B) sacrifice some present consumption. C) increase their demand for goods and services. D) increase exports. E) decrease interest rates. Answer: B Diff: 1 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative

27) Which of the following is a cost of economic growth? A) declining future living standards B) current saving must be sacrificed to increase investment in capital goods C) improvements in technology D) the effect on workers whose skills are made obsolete by technical change E) reduced interest rates Answer: D Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 28) Long-run economic growth can help alleviate the problems of poverty by A) creating new low-paying jobs for the unemployed. B) generating more resources that can be used to reduce income inequality. C) reallocating income away from low-value production to increase the incentives for high-value production. D) requiring increased saving on the part of most of the population. E) increasing future consumption for the middle class. Answer: B Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 29) Consuming fewer goods today in order to invest resources in capital goods can be considered the ________ of economic growth. A) opportunity cost B) social cost C) investment cost D) external cost E) total cost Answer: A Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative

30) What is the main reason that alleviation of poverty is more achievable in an economy that is growing? A) Individuals are more likely to object to the redistribution of income when they earn more. B) Everyone, including the poor, benefits equally from growth. C) Poor individuals are relatively easier to be identified in a growing economy. D) Nobody has to be made worse off when the increment to income caused by growth is redistributed. E) Wage rates for low-income people are naturally rising. Answer: D Diff: 1 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 31) An important social cost of economic growth is A) the increasing inequality of income that usually accompanies sustained growth. B) the sacrifice of current consumption required for a higher level of future consumption. C) the associated inflation. D) the associated frictional unemployment. E) the destruction of jobs due to labour skills of certain workers becoming obsolete. Answer: E Diff: 2 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 32) Economic growth is often associated with structural change in the economy, and this change can present difficult policy challenges to governments. Which of the following government policies would be most useful at addressing the social costs of economic growth? A) expansionary monetary policy B) the imposition of trade restrictions to protect Canadian jobs C) subsidies directed at Canadian manufacturing firms D) worker re-training and education programs E) reducing income taxes Answer: D Diff: 3 Type: MC Topic: 25.1b. benefits and costs of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative

33) Which of the following is the best example of the acquisition of human capital? A) A worker takes a training course that increases his/her productivity. B) A worker receives new machinery enabling him/her to do the amount of work that was formerly done by two workers. C) A worker communicates more quickly and accurately with suppliers because of upgrades to communications software. D) A government-sponsored program increases the amount of investment available per worker. E) A computer chip manufacturer introduces a faster processor for micro-computing. Answer: A Diff: 2 Type: MC Topic: 25.1a. the nature of economic growth Skill: Applied Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 34) The four major determinants of economic growth include all of the following EXCEPT A) technological improvement. B) growth in physical capital. C) growth in human capital. D) growth in financial capital. E) growth in the labour force. Answer: D Diff: 1 Type: MC Topic: 25.1a. the nature of economic growth Skill: Recall Learning Obj.: 25-1 Discuss the costs and benefits of economic growth. Category: Qualitative 25.2 Economic Growth: Basic Relationships 1) Consider the long-run theory of investment, saving, and growth. In the long-run version of our macro model (with real GDP equal to Y*), the equilibrium interest rate is determined where A) aggregate demand equals aggregate expenditure. B) desired national saving equals desired investment. C) the nominal price level equals the real price level. D) desired consumption equals desired investment. E) desired saving equals desired consumption. Answer: B Diff: 1 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth.

Category: Qualitative

2) If government policies are to be successful in enhancing a country's long-run growth rate, they likely work through generating A) higher levels of current consumption. B) greater private investment in physical and human capital. C) an increase in current consumption and a reduction in saving. D) a leftward shift in the AS curve. E) fiscal policies that shift the AD curve to the right. Answer: B Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 3) Consider a closed economy with real GDP in the long run of $400, consumption expenditures of $250, government purchases of $75, and net tax revenue of $20. What is the level of national saving? A) $55 B) $75 C) $95 D) $225 E) $230 Answer: B Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Quantitative 4) Which of the following equations is a correct expression for national saving in the long run when real GDP equals potential output? A) NS = Y* - C - G B) NS = Y* - C + T - G C) NS = Y* - T - C D) NS = T - G E) NS = T - G - C Answer: A Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

5) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Net tax revenues Government purchases Investment Consumption

$2800 $50 $200 $250 $2350

TABLE 25-2 Refer to Table 25-2. What is the level of private saving for this economy? A) $50 B) $100 C) $150 D) $400 E) $450 Answer: D Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

6) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Net tax revenues Government purchases Investment Consumption

$2800 $50 $200 $250 $2350

TABLE 25-2 Refer to Table 25-2. What is the level of public saving for this economy? A) -$200 B) -$150 C) -$50 D) $150 E) $200 Answer: B Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

7) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Net tax revenues Government purchases Investment Consumption

$2800 $50 $200 $250 $2350

TABLE 25-2 Refer to Table 25-2. What is the level of national saving for this economy? A) -$200 B) -$150 C) -$50 D) $150 E) $250 Answer: E Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

8) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Government purchases Investment Consumption Net tax revenues

$14 000 $2200 $300 $11 500 $2000

TABLE 25-3 Refer to Table 25-3. What is the level of private saving for this economy? A) $50 B) $100 C) $500 D) $2000 E) $3000 Answer: C Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

9) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Government purchases Investment Consumption Net tax revenues

$14 000 $2200 $300 $11 500 $2000

TABLE 25-3 Refer to Table 25-3. What is the level of public saving for this economy? A) -$200 B) -$100 C) $200 D) $300 E) $500 Answer: A Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

10) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Government purchases Investment Consumption Net tax revenues

$14 000 $2200 $300 $11 500 $2000

TABLE 25-3 Refer to Table 25-3. What is the level of national saving for this economy? A) $50 B) $100 C) $200 D) $250 E) $300 Answer: E Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

11) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Government purchases Investment Consumption Net tax revenues

$14 000 $2200 $300 $11 500 $2000

TABLE 25-3 Refer to Table 25-3. What is the level of combined budget surpluses of all levels of government in this economy? A) $50 B) $100 C) $500 D) -$200 E) -$500 Answer: D Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative 12) Consider the long-run theory of investment, saving, and growth. Suppose the government has a budget deficit of $400. If the country's level of national saving is $200, then private saving must be A) -$400. B) $200. C) $400. D) $600. E) $800. Answer: D Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Quantitative

13) Consider the long-run theory of investment, saving, and growth. Suppose the government has a budget surplus of $2 billion. If the country's level of private saving is $1.2 billion, then national saving must be A) -$1.2 billion. B) -$800 million. C) $0. D) $800 million E) $3.2 billion Answer: E Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Quantitative 14) Consider the long-run theory of investment, saving, and growth. For a given level of private saving, an increase in government purchases will likely ________ the economy's long-run growth rate. A) slow down B) accelerate C) not affect D) increase E) Not enough information to know Answer: A Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 15) Consider the long-run theory of investment, saving, and growth. For a given level of national income, an increase in private consumption or government purchases will cause national saving to A) increase. B) grow at a constant rate. C) remain unchanged from its initial level. D) exceed investment. E) decrease. Answer: E Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth.

Category: Qualitative 16) Consider the long-run theory of investment, saving, and growth. An increase in the government budget surplus, everything else constant, will cause a(n) A) decrease in national saving. B) increase in national saving. C) decrease in the growth rate. D) equal increase in private consumption. E) equal decrease in private investment. Answer: B Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 17) Consider a closed economy in the long run. A country with a low national saving rate (as a fraction of real GDP) is likely to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) either a high or low growth rate depending on the investment schedule. C) an AS curve moving continually to the right. D) trouble achieving potential real national income in the short run. E) a low growth rate because sustained high investment is not possible with low saving. Answer: E Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 18) Consider the market for financial capital for a closed economy in the long run. Other things being equal, a country with a high national saving rate will tend to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) a high growth rate because sustained high investment is possible with high saving. C) an AS curve moving continually to the left. D) trouble achieving potential real national income in the short run. E) either a high or low growth rate depending on the investment demand schedule. Answer: B Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run

growth. Category: Qualitative

19) Consider the long-run theory of investment, saving, and growth. Which of the following statements concerning national saving is true? A) A country's saving rate is unrelated to its growth rate. B) An increase in the rate of saving will lead to a reduction in consumption and therefore to both a short-run and a long-run decrease in national income. C) An increase in the rate of saving will cause an immediate increase in national income, but may cause a drop in national income in the long-run. D) An increase in the rate of saving will always be offset by a reduction in private investment. E) An increase in the rate of saving will lead to a short-run reduction in national income, but to higher economic growth in the long run. Answer: E Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 20) Consider the long-run theory of investment, saving, and growth. For a given level of national income, a decrease in government tax revenues will cause A) a decrease in national saving. B) an increase in national saving. C) an increase in the growth rate. D) no effect on national saving. E) a decrease in consumption. Answer: A Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

21) Consider the long-run theory of investment, saving, and growth. For a given level of private saving, a decrease in the government's budget deficit ________ the long-run rate of economic growth. A) will reduce B) will leave unchanged C) will increase D) will diminish E) none of the above Answer: C Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 22) Consider the long-run theory of investment, saving, and growth. For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) increase and the flow of national saving to decrease. B) increase and the flow of investment to increase. C) increase and the flow of investment to decrease. D) decrease and the flow of national saving to increase. E) decrease and the flow of national saving to decrease. Answer: D Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 23) Consider the long-run theory of investment, saving and growth. For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) increase and the flow of national saving to fall. B) increase and the flow of investment to increase. C) increase and the flow of investment to decrease. D) decrease and the flow of investment to decrease. E) decrease and the flow of investment to increase. Answer: E Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth.

Category: Qualitative 24) Consider the market for financial capital in the long run. The national saving curve is upward sloping because an increase in the real interest rate A) leads households to increase their current consumption. B) leads to an increase in investment demand. C) decreases the supply of public saving. D) leads households to reduce their current consumption. E) decreases the supply of private saving. Answer: D Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 25) Consider the market for financial capital in the long run. The investment demand curve is downward sloping because A) an increase in the real interest rate leads to an increase in investment demand. B) all components of desired investment are negatively related to the real interest rate. C) all components of desired investment are positively related to the real interest rate. D) a decrease in the real interest rate reflects a higher opportunity cost to firms of using financial capital. E) an increase in the real interest rate reflects a lower opportunity cost to firms of using financial capital. Answer: B Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

26) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 25-2 Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. If the real interest rate is i1, there is ________ which will drive the interest rate down until it reaches i*. A) an excess demand for financial capital B) an excess demand for investment C) an excess supply of financial capital D) an excess supply of public saving Answer: C Diff: 1 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

27) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 25-2 Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. If the real interest rate is i4, there is ________, which will drive the real interest rate up to i*. A) an excess demand for financial capital B) an excess supply of financial capital C) an excess supply of saving D) an excess demand for public saving Answer: A Diff: 1 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

28) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 25-2 Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose there is a reduction in government purchases (G). What is likely to happen in this market for financial capital? A) There is no effect on NS or ID, and the interest rate remains at i*. B) National saving shifts to NS1 and the interest rate falls to i3. C) Investment demand shifts to I1D, and the interest rate rises to i2. D) The real interest rate rises because of the decrease in the budget surplus. E) The real interest rate falls because of the decrease in the budget surplus. Answer: B Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

29) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 25-2 Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose there is a reduction in government purchases. What is the effect on investment demand? A) National saving shifts to NS1, causing an increase in the quantity of investment demanded from I* to I2. B) There is no effect on NS or ID, and the quantity of investment demanded remains at I*. C) Investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I1. D) Investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I3. E) National saving shifts to NS1, and investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I 3. Answer: A Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph

Category: Qualitative 30) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 25-2 Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the real interest rate? A) There is no effect on NS or ID, and the interest rate remains at i*. B) National saving shifts to NS1, and the real interest rate falls to i3. C) The real interest rate rises because of the decrease in the budget surplus. D) The real interest rate falls because of the decrease in the budget surplus. E) Investment demand shifts to I1D, and the real interest rate rises to i2. Answer: E Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

31) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 25-2 Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the quantity of national saving? A) There is no effect on NS or ID and the quantity of national saving supplied remains at I*. B) National saving shifts to NS1, and the quantity of national saving supplied rises to I 2. C) Investment demand shifts to I1D and the quantity of national saving supplied rises to I 1. D) Investment demand shifts to I1D, national saving shifts to NS1, and the quantity of national saving rises to I3. E) National saving shifts to NS1, investment demand shifts to I1D, and the quantity of national saving rises to I1. Answer: C Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph

Category: Qualitative

32) The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 25-3 Refer to Figure 25-3. Suppose the interest rate in this market for financial capital is 2%. In this case there is an excess ________ financial capital of ________ billion dollars. A) supply of; 30 B) demand for; -30 C) supply of; 50 D) demand for; 30 E) demand for; 80 Answer: D Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Quantitative

33) The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 25-3 Refer to Figure 25-3. The equilibrium interest rate in this market is ________% and the equilibrium flow of investment and saving is ________ billion dollars. A) 1; 50 B) 2; 60 C) 3; 70 D) 4; 80 E) 5; 90 Answer: C Diff: 1 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Quantitative

34) The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 25-3 Refer to Figure 25-3. Suppose the interest rate in this market for financial capital is 4%. In this case there is an excess ________ financial capital of ________ billion dollars. A) supply of; 30 B) demand for; -60 C) supply of; 90 D) demand for; 30 E) demand for; 60 Answer: A Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Quantitative

35) The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 25-3 Refer to Figure 25-3. Suppose the interest rate in this market for financial capital is 2%. Which of the following statements correctly describes the adjustment that will occur in this market? A) The excess supply of saving will push up the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. B) The excess demand for investment will push up the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. C) The excess supply of saving will push down the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. D) The excess demand for investment will push down the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. E) The excess demand for investment will push up the real interest rate, which will increase the quantity demanded of investment and decrease the quantity supplied of saving. Answer: B Diff: 3 Type: MC Topic: 25.2a. investment, saving and growth Skill: Applied

Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative 36) In the long run, an increase in the demand for investment pushes ________ the real interest rate, encourages ________ saving by households, and leads to a ________ future growth rate of potential output. A) down; less; lower B) up; less; lower C) down; less; higher D) up; more; higher E) up; more; lower Answer: D Diff: 2 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 37) Data from most industrialized countries show that countries with high investment rates (as a percentage of GDP) tend to be countries A) with the highest levels of per capita GDP. B) with the highest levels of GDP. C) with high rates of economic growth. D) with the lowest rate of national saving. E) with a negative relationship between investment and the rate of economic growth. Answer: C Diff: 1 Type: MC Topic: 25.2a. investment, saving and growth Skill: Recall Learning Obj.: 25-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 38) Consider the Neoclassical growth model. The effect of an increase in population (or the labour force) in an economy, with everything else held constant, is A) an increase in per capita national income. B) an increasingly aging population. C) a decrease in per capita output. D) a decrease in the capital-output ratio. E) an inward shift of the production possibilities boundary. Answer: C Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory

Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

39) One important assumption of the Neoclassical growth model is that, with a given state of technology, A) increases in the use of a single factor bring increasing returns. B) increases in the use of a single factor result in constant returns. C) increases in the use of single factor bring diminishing returns. D) the return from successive units of a single factor increases over time. E) increases in GDP are possible only if all factors are increased at an equal rate. Answer: C Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 40) The main properties of a Neoclassical aggregate production function are ________ when all factors are increased proportionally and ________ when any one factor is increased on its own. A) increasing returns to scale; diminishing marginal returns B) constant returns to scale; diminishing marginal returns C) constant returns to scale; constant marginal returns D) decreasing returns to scale; diminishing marginal returns E) increasing returns to scale; increasing marginal returns Answer: B Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 41) The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor will eventually A) increase the average product of the factor. B) decrease the average product of the factor. C) lead to an increase in the marginal output of the factor. D) lead to a decrease in total output by the factor. E) lead to an increase in the material standard of living. Answer: B Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

42) The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor eventually cause the A) average product of the factor to increase. B) marginal product of the factor to fall. C) marginal product of the factor to increase at an increasing rate. D) marginal product of the factor to increase but at a decreasing rate. E) material standard of living to increase. Answer: B Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 43) Which of the following is a central assumption of the Neoclassical growth model? A) Long-run growth arises from correcting market failures. B) Long-run growth arises only from technological innovation. C) There are diminishing marginal returns to a single factor. D) There are constant marginal returns to investment. E) There are increasing marginal returns to capital investment. Answer: C Diff: 1 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 44) In the Neoclassical growth model, whenever diminishing returns applies, increases in the population, other things being equal, are accompanied by A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and constant living standards. E) increasing GDP and increasing living standards. Answer: C Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

45) In the Neoclassical growth model, decreases in the population, other things being equal, would eventually result in A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and increasing living standards. E) increasing savings and increasing living standards. Answer: B Diff: 3 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 46) In the Neoclassical growth model, increases in the stock of physical capital, other things being equal, will lead to A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and increasing living standards. E) increasing GDP and decreased national wealth. Answer: D Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 47) In the Neoclassical growth model, if capital and labour grow at the same rate, we will observe A) rising GDP but falling living standards. B) rising GDP but no change in living standards. C) rising GDP and increasing living standards. D) increasing living standards but only for workers using labour-intensive production. E) increasing living standards but only for workers using capital-intensive production. Answer: B Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

48) According to the Neoclassical growth model, it is most likely that GDP would increase, but that average material living standards would fall, as a result of A) a fast-growing capital stock. B) a better educated labour force. C) an increase in the working population. D) a growing capacity to develop and incorporate new innovations. E) an increase in the availability of natural resources. Answer: C Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 49) In Neoclassical growth theory, an increase in the labour force ________ total output and ________ total output per person. A) increases; increases B) increases; leaves constant C) increases; reduces D) leaves constant; leaves constant E) leaves constant; reduces Answer: C Diff: 1 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 50) In Neoclassical growth theory, average material living standards in an economy could fall when A) additional units of capital are added to the other factors. B) additional units of labour are added to the other factors. C) there is equal percentage growth in capital and labour inputs. D) technology improves. E) there is a decline in the population. Answer: B Diff: 1 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

51) In Neoclassical growth theory, increasing the amount of capital employed in production ________ the average standard of living as long as the marginal product of capital exceeds zero. A) unambiguously raises B) unambiguously reduces C) has no effect on D) at first raises but eventually reduces E) at first reduces but eventually raises Answer: A Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 52) The Neoclassical theory of economic growth led economics to be referred to as the "dismal science." The explanation for this reference lies in the theory's emphasis on A) growing inequality of income. B) increasing government intervention in the economy. C) increasing damage to the environment. D) the immoral behaviour of firms. E) diminishing returns in production. Answer: E Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 53) The Neoclassical growth model assumes that with a given state of technology, A) increases in the use of a single factor bring increasing returns. B) increases in the use of a single factor result in constant returns. C) increases in GDP are possible only if all factors are increased at an equal rate. D) growth in GDP happens only if the labour force grows more quickly than the amount of physical capital. E) the standard of living will decrease if the labour force grows more quickly than the amount of physical capital. Answer: E Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

54) In the Neoclassical growth model, the law of diminishing marginal returns implies that capital accumulation leads to ever A) larger decreases in GDP and large decreases in living standards. B) larger increases in GDP but smaller decreases in living standards. C) smaller increases in GDP and average living standards. D) larger levels of unemployment but small increases in the standard of living. E) larger levels of unemployment but larger increases in the standard of living. Answer: C Diff: 3 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 55) A person who returns to school to improve her computer skills is an example of an increase in A) the labour force. B) human capital. C) physical capital. D) technological capital. E) financial capital. Answer: B Diff: 1 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 56) According to the Neoclassical growth model, which of the following scenarios explains improvements in long-run material living standards? A) an increase in population B) a decrease in unemployment rates C) an increase in the stock of physical capital D) an equal increase in both population and the stock of capital E) an equal increase in both population and output Answer: C Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

57) According to the Neoclassical growth model, which of the following scenarios (other things being equal) explains progressively smaller increases in per capita GDP? A) an increasing population B) decreasing unemployment rates C) an increasing capital stock D) equal increases in both population and the stock of capital E) equal increases in population and output Answer: C Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 58) Why is real GDP not a good measure of average material living standards? A) Because it is biased by the changes in the inflation rate. B) Because it excludes the role of imported goods. C) Because it does not take into account the size of the population. D) Because it is sensitive to the base year chosen in its calculation. E) Because the price level may be changing, which affects what people can afford to buy. Answer: C Diff: 1 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 59) According to the Neoclassical growth model, balanced growth of labour and capital A) leads to rising material living standards. B) will not increase the level of per capita GDP. C) will result in a constant level of GDP. D) is a natural outcome of long-run equilibrium. E) explains current rising per capita incomes in many countries. Answer: B Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

60) According to the Neoclassical growth theory, sustained rising material living standards can only be explained by A) growth in human capital. B) growth in physical capital. C) growth in the labour force. D) balanced growth of labour and capital. E) exogenous technological change. Answer: E Diff: 2 Type: MC Topic: 25.2b. Neoclassical growth theory Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 61) The aggregate production function shows the ________ for given levels of labour and capital inputs. A) marginal product of labour B) marginal product of capital C) returns to scale D) total output for society (real GDP) E) the production possibilities boundary Answer: D Diff: 1 Type: MC Topic: 25.2c. the aggregate production function Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 62) Neoclassical growth theory is based on the assumption of ________ marginal returns to a single factor and ________ returns to scale exhibited by the aggregate production function. A) decreasing; constant B) decreasing; decreasing C) constant; decreasing D) increasing; increasing E) increasing; constant Answer: A Diff: 2 Type: MC Topic: 25.2c. the aggregate production function Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

63) An aggregate production function, with both capital and labour factor inputs, exhibits constant returns to scale when a 1% increase in labour input A) produces a 1% increase in output. B) along with a 1% increase in capital produces the same amount of output. C) along with a 1% increase in capital produces 1% more output. D) along with a 1% decrease in capital produces the same amount of output. E) induces a 1% increase in capital input. Answer: C Diff: 2 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 64) An aggregate production function exhibits increasing returns to capital when A) no change in capital produces a 1% increase in output. B) a 1% decrease in capital produces an increase in the marginal product of capital. C) a 1% increase in capital produces no change in output. D) each additional unit of capital increases the number of jobs by more than 1%. E) each additional unit of capital has a higher marginal product than the previous unit. Answer: E Diff: 2 Type: MC Topic: 25.2c. the aggregate production function Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 65) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5% each and total output (Y) increases by 5% as a result, then this production function is displaying A) increasing returns to scale. B) constant returns to scale. C) decreasing returns to scale. D) diminishing marginal returns. E) a change in technology. Answer: B Diff: 1 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Quantitative

66) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5% each, and the production function displays constant returns to scale, then total output will increase by ________%. A) 0 B) less than 5 C) 5 D) more than 5 E) Not enough information to determine Answer: C Diff: 2 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Quantitative 67) Consider an aggregate production function Y = F(K, L) that displays diminishing marginal returns to labour. If the amount of capital is held constant and the amount of labour used in production is increasing, then A) each additional unit of labour will add less to total output than the previous unit of labour. B) each additional unit of labour will add more to total output than the previous unit of labour. C) total output increases in proportion to the increases in labour. D) there are increasing returns to scale. E) there are constant returns to scale. Answer: A Diff: 2 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

68) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 25-4 Refer to Table 25-4. The production function that applies to Economies A, B, and C displays A) increasing returns to scale. B) increasing marginal returns to labour. C) diminishing marginal returns to labour. D) constant returns to scale. E) Both C and D are correct. Answer: E Diff: 3 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

69) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 25-4 Refer to Table 25-4. The production function that applies to Economies A, B, and C displays A) increasing returns to scale. B) increasing marginal returns to capital. C) diminishing marginal returns to capital. D) constant returns to scale. E) Both C and D are correct. Answer: E Diff: 3 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

70) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 25-4 Refer to Table 25-4. Diminishing marginal returns to labour is most evident in the data shown for A) Economy A. B) Economy B. C) Economy C. D) Economies B and C, but not A. Answer: A Diff: 3 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

71) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 25-4 Refer to Table 25-4. Consider the changes shown for L, K, and T for Economy A, where output (Y) is the economy's real GDP. As total labour input rises, this economy will show A) rising GDP and rising per capita GDP. B) rising GDP but falling per capita GDP. C) rising per capita GDP and output rising faster than capital. D) GDP rising more slowly than capital but per capita GDP falling. E) declining GDP and declining per capita GDP. Answer: B Diff: 3 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

72) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 25-4 Refer to Table 25-4. Consider the changes shown for L, K, and T for Economy B, where output (Y) is the economy's real GDP. As total labour and capital inputs rise, this economy will show A) rising GDP but falling per capita GDP. B) rising GDP and rising per capita GDP. C) rising GDP but constant GDP per capita. D) GDP rising faster than capital. E) GDP rising more slowly than capital. Answer: C Diff: 3 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

73) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 25-4 Refer to Table 25-4. Consider the changes shown for L, K, and T for Economy C, where output (Y) is the economy's real GDP. As total labour and capital inputs rise, this economy will show A) rising GDP but falling per capita GDP. B) rising GDP and rising per capita GDP. C) rising GDP but constant GDP per capita. D) GDP rising more slowly than labour. E) GDP rising more slowly than capital. Answer: B Diff: 3 Type: MC Topic: 25.2c. the aggregate production function Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

74) "Embodied technical change" is said to occur when A) older capital equipment is replaced with different, more productive, capital. B) the capital-labour ratio is increasing. C) innovations in the organization of production take place which do not involve changes in the form of capital used. D) techniques of managerial control are improved. E) the labour force acquires new skills that can be used across a wide range of industries. Answer: A Diff: 1 Type: MC Topic: 25.2d. embodied technical change and TFP Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 75) Consider the Neoclassical growth model. Sustained economic growth in the long run could best be fostered by A) expansionary fiscal policy. B) decreasing excise taxes on consumer goods. C) technological improvements embodied in physical or human capital. D) elimination of an output gap. E) expansionary monetary policy. Answer: C Diff: 1 Type: MC Topic: 25.2d. embodied technical change and TFP Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 76) When a new personal computer is purchased to replace an old one, and the new PC is much better and faster than the old one, there has been A) a disembodied technical change. B) a rise in the capital-output ratio. C) a fall in the output per unit of capital. D) an embodied technical change. E) capital "deepening." Answer: D Diff: 2 Type: MC Topic: 25.2d. embodied technical change and TFP Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

77) If a country experiences growth in "total factor productivity" (i.e., the "Solow residual"), then A) all growth in real GDP can be explained by growth in the labour force. B) all growth in real GDP can be explained by growth in the capital stock. C) there is some growth in real GDP that cannot be accounted for by growth in capital or the labour force. D) none of the growth in real GDP can be accounted for by growth in capital and the labour force. E) material standards of living are falling. Answer: C Diff: 2 Type: MC Topic: 25.2d. embodied technical change and TFP Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 78) The growth of "total factor productivity," or the "Solow residual," is equal to the growth in real GDP A) accounted for by changes in all factors of production but excluding technological changes. B) accounted for by changes in all factors of production and including technological changes. C) that cannot be accounted for by changes in the quantities of labour and capital. D) that cannot be accounted for by changes in technology. E) that cannot be accounted for by changes in the labour force. Answer: C Diff: 3 Type: MC Topic: 25.2d. embodied technical change and TFP Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 79) Which of the following is an example of "embodied technical change"? A) education that teaches a wider portion of the labour force basic numeracy B) the strengthening of social infrastructure, such as delivery of basic health-care services C) better methods of inventory control D) the development of better intellectual property law E) the replacement of old computer chips with new ones designed for faster processing Answer: E Diff: 2 Type: MC Topic: 25.2d. embodied technical change and TFP Skill: Applied Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous.

Category: Qualitative

80) The Solow residual is an estimate of changes in A) economic growth. B) human capital. C) physical capital. D) labour. E) technology. Answer: E Diff: 2 Type: MC Topic: 25.2d. embodied technical change and TFP Skill: Recall Learning Obj.: 25-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 25.3 Economic Growth: Advanced Theories 1) Modern or "new" theories of long-run economic growth are based on the assumptions that technological change is mainly ________ to an economy and that investment yields ________ marginal returns. A) exogenous; diminishing B) exogenous; constant C) exogenous; increasing D) endogenous; decreasing E) endogenous, increasing Answer: E Diff: 1 Type: MC Topic: 25.3. newer growth theories Skill: Recall Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 2) The "new" theories of economic growth emphasize that the pace of technological change is ________ to economic signals, and that it is ________ to the economic system. A) responsive; exogenous B) responsive; endogenous C) unresponsive; exogenous D) unresponsive; endogenous E) unresponsive; unrelated Answer: B Diff: 1 Type: MC Topic: 25.3. newer growth theories Skill: Recall Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative

3) According to the "new" theories of economic growth, increasing marginal returns to capital investment is A) possible, but only in the early stages of innovation before imitators rush in to drive prices down. B) possible after initial fixed costs of innovation have been borne. C) possible only if the capital is government-owned infrastructure. D) impossible, and is thus a weak source of growth. E) impossible because diminishing returns are unavoidable. Answer: B Diff: 2 Type: MC Topic: 25.3. newer growth theories Skill: Recall Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 4) With respect to long-run economic growth, one rationale for the idea that there may be increasing marginal returns to investment is that A) as further investment takes place the economy moves down to the right along the marginal product schedule. B) as further investment takes place the economy moves upward to the left along the marginal product schedule. C) the investment costs to "followers" are lower than those for "pioneers." D) initial investment shifts the the investment demand schedule to the left, making further investment less costly. E) initial investment shifts the the aggregate demand schedule to the left, making further investment less costly. Answer: C Diff: 2 Type: MC Topic: 25.3. newer growth theories Skill: Applied Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative

5) According to some modern theories of long-run economic growth, successive increments of investment have ________ returns since some fixed costs are ________ for subsequent firms. A) constant; identical B) increasing; lower C) increasing; higher D) decreasing; higher E) decreasing; lower Answer: B Diff: 2 Type: MC Topic: 25.3. newer growth theories Skill: Recall Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 6) In new theories of "endogenous growth," increasing marginal returns to investment can occur because A) investment costs for followers can be higher than for pioneers. B) knowledge provides the input that allows investment to be profitable. C) many investments require large fixed costs, the benefits of which are not available to subsequent firms. D) little risk is associated with the process of innovation for technological followers. E) early investors create an infrastructure favourable to followers. Answer: E Diff: 3 Type: MC Topic: 25.3. newer growth theories Skill: Recall Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 7) Compared to Neoclassical growth theory, newer "endogenous growth" theories are more ________ regarding the prospect of continuous increases in the standard of living, due in part to its emphasis on the ________. A) pessimistic; endogeneity of technological change B) pessimistic; accelerating depletion of natural resources C) pessimistic; increasing birth rates as a result of higher real income per capita D) optimistic; accelerating depletion of natural resources E) optimistic; endogeneity of technological change Answer: E Diff: 2 Type: MC Topic: 25.3. newer growth theories Skill: Applied Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns.

Category: Qualitative 8) Consider the newer theories of economic growth. Given the rapid growth of world population in recent decades, the present needs and aspirations of the world's population can likely only be met through A) enormous increases in financial capital. B) increasing knowledge and technological improvements. C) reductions in the world's capital stock, as a means of controlling the exhaustion of natural resources. D) coordination of fiscal and monetary policies. E) relatively small increases in the saving rates of the developing economies. Answer: B Diff: 2 Type: MC Topic: 25.3. newer growth theories Skill: Recall Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 9) Modern growth theories are more optimistic than Neoclassical growth theories because the former emphasize the unlimited potential of A) modern capital. B) knowledge-driven technological change. C) more educated government policy making. D) modern labour. E) economic theory. Answer: B Diff: 1 Type: MC Topic: 25.3. newer growth theories Skill: Recall Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 10) Which of the following statements is true of new growth theory, and NOT true of Neoclassical growth theory? A) New growth theory cannot explain improved living standards over the long term. B) New growth theory can explain improved living standards over the long term. C) Economic growth does not have an impact on resource exhaustion. D) Economic growth depends only on population growth. E) Economic growth is the result of innovation. Answer: B Diff: 2 Type: MC Topic: 25.3. newer growth theories Skill: Recall Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical

change and increasing returns. Category: Qualitative 11) One reason that investment in innovation is often considered to have increasing marginal returns is because A) new products increase firms' profits. B) R&D costs are negligible relative to firms' total costs. C) innovation is mostly through "leaning by doing." D) new ideas or innovations can spawn ever further new ideas and innovations. E) after the initial investment is made, subsequent investors face more difficult and expensive production problems. Answer: D Diff: 2 Type: MC Topic: 25.3. newer growth theories Skill: Applied Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 12) Consider the competing products made by Apple (iPhone) and Samsung, for example. The innovation generated by these firms as a result of their intense rivalry is an example of A) covert collusion. B) constant returns to scale. C) exogenous technological change. D) endogenous technological change. E) decreasing marginal returns. Answer: D Diff: 2 Type: MC Topic: 25.3. newer growth theories Skill: Applied Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 13) Consider the significant costs to the innovators and developers of 3D printing technology. Modern growth theory suggests that A) there will be decreasing marginal returns to this investment. B) there will be constant returns to this investment. C) there will be increasing marginal returns to this investment. D) follower firms will face higher costs than the pioneer firms. E) the knowledge acquired in this innovation process will remain private. Answer: C Diff: 3 Type: MC Topic: 25.3. newer growth theories Skill: Applied

Learning Obj.: 25-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative

25.4 Are There Limits to Growth? 1) Suppose most of the world's population would like to achieve a standard of living equal to that of the average Canadian family. Such a rise in global living standards is A) not possible given the world's current resources and the current state of technology. B) possible with better political and economic cooperation around the world. C) possible given the world's current resources and current state of technology. D) not possible under any circumstances. E) possible with no adverse effects on pollution and environmental degradation. Answer: A Diff: 2 Type: MC Topic: 25.4. limits to growth Skill: Applied Learning Obj.: 25-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative 2) In 1950, when the world's population was 2.5 billion, it was unimaginable that the world could ever produce enough food to feed the present world population of 7.6 billion. Which of the following variables is key to having met this task (although far from perfectly)? A) political cooperation among developed and developing economies B) birth control C) foreign aid D) technological change in agricultural production E) all of the above Answer: D Diff: 2 Type: MC Topic: 25.4. limits to growth Skill: Recall Learning Obj.: 25-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative

3) In the early 1970s, a group called the "Club of Rome" published a book entitled The Limits to Growth which concluded that industrialized countries faced an imminent absolute limit to growth. Did this prediction come true in the subsequent years? A) No, because as income levels rose, we could afford to purchase more resources and increase growth. B) No, because technology has changed, allowing for new discoveries, development, and more efficient use of resources. C) Yes, all growth in recent decades has been in the non-industrialized and developing economies. D) Yes, there has been no change in absolute levels of output of industrialized countries. Answer: B Diff: 1 Type: MC Topic: 25.4. limits to growth Skill: Applied Learning Obj.: 25-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative 4) Economic growth allows increasing numbers of people around the world to enjoy higher incomes and to escape (material) poverty. Which of the following statements best describes the current limits to this growth? A) Rising consumption due to higher incomes puts increasing pressure on the world's natural ecosystems and its ability to cope with further pollution and environmental degradation. B) The supply of financial capital is insufficient to maintain this level of economic growth. C) The inability of developing countries to increase their human capital will prevent further economic growth. D) Increasing prices of natural resources will limit further economic growth. E) Innovation and technological change with respect to resource development have been exhausted. Answer: A Diff: 2 Type: MC Topic: 25.4. limits to growth Skill: Applied Learning Obj.: 25-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative Economics - Canadian Edition, 16e (Ragan) Chapter 26 Money and Banking 26.1 The Nature of Money 1) The function of money in an economy is to serve as 1) a unit of account; 2) a store of value;

3) a medium of exchange. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1, 2, and 3 E) 3 only Answer: D Diff: 1 Type: MC Topic: 26.1a. the functions of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 2) Which of the following is a common definition of money? A) a generally accepted medium of exchange B) gold C) foreign-exchange reserves D) paper currency E) the Canadian dollar Answer: A Diff: 1 Type: MC Topic: 26.1a. the functions of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

3) In order to be considered "money," paper currency must be A) convertible into a precious metal. B) impossible to counterfeit. C) issued by a chartered bank. D) issued by a government agency. E) generally acceptable as a medium of exchange. Answer: E Diff: 2 Type: MC Topic: 26.1a. the functions of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 4) Doug is saving money in order to purchase a new snowboard next winter. This represents using money as A) a medium of exchange. B) a store of value. C) a unit of account. D) a medium of deferred payment. E) a method of barter. Answer: B Diff: 2 Type: MC Topic: 26.1a. the functions of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 5) Other things being equal, a rise in the price level will A) increase the value of money. B) decrease the purchasing power of money. C) stabilize the value of money. D) increase the purchasing power of money. E) have no effect on the value of money. Answer: B Diff: 1 Type: MC Topic: 26.1a. the functions of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

6) Other things being equal, the purchasing power of money is A) inversely related to the level of aggregate demand. B) inversely related to the price level. C) directly related to the price level. D) directly related with the cost of living. E) directly related to the level of aggregate demand. Answer: B Diff: 1 Type: MC Topic: 26.1a. the functions of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 7) When you are estimating your monthly income and expenses, money is being used as A) a medium of exchange. B) a store of value. C) a unit of account. D) a standard unit of deferred payment. E) a money substitute. Answer: C Diff: 2 Type: MC Topic: 26.1a. the functions of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 8) Doug compares the unit price of chocolate bars in order to get the "best buy." This represents using money as A) a medium of exchange. B) a store of value. C) a unit of account. D) a unit of deferred payment. E) a money substitute. Answer: C Diff: 2 Type: MC Topic: 26.1a. the functions of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

9) What is the major advantage of using money as opposed to barter? A) In the barter system, there is no way to express values of commodities. B) Money is the only convenient way to store one's wealth. C) Money has more value than real goods. D) Money stays where you put it, whereas a cow often has to be fenced in. E) The use of money significantly reduces transactions costs. Answer: E Diff: 2 Type: MC Topic: 26.1a. the functions of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 10) What is the biggest disadvantage of a barter system compared to a system that uses money? A) It is difficult to find goods to trade in a barter system that satisfy the needs of society. B) A standardized unit of account cannot exist in a barter system. C) All commodities are difficult to transport and therefore inefficient for exchange. D) Each trade requires a double coincidence of wants. E) Commodities are difficult to use as a store of value. Answer: D Diff: 2 Type: MC Topic: 26.1a. the functions of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 11) Which of the following is an example of the use of money as a medium of exchange? A) Dave keeps $250 in his drawer for a "rainy day." B) Mike gets a friend to give him a beer today in return for promising to give the friend two beer when Mike gets paid at the end of the month. C) Judy lends her car to a friend who signs a promissory note that she will pay Judy $10 a day for the use of the car after she returns the car to Judy. D) Barry pays $275 with his bank debit card for tickets for an NHL play-off game. E) ABC Investments Inc. enters in its account books that it owes Nallai $20 for his last month's investment income. Answer: D Diff: 2 Type: MC Topic: 26.1a. the functions of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

12) If a majority of Canadian households and businesses refused to accept Canadian dollars in exchange for goods and services, the value of the Canadian dollar would A) fall. B) rise since less would be in circulation. C) stay constant since the value does not depend on its acceptability by people. D) stay constant since its value is determined only by the Bank of Canada. E) stay constant since its value is determined only by the Government of Canada. Answer: A Diff: 1 Type: MC Topic: 26.1a. the functions of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 13) In order for money to be successfully used as a medium of exchange, it must 1) be readily acceptable; 2) be easily divisible; 3) have a high value-weight ratio. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1, 2, and 3 Answer: E Diff: 1 Type: MC Topic: 26.1a. the functions of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 14) The use of money in an economy does which of the following? A) creates the necessity for a double coincidence of wants B) solves the problem of inflation C) creates a problem of trading a portion of indivisible commodities such as a ship D) promote specialization and the division of labour E) promotes the use of barter Answer: D Diff: 2 Type: MC Topic: 26.1a. the functions of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

15) When metal coins, such as gold and silver, were used as money, a technique which helped to prevent the reduction of their value through clipping was A) basing. B) re-minting. C) milling. D) debasement. E) sweating. Answer: C Diff: 1 Type: MC Topic: 26.1b. the origins of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 16) Historically, when gold and silver coins were used as money, their debasement resulted in A) deflation. B) an increase in the supply of money. C) an increase in the amount of gold bullion. D) an increase in the desire to store wealth by holding coins. E) a decrease in the money supply. Answer: B Diff: 1 Type: MC Topic: 26.1b. the origins of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 17) Gresham's law predicts which of the following? A) Good money drives out bad money. B) Debased money will circulate with undebased money. C) Undebased money will be driven from circulation. D) Debased money will be driven from circulation. E) Money is neutral in the long run. Answer: C Diff: 1 Type: MC Topic: 26.1b. the origins of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

18) Which of the following is consistent with the predictions of Gresham's law? A) An increase in the money supply will be followed by inflation. B) The increased circulation of U.S. coins in Canada during periods when the Canadian dollar is worth significantly less than the U.S. dollar. C) Debasement of a metallic money will be followed by inflation. D) Increases in the money supply led to the hyperinflation of the 1920s in Germany. E) The disappearance of U.S. coins circulating in Canada during periods when the Canadian dollar is worth less than the U.S. dollar. Answer: E Diff: 3 Type: MC Topic: 26.1b. the origins of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 19) Suppose you come into possession of two "silver" dollars, one minted in the 1950s which contains a lot of silver, the other minted in the 2000s which contains no silver at all. The legal exchange rate between the coins is fixed at one for one. According to Gresham's law, the 1950s silver dollar A) is considered "bad" money. B) will drive out of circulation the 1990s silver dollar. C) is more likely to be used as a medium of exchange. D) is less likely to be used as a medium of exchange. E) is less likely to be used as a store of value because it will appear old fashioned. Answer: D Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 20) Which of the following was the most important initial step in the evolution of paper currency? A) the acceptance of bank notes B) the acceptance of goldsmiths' receipts C) the acceptance of metallic coins D) the issuance of currency by governments E) the use of the Gold Standard Answer: B Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time.

Category: Qualitative 21) Suppose an economy has two types of money — gold and silver coins — that are both legal tender but have different non-monetary values. Gresham's law has come into effect when A) people refuse to use the coins of lesser value. B) the value of the coins is in the same ratio as their non-monetary values. C) the lower-valued coin is taken out of circulation. D) the higher-valued coin is taken out of circulation. E) people use the higher-valued coins for exchange and the lower-valued for savings. Answer: D Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 22) What do we mean in our current banking system when we say that a currency is "fractionally backed"? A) Banks have many more claims outstanding against them than they have reserves available to pay those claims. B) The currency is partially backed by the nation's supply of gold. C) A bank's currency is fractionally backed by its supply of gold. D) All paper currency is convertible to gold. E) Banks maintain a fixed fraction of their outstanding deposits as cash deposits with the central bank. Answer: A Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 23) The major problem of a currency that is fractionally backed and convertible into a precious metal is that of A) clipping, which debases the metal coins. B) counterfeiting. C) maintaining its convertability into the metal. D) paper money being less durable than gold. E) perennial shortages of paper currency. Answer: C Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Recall

Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 24) Most Canadians accept Canadian dollars in payment for goods and services in Canada because they have confidence that the dollar A) will be accepted in the future. B) is fully convertible into gold. C) is accepted by foreigners as more stable than their own currency. D) is fully convertible into American dollars at a set exchange rate. E) is fully backed by the British pound sterling. Answer: A Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 25) What is the main reason that fiat money has value? A) Because it can be manufactured at will by the issuing government. B) Because it has intrinsic value equal to its face value. C) Because it is fully backed by gold at a fixed ratio. D) Because it is only fractionally backed by gold. E) Because it is generally accepted. Answer: E Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 26) For a country to be on a "gold standard," it must A) use gold coins as money. B) use gold coins as money and promise never to debase its coins. C) use gold as money, but not necessarily in the form of gold coins. D) make its currency convertible into gold at a fixed rate of exchange. E) use gold as fiat money. Answer: D Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

27) If most individuals accept paper currency in transactions, and paper currency is "backed by" gold held by commercial banks, then banks can safely issue A) no more paper currency than the value of the gold they hold. B) more paper currency than the value of the gold they hold. C) as much paper currency as they please. D) paper currency equal to a fraction of the gold they hold. E) paper currency equal to the bank's commercial debt divided by their gold reserves. Answer: B Diff: 3 Type: MC Topic: 26.1b. the origins of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 28) The currency that is in circulation in Canada today is A) fully backed by gold held at the central bank. B) backed by the U.S. dollar. C) backed by the euro. D) fractionally backed by gold. E) not officially backed by anything. Answer: E Diff: 1 Type: MC Topic: 26.1b. the origins of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 29) Which of the following illustrates the use of fiat money? A) exchanging Canadian dollars for a T-shirt B) exchanging money-market funds for gold C) exchanging money-market funds for insurance D) keeping gold as a hedge against inflation E) bartering goods for services Answer: A Diff: 1 Type: MC Topic: 26.1b. the origins of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

30) Debit cards that are issued by commercial banks can be characterized as A) an example of near money. B) an electronic version of a cheque. C) deposit money. D) fiat money. E) a store of value. Answer: B Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 31) The use of debit cards issued by commercial banks has now become standard. When you pay for a purchase at a store using a debit card, you are A) authorizing the transfer of cash from your bank account to the merchant's bank account. B) creating an electronic debt to the merchant. C) authorizing an electronic transfer of a money substitute from you to the merchant. D) authorizing an electronic transfer of deposit money from you to the merchant. E) authorizing the transfer of bank notes from you to the merchant. Answer: D Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Applied Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 32) Which of the following statements about deposit money is true? A) The quantity of fiat money in the Canadian economy far exceeds the quantity of deposit money. B) Deposit money can legally be created solely by the Bank of Canada. C) Deposit money is the paper money or coinage that is decreed by the government to be accepted as legal tender. D) Deposit money is recorded as an asset on the balance sheet of a commercial bank. E) The quantity of deposit money in the Canadian economy far exceeds the quantity of fiat money in circulation. Answer: E Diff: 2 Type: MC Topic: 26.1b. the origins of money Skill: Recall Learning Obj.: 26-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative